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The power of investing in what you know.

Kellogg's Corn Flakes, Heinz Ketchup, Tootsie Roll Pops, Coca-Cola Classic, Nike Air Jordans and a Mattel Barbie. Sounds like a teenager's shopping list? Well, in a way it is. And anyone who is in the market for stocks ought to check out a list of companies whose products are household brand names directed at youth. Many of those same companies are market leaders providing growing income and earnings per share for astute investors.

"Year in and year out, consumers reach first for brands that they know and love, even if those products come at a premium price," says Stephen Sanborn, a securities analyst with The Value Line Investment Survey, a New York-based investment advisory publication.

And, with more and more baby boomers having children, companies with family appeal have demographics tilting in their favor. According to the National Center for Health Statistics, since the mid-1970s, births have increased steadily, nearly surpassing the birth rate of the original baby boom of 1946-1964. In fact, the Census Bureau says the child population in the United States could reach a little over 100 million by the year 2000.

Besides, a large chunk of a family's disposable income is spent on the children. Can you recall an instance where a young child was pulling his or her parents' coattails and asking for a certain toy or outfit? Well, very persistent, vocal children heavily influence their parents' buying decisions. We all know that children are avid consumers. Last year, discretionary income for young people--age 6 to 17--totaled $33.1 billion, according to the annual Youth Monitor Study from Yankelovich Clancy Shulman of Westport, Conn. Children age 6 to 8 spent half of their money on candy and gum. The rest went for soft drinks, fast food and entertainment. This leads Eric T. McKissack, senior vice president of Chicago-based Ariel Capital Management, a full-service asset management firm, to say that businesses should take advantage of the fact that "at different times, certain demographic trends favor one group over another and affect companies in different [sometimes favorable] ways."

These factors could also have a positive impact upon one's investment portfolio. Stocks whose performances are driven by family- and children-oriented consumer markets are viable picks for investors looking to create portfolios that offer diversification and superior equity returns.

This is a lesson Bernard and Valerie Beal learned coincidentally. The couple has been buying stocks they think their children, Michael, 8, and Erica, 4, might have an affinity for. When their son was born, the Beals purchased shares in Tootsie Roll Industries Inc., The Topps Co. Inc., Mattel Inc. and MacGregor Sporting Goods Inc.

Now both parents and children have their own portfolios. Bernard and Valerie own mostly blue chip stocks, while Michael and Erica have their own demographically based basket of stocks.

Ironically, Michael's portfolio has outperformed his parents' since his birth. "Michael's portfolio is up 481%. Over that same period, my portfolio is up 160%," says Bernard, who BLACK ENTERPRISE selected as one the "25 Hottest Blacks on Wall Street" (See cover story, October 1992). "But I turned over my portfolio quite a bit before the 1987 crash," Beal says. By contrast, he says, his son's portfolio was left alone.

Taking a look around for investment opportunities and buying stock in companies that make products that appeal to you and your family is a sound strategy, says Valerie Beal. "We wish we had taken that approach as opposed to looking at industries that were supposed to be hot."

Plenty of people have made money by simply observing what's going on around them and following trends (See How To Pick A Stock Before It Gets Hot, October 1992). Cheryl D. Broussard, an investment adviser with Broussard & Associates, Oakland, Calif., recalls a woman making a lot of money "in the early 1980s when the Star Wars movies first came out. She noticed the long lines at the theaters, checked out the film's producer, Twentieth Century Fox-Film Corp., and invested [in the company]."

Had you invested $1,000 in Stride Rite in 1981 your portfolio would have been worth $26,730 in 1990 (with dividends reinvested). Over that same period, $1,000 invested in Gerber Products or Campbell Soup would have grown to $14,873 and $13,165 respectively.

Similarly, no Saturday afternoon would be complete for some families without a trip to the mall and later a fast food pit stop. So, it's fitting that 4-year-old James Abbott and his sister Ayanna, 2, are eager shoppers at and investors in McDonald's Corp. and The Gap Inc.

The young Abbotts were exposed to the stock market by their aunt, Yolanda Herbert. In 1986, the Detroit elementary school teacher began buying shares for herself and her four nieces and nephews. "We sat down as a family [children included] and jointly came up with a portfolio of stocks in the retail and food industries." What's important, she says, "is that the children are learning the role of becoming producers rather than consumers."

Indeed, you can look at the clothes that you wear and the food that you eat. Wouldn't it be nice to own the companies that produce them? But popularity alone doesn't make a company a good investment. It's also the fact that the company has a good balance sheet, consistent sales and strong earnings growth.

There are a number of promising consumer-driven stock sectors. Below, BLACK ENTERPRISE takes a look at several, including soft drinks, fast food, food processing, toys, specialty retail (fashion) and entertainment.

The Cola Wars

In the soft drink industry, colas are by far the real thing. The stellar earnings and price momentum of Coca-Cola Enterprises Inc. and PepsiCo Inc., leading niche players in the concentrate business, make the soft drink industry very appealing. Together, the two companies account for 75% of the U.S. market.

Erratic demand patterns have created sluggish volume during the past 13 months and kept case sales around 1%. But analysts anticipate a comeback in annual sales closer to the 5% growth rate of the 1980s. "What's ideal about this industry is that you are dealing with low-tech companies," says George E. Thompson, first vice president of Prudential Securities Inc. in New York.

"There is no great mystery to duplicating the taste of Coke," he adds. Product packaging usually eats up 40% of total costs. Coke can fill 2,000 cans a minute and put them into consumers hands cheaply. Coca-Cola is growing industry-wide at a rate of 6% to 8% both internationally and domestically. Other consumer staples tend to grow at a 3% rate says Thompson. But a 30-year lead over Pepsi and a strong international presence are a major part of the soft drink giant's profitability.

Coke has the potential to raise profits by an average rate of 20% a year over the next five years. Pepsi may add 15%. Then again, PepsiCo sells more than soda. Its Frito-Lay Inc. snack food enterprise produces its greatest share of earnings. Frito-Lay is the world's largest snack food company with a 50% domestic market share. PepsiCo is also the parent company of the Taco Bell fast food chain, Pizza Hut Inc. and Kentucky Fried Chicken Corp.

Productivity in all three Pepsi businesses has suffered in this economy, says Ken Shea, senior securities analyst with New York-based Standard & Poor's Corp. "People have been eating out less and cutting back on their snack food intake."

But because these products are low-ticket items, they are the last areas impacted by the recession and the first ones to recover from it. Thus, the relative performance of these companies should be significantly better then the S&P 500 index of stocks over the next five years, notes Thompson.

Value Meals And Money-Making Deals

Taco Bell, Wendy's International Inc., McDonald's and Pizza Hut know that if the price is right, there will be plenty of customer demand, even in an economic environment where family incomes are pinched. A major marketing tool in the fast food business is the "value game." Give people a deal and they will buy it.

Discount coupons bring in more purchasers but at lower profit margins. Once the coupons expire, customer traffic drops. Many fast food restaurants now offer lower prices on meal combinations, selecting items that will not reduce profits.

McDonald's value meals guarantee the sale of French fries and a soda with the purchase of a hamburger. Marketing campaigns targeting the family and urban youth haven't hurt either when it comes to boosting overall revenue.

But booming domestic and international business is what really makes the golden arches a choice investment pick. Mickey D's plans to add 600 new eateries worldwide next year. Its share earnings are expected to rise 11%.

The fast food industry maintained a 10% sales growth this year, according to the Washington, D.C.-based International Franchise Association. These businesses are dealing with low-end items, so fast food chains will pick up speed in earnings well before an otherwise saturated restaurant industry.

Stocks That Are "MM-MM Good"

Campbell Soup Co., H.J. Heinz Co., General Mills Inc., Gerber Products Co., Kellogg Co., Sarah Lee Corp. and Tyson Foods Inc. are among those food processing companies poised for superb gains next year.

The past 18 months have been tough for the food industry, says Standard & Poor's Ken Shea. "A lot of companies lost their pricing flexibility and their profit margins have been hurt." In fact, food processing stocks have underperformed the market. This is attributed mostly to a rotation out of defensive stocks and into cyclical stocks.

Slowly but surely, investors are starting to do a 180[degrees] turn. "Now the question is how well can these companies grow their earnings over the next 12 to 24 months," says Roger W. Spencer, first vice president of PaineWebber Inc. in Chicago.

Spencer expects most food processors to garner double digit earnings next year, around 12%. The industry has a remarkable record: Net income has been up every year since 1982.

One key to the success of this industry is the strength of the leading players' brand names, says Value Line's Stephen Sanborn. Food processors have invested heavily in marketing. In addition to introducing a host of new names, larger companies have been actively acquiring smaller companies to expand their product lines and increase volume.

Now the market shares of leading food companies are at or near all-time highs. The big players can boast that the majority of their products command either the number one or number two position in their respective categories, adds Sanborn. This normally means higher profits for investors. These companies will also have more stable and flexible pricing environments.

Moreover, the dividends of food processing stocks continue to rise. Their return on equity--about 20%--is much better than that of the S&P 500, around 15%. Then there is an industry drop in stock prices. With the exception of a few premiums, such as Kellog, Sarah Lee and General Mills, many of these stocks are selling at discounts. Worldwide expansion makes the leading food companies even more attractive.

Big Bucks For Tiny Tots

As in the food industry, the big toy companies are growing bigger and bigger. Even major discount stores, Toys "R" Us Inc., Wal-Mart Stores Inc. and Kmart Corp., are expanding their retail toy market share.

Toys "R" Us has filled in the void left by the demise of Child World Inc. by snapping up leases to its former primary competitor's outlets. Toys "R" Us seeks to double its domestic store count to 900 next year. And it opened four stores in Japan earlier this year, adding to an overseas market that includes 131 stores in 10 countries.

Nowhere near being out for the count, warehouse clubs are lively competitors. And over the next year, national and international retailers will continue their drive to buy from big toy makers to meet volume demand.

Today's toy industry is seeing a shrinkage in the number of players as larger companies increase their product lines and sales through acquisition. A prime example, Hasbro Inc. acquired Milton Bradley Co., Playskhool Inc. and Tonka Corp., which owned Parker Brothers and Kenner Products Inc. "Smaller toy companies are at a competitive disadvantage, because they aren't able to finance the level of advertising and the amount of product that retailers need," according to Value Line securities analyst James W. Sullivan.

As a group, toy companies have increased earnings five times consecutively over the last 25 years. Hasbro and Tyco Toys Inc. increased earnings seven years straight. Even though this was a good year for toy sales, the ability to increase gross margins will be a key factor in the ability of toy companies to maintain earnings momentum, notes Sullivan.

One toy maker that is gaining momentum is Fisher-Price Inc. (the company recently began trading publicly after being spun out by Quaker Oats). Fisher-Price has profited in part from a strong product mix and is moving rapidly to expand overseas. International penetration has already driven the growth of big boys, Mattel and Hasbro.

From an investors standpoint, pay close attention to a company's promotable television merchandise and traditional staple products. Promotional items refer to the Batman line of characters, the crash dummy figures and the super squirter water guns. Whereas these items have an expected short life span, traditional toys are as viable on Dec. 26 as they were on Dec. 24. Lego, Barbie, Monopoly and Mickey Mouse fall under this category.

Mattel Inc. is known worldwide for its franchise product--Barbie. "If Barbie were a toy company by herself, she would rank among the top five," says David S. Leibowitz, senior vice president at the New York City brokerage firm, American Securities Corp. He explains that 1992 Barbie sales may total $1 billion.

While it had a terrific run, the video game fad is flat. Ironically, one mostalgic trend is Treasure Trolls: the ugly creatures are as popular today as 20 years ago. Russ Berrie Inc. is bound to have record sales from an extensive line of these eccentric items.

With most toys sold between the Thanksgiving and Christmas holidays, the industry is both cyclical and seasonal. Still, toy sales have been up in the last 40 years--although a modest 2% in the last five years. The one exception is 1963--the year Kennedy was shot.

"The beauty of the toy business and the reason behind its successful growth is that year after year the children of America will not be denied," says Leibowitz.

Here Today, Still Here Tomorrow

The clothing retail business is another industry that's flooded with trends. But trendy fashions are fast and fleeting. This translates into lost sales, profits and often market share for the retailer. And the company's stock runs the risk of falling because the retailer failed to move merchandise or to recognize the next trend.

Thanks to its specialty stores--The Gap, GapKids and Banana Republic--The Gap Inc. posted sales up 30% last year when most retailers suffered through the recession. What makes The Gap different is that it operates like a discounter, and it targets the under-25 crowd. The successful strategy has made The Gap Inc. the number two hottest retailer in clothes brand behind privately held Levi Strauss.

In just five years, this stock has grown from $4 per share to as high as $60 at one point. Over the next five years, analysts expect the company to generate annual earnings around 20%. And sales could double from plans to expand the empire to 2,000 stores.

But an ultra-slow recovery will hurt retailers even the ones that are currently doing well, says Ariel Capital Management's Eric McKissack.

Children's products and leisure sportswear are two sectors that Ariel Capital's founder and president, John W. Rogers Jr., is bullish about. There are some clothing manufacturers that have value and growth potential. Oshkosh B' Gosh Inc. is known for its patterned bib overalls. Now that its line sells at Sears Roebuck & Co. and J.C. Penny Co. Inc., Oshkosh has more muscle to compete with other major labels.

Oshkosh is also looking to expand overseas. To help it penetrate the European market, Oshkosh formed a joint venture with French children's wear maker, Poron Diffusion.

Footwear maker Stride Rite Corp. has had a superb performance for a company vying against top contenders like Nike Inc. and Reebok. In the past five years, Stride Rite's sales increased 16% annually, with earnings up 42% annually on average. Favoring earnings prospects is the fact that Stride Rite has opened stores in the Asia and is expanding its current European market.

Nike's biggest sales gains last year came from international sales, which increased 80%. With half of the footmaker's sales generated abroad, analysts anticipate a 20% to 25% next year. Nike owes its popularity to its athletic line and endorsements by such superstars as Michael Jordan.

The sports-apparel boom will boost profits for small companies like Russell Corp., manufacturer of fleece-lined sweats, and Nutmeg Industries Inc., maker of spectator sportswear. Russell Athletic apparel has the potential to raise profits 20% over the next 12 months. With Russell set to further penetrate its oversea markets and turn around its international operations, the clothing manufacturer could even see an earnings growth of 33% or more. And sales could increase to 30%. Experts claim Nutmeg is growing so rapidly that it could increase sales 30% and earnings 72%.

No Business Like Show Business

As long as the economy is sluggish, the entertainment business will be weak, says Harold Vogel, a Merrill Lynch industry analyst. "The earnings potential for the industry is not that great." Yet, Vogel likes Paramount Communications Inc. "It has a lot of cash and a reasonable slate of films for next year."

The diversified conglomerate has operations in motion pictures and television production, home video, theaters, cable and broadcast television, publishing and sports. After operating at a loss in 1991, earnings started to rise last spring and should continue over the next 18 months. The producer of BeBe's Kids and Boomerang, Paramount's growth in part is reflective of its growing strength in box office sales.

Walt Disney Co. has profited in a somewhat nebulous film industry. Still, the lion's share of its profits comes from theme parks. Plans to expand park operations is what investors should eye.

True, the latest theme park, Euro-Disney, has not lived up to expectations. But domestic Disney has enjoyed somewhat an unexpected windfall because of a cheaper dollar. Instead of going to France this summer, Europeans flocked to Orlando to see Mickey. In recent years, Disney has had high, sometimes erratic earnings. Its P/E ratio is around 28.

With respect to television programming Viacom Inc., parent company of MTV, Nickelodeon and VH-1, has cornered the cable industry with its youth format.

Unlike other broadcast and cable networks, MTV is rapidly expanding overseas. Last year, MTV's advertising revenues increased by 7.7%, while most other media either maintained or lost ad dollars.

The earnings potential for Viacom over the next 12 months is around 12%. It also owns Showtime and the Movie Channel and the syndication rights to the Cosby Show and Roseanne.

Media giant Time Warner Inc. could raise annual profits 15% from its cable, film and amusement park holdings (it acquired Six Flags/Great Adventures). Time Warner's publishing and records businesses should also boost earnings. Just think what the resurrection of Superman in 1993 [he was killed last November] will mean to the sales revenue of DC Comics, a Time Warner subsidiary.

Recently, the stock of comic book publisher Marvel Entertainment reached an all-time high of $35 in part because of the company's purchase of Fleer, a manufacturer of baseball trading cards and candy (bubble gum). Marvel may fetch an even higher share price if it secures movie rights to Spider-Man and if it is as big a hit as the Batman movies (produced by Warner Bros. Inc., a Time Warner company). Marvel may license Spider-Man cards or action figures.

Finally, remember to check out the company first. While some may not trade publicly, the parent company may. Contact investor relations to receive the annual report and 10-K (annual) or 10-Q (quarterly) earnings report. If you make the right picks, it may be possible to ride a demographic wave all the way to the bank.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Brown, Carolyn M.
Publication:Black Enterprise
Date:Dec 1, 1992
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