A conviction buy is a rare and beautiful thing

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This article introduces JM Smucker Co., Reynolds American and The Buckle. Michael Hooper owns shares of The Buckle, Reynolds American and JM Smucker. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle.

A conviction buy is a rare thing. This is a time when an investor is absolutely convinced that he is right in his analysis of a security. He knows he won’t lose on his trade and will likely make an exceptional comeback.

Very few professional analysts use the term “buy with conviction”. They are more likely to say “buy” or “overweight”. I have been an equity investor for 20 years, but have only experienced a handful of “conviction buys”. To make a buy with conviction, you first need to have a list of stocks to acquire and a bunch of cash on hand. Monitor stocks daily. Fear and greed will create buying opportunities.

I offer you three actions that should be on your wishlist: JM Smucker Co. (NYSE: SJM), American Reynolds (NYSE: RAI) and The loop (NYSE: BKE). They are exceptional companies with strong balance sheets and higher profit margins than their peers. Here’s a chart comparing these companies to their peers using fundamental metrics:

name P / E forward Price / Sales The net profit margin Debt / Capital Yield
The loop 15.31 2.27 14.47 0.00 1.48%
Abercrombie & Fitch 18.42 0.66 5.03% 0.11 2.09%
The hole 15.26 1.22 8.00% 0.27 1.90%
American Reynolds 15.51 3.30 18.51% 0.52 5.03%
Altria Group 14.97 2.95 18.15% 0.81 5.36%
Lorillard 14.44 2.50 18.26% 2.08 4.87%
Jm smucker 18.43 1.93 9.52% 0.29 2.15%
Kellog 4:15 p.m. 1.49 6.52 0.75 3.01%

Source: Charles Schwab Research and Yahoo Finance.

Jelly, tobacco and teen fashion
Smucker has a higher profit margin and lower debt-to-capital ratio than Kellogg. The lower the debt-to-capital ratio, the better. Smucker owns Folgers coffee and many staples such as Smucker’s Jelly, food products that have maintained their popularity over time. Smucker is a family business that has been around for over 100 years. Family members want the stock to perform well and earn increasing levels of dividends to shareholders. Investors like us can participate in the race.

Michael Hooper owns shares of The Buckle, Reynolds American and JM Smucker. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle.

Reynolds American has a slightly higher net profit margin than Altria Group and Lorillard Reynolds also has a lower debt-to-capital ratio. Tobacco companies have huge profit margins, but are struggling to grow due to growing awareness of the health risks of smoking. Reynolds has developed some interesting niches, including his Santa Fe Natural Tobacco Co. and RJ Reynolds Steam Company. I noticed that several friends were smoking Santa Fe Natural Tobacco cigarettes. They say Santa Fe cigarettes taste more natural than traditional cigarettes. The vapor company was created last year to bring a new electronic cigarette to the market.

The Buckle is a leading teen fashion designer. The company has a whopping 14.47% net profit margin, beating Abercrombie & Fitch’s 5.03% margin and The hole’s 8% margin. La Boucle has no debt either. Its comparable store sales are growing. Over the past four years, The Buckle has paid a special dividend. Last year, the special dividend was around 10% of the share price at the time. The loop has had a solid year so far. I expect him to pay another special dividend this fall.

The bottom line
When Warren Buffett knew he was right about a stock, he wasn’t afraid to go deep. In its early days, a conviction buy could represent a third of its portfolio. If he was right – and usually he was – that big holding really boosted his returns. On September 19, Buffett told CNBC that stocks “were very cheap five years ago, ridiculously cheap, and that has been fixed. Their price is probably more or less fair now … We’re having a hard time finding things to buy. “

Smucker, Reynolds American, and The Buckle need a pullout before they can be a conviction buy, but keep them on your wishlist. The patient investor watches and waits for the right opportunity to make a conviction buy. It can take months of patient observation, reading and analysis. When the investor knows the odds are likely in their favor, they invest with conviction. He’s not afraid to go deep because he knows the rewards are likely to be exceptional.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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