Buy What You Know: 2 Top Stocks You Visit Every Day

Putting Peter Lynch’s advice into practice.

| More on:
The Motley Fool

Buy what you know. That was the commonsense philosophy immortalized by the legendary investor Peter Lynch in his classic book One Up on Wall Street. Sometimes, the best investment ideas come from the very same goods and services you use every day. What stores are attracting crowds at the mall? What products are getting rave reviews from family and friends? A keen observer can sometimes spot an investment opportunity long before the analysts on Bay Street.

Of course, as Lynch made clear, just because you like a company doesn’t necessarily qualify it as a good investment. The diligent investor must drill deeper. Is the balance sheet strong? What are competitors doing? Is the stock reasonably priced? Only then can a security be confidently added to a portfolio.

With this theme in mind, here are two companies you probably visit every day that double as great investments.

I’ll take a large double-double in my portfolio
It’s a simple business. You take some bean and add hot water. Sell each cup for $2.00. Yet it’s a highly profitable business model that has made Tim Horton’s (TSX: THI, NYSE: THI) a Canadian icon and one of the most successful businesses in the country.

The numbers are impressive. Tim Horton’s sells eight out of every 10 cups of coffee in the country. The company sold more than 2 billion cups of coffee last year. And its product is habit-forming. More than 40% of Canadian Tim Horton customers visit the chain at least four times per week.

Of course, when you’re posting those kinds of numbers, it’s natural to assume that Tim’s has saturated the market. But that’s not necessarily true. Tim’s still has an opportunity to grow in Alberta and Quebec. New stores in established markets will be smaller, kiosk-like shops with limited menus. The company is also trying new initiatives to grow sales at existing locations. In what’s called in the industry lingo “daypart expansion”, the company is beefing up its lunch and dinner menu.

Exporting the Tim’s brand south of the border has been a mixed success. Last quarter, U.S. same-store sales grew only 1.4%. But, notably, in states where the company is more established — Michigan, Ohio, and New York — operations have posted strong results.

Better yet, Tim Hortons has a great track record of rewarding shareholders. Since going public, management has tripled its dividend payment. In August, the company has also pledged to buy back $1 billion in stock. That could be a catalyst for a higher share price.

Padding your portfolio one dollar at a time
Dollarama (TSX: DOL) is the ultimate no-frills operation. Until recently the company tracked its inventory by paper. It was only in 2011 that stores started to accept debit cards.

How did such a simple operation come to dominate Canadian business? By sticking to the basics, differentiating itself from other retailers, and aggressively expanding. And the model is working. Last quarter, sales hit a record $511 million — up 16% year over year. Comparable-store sales and net income increased 6.5% and 24%, respectively.

And the company still has a long growth runway left. Relative to the U.S., dollar stores remain an underrepresented retail concept in the Canadian market. Dollarama is also adding higher margin merchandise to its stores through the introduction of $2.00 and $3.00 price points.

Now, some investors may be a little concerned about Dollarama’s valuation. At 20 times forward earnings, the stock certainly hasn’t been marked for the discount bin. But once you factor in the company’s growth rate, that multiple seems much more reasonable. With analysts anticipating earnings to grow 18% annually over the next five years, the stock trades at a reasonable 1.1 price-earnings-to-growth, or PEG, ratio. That’s hardly nosebleed territory.

Foolish bottom line
Buying what you know is a time-tested investment principle. Of course, your homework doesn’t end there. But reviewing the businesses you patronize every day is a great way to find investment candidates.

What are you doing October 1?
Our senior investment analyst will unveil his top two stock ideas for new money now on Oct. 1. And YOU can be one of the select few investors to find out first — just click here to reserve your invitation.

Disclosure: Robert Baillieul has no positions in any of the stocks mentioned in this article. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Oil pumps against sunset
Energy Stocks

Is it a Good Time to Buy in the Energy Sector?

Boosted by a very bullish supply/demand environment, energy stocks like Canadian Natural Resources and Tourmaline have much further to go.

Read more »

Investing

2 Stocks to Buy Offering Better Value Than Air Canada

Air Canada has been a popular stock for years, but despite its low price, these two picks are much better…

Read more »

money cash dividends
Investing

How to Make $373/Month in Passive Income With These 2 TSX Stocks

You could bring in passive income of $4,482 annually, or $373 per month!

Read more »

clock time
Stocks for Beginners

3 Stocks to Start Investing Today

Looking for a set of stocks to start investing today? Here are some great options that offer growth and income…

Read more »

investment research
Dividend Stocks

Young Investors: Create Cash Flow With This Top Dividend Stock

If you're a young investor looking for cash flow, you need a strong dividend stock and solid banking program designed…

Read more »

Illustration of bull and bear
Investing

Is the Stock Market Selloff Over?

Throughout this week, many stocks have been gaining value and rebounding from their lows. So, is the stock market selloff…

Read more »

potted green plant grows up in arrow shape
Investing

Retirement 101: How Investors Can Turn $20,000 Into $500,000 in 25 Years

These top TSX dividend stocks have made some investors rich.

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Dividend Stocks

3 Superb Dividend Stocks I’m Ready to Buy

The market is full of great options for income-seeking investors. Here are three superb dividend stocks to buy now.

Read more »