Find the Shoe That Fits

 | Mar 07, 2014 | 1:22 PM EST
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Stocks, in a weird way, are like shoes. There's no one size that fits all. You have to find what you are comfy with or the pain is all-encompassing. That's what I've been thinking about both with the cloud plays I recommend and the consumer packaged goods stocks I like.

It would seem almost two-faced to admire the stocks of Cornerstone (CSOD), Workday (WDAY) and Yelp (YELP), while at the same time think highly of, say, Pinnacle Foods (PF). But it isn't. It isn't because of my shoe theorem.

I seem to be always prattling on, for example, about how important it is that youth embrace risk in the stock market. Younger people have big shoes to fill, they need to have lots of room and can't have their feet cramped by the stocks of slower-moving companies, ones that rack up decent earnings growth but have slower revenue growth. So, if young investors want to augment their retirement savings with individual stocks, they should take risks and that means buying the stocks of companies like Workday or Cornerstone or Yelp, which are companies with phenomenal earnings growth but no earnings at of yet. The key thing is to accept that these companies have such amazing opportunities to dominate in their fields worldwide that it is almost foolish for them to focus on earnings right now.

Workday and Cornerstone are exploiting cloud-based platforms to take share from giant companies like Oracle (ORCL) and SAP (SAP). If they spend all of their time simply taking their cash and returning it to you rather than plowing it back into the business, they will not expand fast enough and lose the opportunities that could be theirs. Plenty of time for profits later.

And if they fail? Well, that's what I mean when I say that you have your whole life ahead of you to make back the money. The risk is huge, but the reward, as we have shown with (CRM), is gigantic and far more bountiful than you will get from any slower-growing company that returns more capital to you than it keeps to grow the business.

But what if you don't have your whole life ahead of you to make back losses? What if you want to be more conservative because the stream of paychecks ahead of you is smaller than the ones behind you, or if you know you will need the money sooner, as you are within a decade or two of retirement?

That's where Pinnacle Foods comes in. Here's a company that makes Duncan Hines cake mixes, Wishbone salad dressings, Birds Eye vegetables and a host of other brands as varied as Hungry Man dinners and Log Cabin syrup. Those brands in aggregate grow sales 1% to 2% a year, which generates 12%-to-15% earnings growth because the company is so effective at taking out costs and adding slight changes to each brand to take more aisle space. The company spews cash, which means the possibility of consistent dividend increases. You will never, ever shoot the lights out with Pinnacle. The best you can hope for is some nice, steady growth as the company buys unloved divisions of other companies, dusts them off and grows them with lower costs, a tried-and-true Pinnacle formula.

That's certainly an awfully cozy shoe for a more mature investor.

So, I am not speaking with a forked tongue when I say I like them both. I am simply saying that in the fast shoe store that is the stock market, you have to find the shoe that fits and if you do, wear it.

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