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

3 colorful arrows racing straight up on a black background.
Investing

1 Must-Consider Stock as the TSX Reaches New Heights

Constellation Software (TSX:CSU) stock still looks like a great deal at around $5,000 per share.

Read more »

Canada national flag waving in wind on clear day
Investing

3 Must-Have Canadian Stocks for Your TFSA During Economic Uncertainty

These three all-weather Canadian stocks are ideal additions to your TFSA.

Read more »

stock research, analyze data
Dividend Stocks

The Smartest Dividend Knight to Buy With $800 Right Now

One of the TSX’s dividend knights is a smart buy today, even with a less than $1,000 investment.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Investing

1 Magnificent TSX Stock Down 80% With Massive Growth Potential

Down 80% from all-time highs, this top TSX stock trades at a sizeable discount given the company's steady growth estimates.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How I’d Invest $40,000 of TFSA Cash in 2025

These three TFSA investments are some of the best options out there, especially while each remain on sale.

Read more »

Aircraft Mechanic checking jet engine of the airplane
Dividend Stocks

Where I’d Invest $2,800 in the TSX Today

Looking for a mix of resilience, income, and upside, I'd consider building a position in Exchange Income as a part of…

Read more »

ways to boost income
Coronavirus

Why I’m Holding My Air Canada Stock Despite Recent Turbulence

Air Canada (TSX:AC) stock is down this year, but I'm holding the line.

Read more »

A plant grows from coins.
Dividend Stocks

This Dividend Knight Paying 3.9% Is Trading at a Deep Discount 

Find out how the recent dip in goeasy stock affects its dividend and what it means for potential investors today.

Read more »