Question:
I’ve held AFC Enterprises for about three years. I’ve had a good run. I’m ready to take my profits and invest elsewhere. What would be a good replacement, or do you think I should hold on to some shares?
Answer:
AFC Enterprises (NASDAQ: AFCE) owns Popeyes Chicken & Biscuits through both franchises and company-owned restaurants in 47 states and 26 countries, with a concentration in the southeastern United States. The stock has appreciated 416% in the past four years. Its current price-to-earnings is 31.5 versus its five-year average of 15.87. The company has a long term growth projection of 17%, making its current price-to-earnings-to-growth 1.8. The stock is expensive after such a large gain and relative to growth prospects.
If you were interested in staying with fast food restaurants, we like both McDonalds Corp. (NYSE: MCD) and Starbucks Corp (NASDAQ: SBUX); however, they too look somewhat expensive with a 1.79 and 1.85 PEG, respectively. McDonalds has a dividend of 3.44%, which pays you to wait while earnings growth catches up with the financial markets. Starbucks, on the other hand, is a low debt option, with potential to fuel earnings increases, if management were to increase leverage. This is the kind of company where investors may benefit from the pressure of an institutional investor like Carl Ichan or Bill Ackman, who are known for their history of investing, to gain influence on the board of directors to drive changes.
Question:
I’ve heard you debate Coke vs. Pepsi for years. I’ve got a new one for you: Dunkin Brands vs. Starbucks. What’s your pick and why? I’m leaning toward Dunkin because of their Baskin-Robbins brand.
Answer:
We prefer shares of Starbucks Corp (NASDAQ: SBUX) to Dunkin Brands (NASDAQ: DNKN). We currently recommend shares of Starbucks, as they meet our criteria for financial strength; however, the shares look expensive at current levels. Starbucks trade at about 37 times earnings now versus their five-year average of 27 times and their three-year average of 29 times earnings. When comparing Dunkin Brands and Starbucks, not only does Starbucks look cheaper by most measures of valuation, but it also is expected to grow earnings at a higher rate than Dunkin, and it has far less debt. While we don’t recommend shares of DNKN, if you insisted on buying, we recommend focusing on the Dunkin Donuts part of the business more so than the Baskin-Robbins part as Dunkin represents about 80% of sales.
Question:
I’m interested in the 3D printing company, Stratasys, Ltd. I know you’ve said you don’t look at stocks without a track record. This one just came to the stock markets in September. I’ve read some good things about this company on Seeking Alpha. What do you think?
Answer:
Stratasys Ltd. (NASDAQ: SSYS) is a maker and servicer of 3D printing equipment. The company has received a lot of attention lately and for good cause: These 3D printers are amazing. They can take a concept and create a prototype using resin. We encourage you to go to the company’s website and see how Orange County Choppers used their printers to make a dragon chopper. However, the company does not seem to be the best investment in the group.
There is a lot of consolidation going on in the space. We don’t advocate buying a stock that might have a chance for it being bought by a larger company, but it does happen. This space seems to have above-average buyout potential. Meanwhile, Stratasys has reported negative earnings. There is no price-to-earnings or price-to-earnings-to-growth to speak of. Still, the company is very profitable based on gross margin of 51% and revenue growth of 38.1%. The company also recently purchased MakerBot, a desktop version of the 3D printers.
While Stratasys is a leader, 3D Systems Corp. (NYSE: DDD), a competitor, seems more attractive at the moment, with positive earnings of $1.02 per share and a P/E of 54. Two other choices are Mentor Graphics Corp. (NASDAQ: MENT) and FLIR Systems Inc. (NASDAQ: FLIR). Right now, Stratasys is more speculation. 3D printing is an exciting concept, but for the investment to have the huge gains like an Apple, the printer must be made into a common household item.
Question:
My husband is really aggressive in his 401(k) with emerging market funds and international funds (AEMGX and UMBWX). I feel I should balance our overall portfolio with more conservative choices in my own 401(k). Should I be looking at bond funds, or the proprietary conservative portfolios?
Answer:
First of all, let’s talk about risk. Several things should go into the decision about how much risk to take, but chief among them is the length of time before you need the principal of your investment. In general, the longer the time you have to invest, the more risk you can allow. The other major factor is your personality. Some, like your husband, are fearless when it comes to taking risks; others lose sleep over the potential for even minor losses. In the end, you shouldn’t lose sleep over your investments. We encourage you to work with someone who understands this and can help you invest your assets accordingly.
That said, we believe it is a good idea to balance the portfolio, since it seems you are not comfortable with risk on the same level as your husband. We still believe you should stay in the equities markets, if you do not need the money in the next 10 years. Perhaps, you may find it more palatable to invest in income stocks. That is, stocks that pay a dividend.
We have a portfolio, which focuses on this strategy, paying about 4% dividend overall. It has lower volatility than the market in general, also referred to as a low Beta. You can generally expect a dividend or income strategy to go down less in negative market trends. On the other hand, they also tend to lag the overall market in positive trends. They also appeal to those who need income. These are not a reasonable replacement for bonds as they still have more volatility as they are equity investments. You can get exposure to income strategies through a couple of funds or ETFs. As far as ETFs go, we like iShares Dow Jones Select Dividend Index (NYSE: DVY), which we recommend to clients. On the mutual fund side, we like Parnassus Equity Income (PRBLX) or Commerce Value Fund (CFVLX).
At Henssler Financial we believe you should Live Ready, which includes understanding both your risk tolerance and investment horizon. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
