There will always be risk inherent to investing. What if crude oil supplies in Russia are blown up by the Iranians in a move of utter defiance? Oil prices would skyrocket higher, crushing companies such as Alcoa (AA), Wal-Mart (WMT) and Clorox (CLX). That is a risk, but one that is not factored into the decision-making process today by investors and trading programs as the likelihood of it is minimal.
I mention this because the headlines have investors super confused on what to do next with cash raised during the recent mini-panic. One day we are in a raging bull market, the next day the sky is falling. Bonds should be bought, cash hidden under the rug. The bottom line amid all this zaniness is that you should have a checklist of things (which changes as new information on the world and individual companies are received) in mind when deciding to invest in a company, especially as earnings season gets in full swing.
Look at my list being used during this earnings season:
Exploding sales categories that seem to run counter to conventional wisdom.
- Examples are Harley-Davidson (HOG) and Polaris (PII). I was very impressed by the sales and margin numbers from each company (more so Polaris). The commentary on the U.S. businesses was solid. When I see a sales explosion like this I think, first, that a new wave of consumers are entering a sector for a fundamental reason, and, second, demand among the existing consumer base remains solid.
Market share gains plus margin expansion.
- I can't say it enough: Market share gains without margin expansion are ingredients for long-term brand destruction. In this regard, review the quarter from Stanley Black & Decker (SWK), which had market share gains and margin expansion in its key business segments.
Sales outside of Southern Europe are holding up well.
- Demand in Southern Europe seems to have taken a turn for the worse, so I have written off the region. Therefore, global companies must be performing well in other parts of Europe. If they aren't, it's a huge red flag as to the demand for their products and services.
More on Fast Food
I reiterate that I'm a little concerned about how margins fared for Dunkin' Brands (DNKN) and Starbucks (SBUX) in the third quarter. Price competition was quite intense during the summer/fall, and rising coffee prices have me weary of the 2015 outlooks we could receive from each. But on the topic of fast food, I continue to get inquiries regarding my views on the industry, specifically the fundamental changes happening.
Here are some new views in a week that has been dominated by fast food headlines.
What you are witnessing in the fast food industry now is a movement, a fundamental change if you will, in how people scrutinize what they put into their bodies. Not to sound like a walking billboard for fast casual restaurants or organic grocers, but this movement is occurring in fast food and in the aisles of Whole Foods (WFM) and Trader Joe's. The movement is fueled by two things: great access to information in real-time on mobile devices, where people could check ingredients and calories while in a fast food line or grocery store; and serious amounts of marketing dollars across video, social media and traditional television to highlight the perception that food is healthier at Chipotle (CMG) than McDonald's (MCD). One of Chipotle's secret weapons, and a key ingredient to its success, is its grassroots marketing of the whole ingredients found in its products. In essence, Chipotle, and new farm-to-table companies, are creating an entire generation of folks who will only visit one fast food company for one thing -- Starbucks for coffee and some trail mix.
What the future looks like:
- Chipotle continues to open hundreds of restaurants in the best locations each year for the next five years. McDonald's announces a U.S. restructuring plan in 2015, setting the table for new healthier fast food companies to enter markets.
- Chipotle will likely have to open some form of discount-oriented restaurant, either under its own name or create a new brand in low-income areas. Those restaurants would offer Chipotle's healthier fare, just at cheaper prices, rendering a trip to McDonald's useless to a mom on a budget.
- Chipotle will start acquiring upstarts in the farm-to-table movement. A new breed of restaurant owners is copying Chipotle's success. To stay on top, Chipotle will need more creative people and real estate. This video I did with the CEO of NYC's Dig Inn explains a ton.