9 Market Leaders and Category Revolutionaries

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 |  Includes: AAPL, AMZN, BIDU, CAT, DE, NFLX, OPEN, PCLN, WYNN
by: Rick Shea

One year ago on April 26, 2010, I wrote an article on market leaders and category revolutionaries. These are companies that either through technological innovation, superior branding or just plain better execution, have developed a better business model that allows them to lead and drive long term, superior sales and revenue growth. In the past, they might have been called “Category Killers”, but I prefer the term “Category Revolutionary” because through their excellence, they have redefined how consumers or businesses use their product.

My three main criteria are:

· Growing category sales and usage

· Leading or dominant market share

· Sustainable and superior sales and earnings growth

On April 26, 2010, I chose eight companies based on these criteria. They were as follows:

· Apple (NASDAQ:AAPL): For their innovation with the iPhone and now the iPad

· Baidu (NASDAQ:BIDU): For their dominance in the fast growing Chinese internet market

· Amazon (NASDAQ:AMZN): Leader in online retailing

· Netflix (NASDAQ:NFLX): Their leadership in online streaming of video

· Cree (NASDAQ:CREE): For their leadership of the growing LED market

· Priceline (NASDAQ:PCLN): Leader in the fast growing internet travel sector

· Sandisk (NASDAQ:SNDK): Flash memory card leader

The goal is obviously to identify companies that will experience hyper growth in sales and profits for several years, withstand competitive pressures and ultimately drive superior stock price appreciation.

So how did I do, and does my theory of investing in category revolutionaries work? Listed below is a chart of the eight picks with their share price on April 26, 2010 and their current share price as of April 22, 2011.

Stock

4/26/2010

4/22/2011

% Gain

AAPL

$270.83

$350.70

+29.4%

BIDU

$64.00

$148.90

+132.6%

AMZN

$142.02

$185.70

+30.8%

NFLX

$99.39

$252.20

+153.7%

CREE

$79.19

$38.89

-49.1%

PCLN

$258.30

$546.58

+111.6%

SNDK

$44.61

$48.99

+9.8%

Click to enlarge

So as you can see, I nailed it on Priceline, Baidu and Netflix with decent results on Apple, Amazon and Sandisk. Total results for the portfolio of stocks would have yielded you a +52.3% gain, if you invested equal amounts in all stocks and held for one year. Not bad, if I do say so myself. I only missed on CREE (and yes, they and I missed badly). Cree violated two of my three criteria. They are not the leader in market share (recent estimates have them 3rd in the fast growing LED market to two private companies that I was unaware of), and they have not been able to sustain sales and EPS growth due to competition.

For 2011, I am expanding my list to nine stocks. I am dropping Cree and Sandisk but sticking with AAPL, BIDU, PCLN, AMZN and NFLX. Cree’s issues have been discussed and Sandisk does not fit my criteria because they have not been able to accelerate sales and earnings growth in the flash memory market like I thought they would. (The jury is still out, however, as flash and Sandisk may ramp up growth when Apple gets over their bottleneck issues with the iPad2.)

Drum roll…please. Here is my list of nine market leaders and category revolutionaries for 2011 and 2012, along with some commentary:

1) Apple - Great quarter; the one two punch of the IPhone and IPad should drive growth for many years.

2) Baidu - Dominance continues in Chinese search market with additional growth platforms coming.

3) Netflix - Streaming video is the future. The main questions are increased cost for content and if they can hold off the oncoming rush of competition.

4) Priceline - Internet travel is still growing and I am still a big fan of William Shattner, aka Captain Kirk.

5) Amazon - Ongoing leader in online retail, although their growth to P/E still scares me.

And now my new choices for 2011 and 2012:

6) Wynn Resorts (NASDAQ:WYNN) - They are the leader in the fast growing Chinese gambling market. They reported a blowout quarter driven by their Macau resort and have plans to build a 2nd, and hopefully more casinos for the Chinese consumers. Their main competition is from Las Vegas Sands (NYSE:LVS) (Please change your name already), but the important thing is the expansion of gambling and the aging Chinese population. Older people and the Chinese love to gamble, and Wynn is well positioned to lead this future growth.

7) Caterpillar (NYSE:CAT) - The market leader in global construction and mining equipment. Our need for precious resources, including coal and minerals, along with the rebuilding of Japan should drive growth for the next few years. They've had outstanding sales and EPS results of late, with their main competition coming from Joy Global (JOYG) on the mining side. CAT's a cyclical company and has the best brand recognition, so they should do well as long as the global economy does well.

8) Deere and Company (NYSE:DE) - The leading global farm equipment company. They continue to be my favorite company to take advantage of rising food inflation and global food shortages. Farmers are flush with cash from high grain prices and that usually means more spending on tractors and farm equipment. The stock price probably won’t grow like some of the tech companies, but this is about picking great companies and letting stock appreciation take care of itself.

9) Open Table (NASDAQ:OPEN) - The leader in the online reservation system for restaurants. It's much more speculative than most of my other choices, but I really hate to wait in lines and think they can expand their business model to other businesses besides restaurants. Part of achieving fantastic price appreciation is identifying leaders and fast growers early and then sticking with them through the bumps and bruises of the stock market.

I would have probably added Facebook, Twitter or Groupon here if they were public, but alas, those IPO’s will come out in the future at sky high valuations. I generally ignore P/E ratios, but I do pay attention to PEG (Price to earnings growth) and generally will not do a new buy when the PEG is above 1.5.

So there you have it, our nine best stocks for long term appreciation. We considered many other companies and stocks including Salesforce.com (NYSE:CRM), Acme Packet (NASDAQ:APKT), Whole Foods (WFMI), First Solar (NASDAQ:FSLR), Oracle (NYSE:ORCL), Sina (NASDAQ:SINA) and many others. We would love to hear from readers on other companies that fit the criteria and if you think we are right, wrong or sideways on our top nine picks.

Please note most of these stocks are high beta stocks so they work best in a bull market. As always, do your own homework. The old adage applies “Our advice is free but sometimes you get what you pay for”. Good luck, and be careful…it’s a jungle out there.

Disclosure: I am long AAPL, BIDU, NFLX, SNDK, DE, CAT, WYNN.