Investing in Smart Companies

Written By Briton Ryle

Posted September 2, 2015

We had a potluck at my neighborhood pool on a sweltering Friday night in early August. Burgers, sausages, and hot dogs on the grill, two big plates of deviled eggs, salads of Caesar, potatoes and pasta, plenty of beer and wine, and some homemade concoction that tasted heavily of mint leaves and gin.

I’ve got great neighbors; there was no quinoa or kale anywhere on the picnic table.

We were still sitting in front of our paper plates when my neighbor Rich told me and a couple of the other dads who were sitting together that his oldest son (15) had $1,200 saved from his various dog-sitting and grass-cutting endeavors.

“What should he do with all that loot?” Rich asked. “Buy a car? Cause he ain’t driving mine…”

I had two words for Rich: Roth IRA.

Get him to take $200 and put it in a Roth IRA, the greatest investment vehicle we’ve ever known, because he will never owe capital gains taxes.

Rich is a thrifty guy. He loved the idea of his boy getting some experience saving and investing and planning for the future.

“But what should he put in it?” Rich asked. Another dad chimed in and said, “Just find a good mutual fund.”

That was too much for me. “No, no, not a fund. A fund will eat up his gains with fees. 1% to 2% a year for 40 years is a lot of money. Just find a nice company that’s likely to be around in 30 years, maybe one that pays a dividend, like a Starbucks or a Bank of America or even a Google.” 

Mutual Fund Dad was horrified. “Google?!? A search engine isn’t going to be around in 30 years.”

I carefully explained that Google — with $69 billion in cash — was way more than just a search engine. Its Android mobile phone operating system powers twice as many phones as Apple’s. Google’s driverless cars are testing on the road in Austin, Texas and Mountain View, California. You’ll be able to own one in less than five years.

Solar-powered drones or weather balloons that can deliver wireless Internet service, smart contact lenses, robots, 3D smartphones, space exploration — plus, in 2014, Google captured $45 billion of the $550 billion total of ad dollars spent.

I don’t know which of these initiatives will succeed and which ones will fail. But I know Google has a bunch of smart people and a bunch of cash — a pretty good formula for new products and new strategies to get a bigger piece of that $550 billion advertising pie.

Bet on Smart People

When you bet on Google, you’re betting on smart people. Smart people come from all over the world to work for Google.

(As an aside, this is a great reason to make immigration to the U.S. easier, not harder. U.S. laws protect individual rights and intellectual property better than anywhere else in the world. The world’s smart people want to come here to start or join a company. And when the U.S. gets all the smart people, guess what? We win.)

You know who else is smart? Starbucks CEO Howard Schultz. He pretty much single-handedly turned Americans’ morning cup of joe into a social endeavor and obsession. Schultz integrated Starbucks, so it controls of much of its own supply of coffee beans. And the Starbucks gift card — a ubiquitous gift and stocking stuffer — is the basis of one of the three most successful rewards programs in the world today.

It’s a pretty smart bet that Starbucks will be around in 30 years.

I wish I had come up with the “bet on smart people” idea, because it’s a really great way to think about where to put your investment dollars. And when we’re experiencing the kind of stock market volatility that we’ve seen over the last couple of weeks, it can be comforting to know that your money is in the care of smart people who will figure out how to put resources to work growing their businesses…

Now, with that in mind, let’s have a look at a couple companies that have some smart people and a couple that don’t. Let’s do the not-smart companies first…

Not-Smart Companies

Number one on my not-smart companies list right now is Twitter (NYSE: TWTR). Twitter has 300 million active monthly users — and cannot for the life of it figure out how to make money off them or even what kind of specialized service these 300 million users might want.

Now, 300 million is not as many as the one billion users Facebook (NASDAQ: FB) has, but still, 300 million is a lot. And Twitter is clueless about monetizing them. One CEO, Dick Costolo, has already been fired. One of Twitter’s founders, Jack Dorsey, replaced Costolo on a temporary basis and seems just as clueless about the business.

Twitter IPO’d around $40 two years ago. It rallied to $70 and then fell to as low as $25 because of the lack of smart people.

But here’s the thing: Eventually, Twitter will hire some smart people or smart people will buy the company out. And it’s pretty well known that Twitter needs smart people. So I say this move happens pretty soon…

My number two not-smart company is McDonald’s (NYSE: MCD). I know, I’ve railed on it plenty. But McDonald’s has been missing earnings and sales numbers for nearly two years. In fact, 2016 revenues are expected to be 4% lower than 2015 revenue. And the best solution management has come up with appears to be flavored lemonades and all-day Egg McMuffins.

The worst part, however, is that despite these serious fundamental problems, MCD shares still trade about 5% from all-time highs. So maybe MCD investors aren’t that smart either…

Smart Companies

Fortunately, there are a lot more smart companies than dumb ones. But for this section, I want to find some smart companies that are smarter than most people realize.

J.C. Penney (NYSE: JCP) fits the bill. I know, I’ve talked about JCP in the past, too. But I really think investors are underestimating the new management team that’s in place.

CEO Marvin Ellison came from Target and then Home Depot, two of the smartest retailers out there. And he recently brought over two marketing executives from Target and Home Depot to fine-tune the online business.

These moves are already having an impact: JCP is putting up better same-store sales numbers, has made a couple of really good partnerships, and is doing a good job of cutting costs. The stock is currently around $9. Don’t be surprised if it finishes the year around $12.

Smart company number two may be a bit of a surprise: Banco Santander (NYSE: SAN). Yeah, it’s a big international bank with a lot of exposure to Europe and Latin America. But it’s been using the economic implosion in Brazil to expand its market share there. In other words, it is buying low when there is blood in the streets.

Despite the economic problems, Brazilians still use banks. And when Brazil’s economy finally turns around (it will happen eventually), Banco Santander will benefit as investment picks up and bank deposits grow. I can say the same about Spain, where Banco Santander is based.

As a foreign bank, Banco Santander is not restricted from expansion in the same way U.S. banks are.

At $6 a share, Banco Santander is paying an 8% dividend, has a forward P/E of 7.5, and trades at a 25% discount to book value. There’s some good upside here.

Be a Smart Investor

I’d love to be able to change Mutual Fund Dad’s mind about investments. But I also know that it may not be worthwhile. Some people just don’t want to hear it. But for those that do want to hear — that want to be better, smarter investors — it’s not that hard…

And this is why individual investors like you really do have an advantage. Keep it simple, and find the smart people.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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