Like Ted Williams, we wait for the “fat pitch”

By Elmer L. Meszaros, CFA, Partner

For the past several years, approximately 20%-25% of the stocks we held in client portfolios were stocks of consumer product companies. The chief reason is that the broad sectors known as “consumer discretionary” and “consumer staples” companies fit well the philosophy of Midwest Investment Management.

Consumer spending is the largest part of the American economy, counting for two-thirds of Gross Domestic Product and 22% of the S&P 500 weight.

The better consumer product companies have also grown faster than the aggregate S&P 500 companies in terms of revenue, earnings, and dividends.

Searching for quality

We look diligently for stocks of “quality” companies that have displayed consistent growth, and are available at a value price.

To us, “quality” means a strong industry position and healthy finances. This allows a company to withstand cyclical shocks, should they occur, or unexpected competitive pressures. Superior profitability is a mark of quality because it demonstrates a company’s ability to prosper, stay competitive, and grow.

The consumer stocks we like have demonstrated growth in earnings, dividends, and book value, and have done so consistently—preferably each year. We like to have confidence that their business model will generate growth for many years, lifting the stock price.

Dividend growth

Dividend growth is a good reality check on healthy finances and the ability to grow. General Mills has made dividend payments for 105 consecutive years.

Some consumer stocks have records of increasing their dividends over many years (see box bottom left).

Cyclical stocks

But not all consumer stocks are stable or even growing. “Consumer discretionary” stocks are more cyclical, since people can defer buying automobiles, vacations, or home improvement items. Some business models (i.e., department stores) suffer as they are eclipsed by new formats such as discounters or specialty stores.

Opportunity often comes in the form of short-term problems for a company with long-term advantages. Such was the case of Proctor & Gamble a few years ago, when our research indicated that P&G’s problems would soon be resolved.

But past success is no guarantee of a great future—witness recent problems at Toys-R-Us, Winn Dixie, and more recently, Coca-Cola. Selectivity will always be critical.

Patience pays

Since our clients’ investment success is linked to the price we pay for the stock, we use a five-model price discipline to arrive at a fair price, and then try to buy the stock 20% to 30% below that level, our “value price.” In baseball, it’s called waiting for the “fat pitch.”

In fact, legendary

Ted Williams—the greatest hitter of all time—seldom swung at a ball that was not exactly where he wanted it...even though it might have been in the strike zone. Ted remained patient, waiting for just the right pitch—just as we do when selecting stocks.

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Building long-term wealth requires patience and a disciplined approach to stock selection. If you’re not currently a client at Midwest Investment Management, Al Meszaros can help get you started. Contact him at (216) 830-1133 or elm@mimllc.com