Invest in the Basics

 | Oct 04, 2011 | 4:00 PM EDT
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In February, I wrote about how economies abide by Abraham Maslow's hierarchy of needs. There is no hierarchy of wants. Needs are ubiquitous, universal, easily defined and recognized. Wants are none of those things -- but are essentially everything else in the universe.

Good economic times allow investors to indulge in wants, risk taking and dreaming, while bad economic times mandate the prudence and safety of parking assets in companies that serve the lowest common denominators of needs: food and shelter.

The basics of food and shelter in the capital markets are grocery stores and motels, which are broken into two sections: high end and everything else. The everything else category is the safest place to park capital that has the possibility of appreciation while also enjoying a dividend stream that is far above many bond yields today.

The three publicly-traded workhorses of the grocery store industry are Wal-Mart (WMT), Kroger (KR) and Safeway (SWY). The current dividend yield on these companies common stocks are 2.8%, 2.1%, and 3.5% respectively. Each has positive earnings with price-to-earnings ratios (P/E) ratios in the 11-12 range.

These are nice, steady and safe places to park assets, get some income and look for some upside. As this is also a global phenomenon, investors have many options for diversification. (I plan to write about that and investing in the debt of these companies in future column.)

In the economy section of temporary lodging space two publicly traded companies are positioned to benefit from either a slowing or a growing economy: Choice Hotels (CHH), and Intercontinental Hotels Group (IHG).

Choice Hotels is the holding company for several brand names, which include EconoLodge, ComfortInn, Quality Inn and others, while Intercontinental is best known for its Holiday Inn and Holiday Inn Express brands. Choice and Intercontinental both have P/E ratios in the 15-16 range today and dividend yields of 2.5% and 1.9%, respectively.

During good economic times, family travel increases and motel lodging revenues are strong. During bad economic times, business travelers marginally adjust their lodging preferences from hotels to motels and the industry benefits from this shift.

The rest of the names in the lodging space begin to migrate into the higher-end properties. Typically, revenue for these properties and their holding companies declines precipitously during recessions. Not only does this negatively impact earnings but it makes debt financing, or (more importantly) refinancing, difficult to nearly impossible.

Although they lack glamour, all five of the companies briefly outlined here represent defensive positions with upside appreciation potential with income while waiting. In addition, their stock values are not likely to be impacted by large institutional positions moving either in or out as the liquidity requirement of those institutions will preclude this. Being small relative to the universe of financial products available can sometimes be an advantage. 



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