Have you ever heard the phrase "a picture is worth a thousand words"? Well, I'm going to put that notion to the test and demonstrate why I believe that Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), Kellogg's (NYSE:K), Kraft (NASDAQ:KRFT), Mondelez (NASDAQ:MDLZ), Unilever (NYSE:UL), General Mills (NYSE:GIS), and Nestle (OTCPK:NSRGY) are the ideal stocks to make up 20-50% of your common stock portfolio.
Take a good look at that picture.
If you make these eight stocks the cornerstone of your investment portfolio, you will pretty much own every aisle at the grocery store. The appeal of these eight companies is that you can truly be a "buy-and-hold" investor with these kinds of companies because they do not share the attributes that typically cause other blue-chip companies to collapse.
(1) First of all, none of these companies need particularly strong management to succeed. Warren Buffett publicly criticized the CEO of Kraft (at the time) Irene Rosenfeld for the value destruction of issuing cheap shares to buy Cadbury while paying high taxes to sell DiGiorno pizza to Nestle. Even though this move may have been unwise when adjusted for tax ramifications and the value destroyed by issuing cheap shares, the consequences have been minimal because the operating margin across the board remained steady at 17-18% and overall profits barely hiccupped.
You do not have room for much stupidity with a bank investment. When Ken Lewis, the CEO of Bank of America (NYSE:BAC), acquired Countrywide, the entire company flirted with bankruptcy, having to issue billions of dilutive shares and taking other extreme measures to stay afloat. That's the nature of dealing with a business that involves high debt to equity: a principal risk is that bad management can sink your ship quickly. That risk is close to nonexistent in the consumer staple sector because the underlying strength of the business is so strong that it can withstand a lot of abuse and still make money for shareholders.
(2) The second element is that these companies are incredibly resistant to shifts in technology. The problem with most technology companies is that they must always be coming up with something new to grow profits, or in some cases, just to keep profits static. That is a difficult place to be if you have to endure a period of minimal innovation. With the notable exception of IBM (NYSE:IBM), there are not many American technology companies that have records of sustained profits over the decades.
These companies, almost by definition, are immune from technology. They sell food and beverages. As long as people need to eat and demonstrate enough of a preference for brand-name products that they are willing to pay a small premium to consume them, then these businesses should prove resistant to the changing tastes over time. Product obsolescence is not a real risk with cereal, potato chips, and carbonated beverages.
When you monitor a snack food or drink company, you only have to worry whether folks will still be buying Cheerios in a way that will allow General Mills to realize a 10% operating margin, but you are largely isolated from the worry of whether consumers will still be purchasing cereal in general.
What is the repetitive narrative that we hear about long-term investing? Normally, it is something along the lines of "the world changes too fast these days to think of anything as permanent holdings anymore." That narrative is true for many sectors, but the consumer staple sector remains an exception because the products are resistant to technology and there is large consolidation within the industry.
In many ways, these eight companies are more eligible for buy-and-hold consideration today than they have ever been in their history. Let's use Coca-Cola as an example. In 1919, Coke went public. A year and a half later, the stock fell over 50% because the company had to deal with shortages from one of the sugar refineries that tried to hold the company hostage.
Coca-Cola has largely diversified itself away from putting itself in the position of having a "singular reliance" in the same manner it once did. Heck, the company is not even reliant on the United States any more, as over 59% of sales occur outside of U.S. borders. The company now has over 500 brands in its portfolio, so even if consumers stop drinking Coke as much, there is a reasonable likelihood they could shift to other products under the Coca-Cola umbrella such as Powerade, Vitamin Water, Minute Maid, and so on.
While "buy-and-hold is dead" may be the prevailing narrative across some sectors, it seems that the big food and beverage companies have gotten stronger over time because they slowly and gradually acquire smaller food and beverage companies to diversify their product offerings and aid long-term growth. In many ways, Coca-Cola is a much stronger buy-and-stock than it was 70 or 80 years ago.
However, the trick with these companies is to avoid overpaying. Each of these companies are trading above their 10-year P/E ratio average, and unless they have brighter growth prospects now than they did in 2003, it may be unwise to overpay (and I should note that Kraft and Modelez have incomplete 10-year histories due to stock spinoffs). But these companies can be a joy to hold long term because they keep paying out uninterrupted dividends and have strong histories of generating profits in all economic environments. And they are easy to hold because these eight companies almost have monopolies on the entire food and non-alcoholic beverage market in the United States. Once you own these eight companies, it is very hard for someone to visit a grocery store without you getting a fractional share of something they bought.