Back in the fall of 2007, I said a few bullish things about wholesale food distributor Sysco (NYSE: SYY).
I started with the basics, telling readers how the company used the nation’s largest private trucking fleet to hand-deliver fresh meat, fruit and vegetables to customers like school cafeterias and fast food outlets.
At the time, it had tight relationships with 400,000 clients that hauled in $34 billion in annual sales. That made the firm larger than its four biggest competitors combined. And this is definitely an industry where size matters.[ad#Google Adsense]Powerful economies of scale and an efficient distribution network had allowed Sysco to undercut rivals — making it the Walmart (NYSE: WMT) of food distribution.
Needless to say, those low prices were attracting customers. In fact, organic sales growth was running double the industry average and the firm still had the widest operating margins in the business. Earnings had been climbing at a healthy +17% pace for several years.
Looking ahead, I liked the fact that Sysco was flexing its muscles by negotiating better purchasing contracts with suppliers. And with other supply chain efficiencies being wrung out, I saw even lower costs — and thus more opportunity to consolidate market share.
As it stood, this was already the dominant leader in a fragmented $200 billion market. And there were other perks: recession-resistant demand, predictable cash flow, generous dividend hikes and stock buybacks along with superior returns on equity above 30%.
These are the hallmarks of a great company. Best of all, the shares were trading around $30 — a nice discount to my fair value estimate of $43.
All of this sounded pretty tempting. But one look at the stock chart will tell you why I lost faith…
After three years, Sysco is still stuck at $30.
I still believe the stock is worth every penny of $43 per share. If anything, it might be worth more. But I’m not biting again. And I’ll tell you why.
There just aren’t any real catalysts to excite investors and get the stock moving.
From here, an advance to fair value at $43 would provide a gain of +45%. That’s nothing to sneeze at — if you can make that trip in 365 days. But what if it takes two years to reach fair value? In that case, your annualized return drops to +21%. And if the journey takes three years, then your money made just +13% a year.
On the flip side, if you can latch on to a fast-moving stock that makes the same trip in six months, then your annualized gain shoots up to +104%.
Here’s the moral of this tale: there are two components that influence investor returns — a stock’s upside potential and the time it takes to realize that potential. Obviously, you want the shares to reach their final destination sooner rather than later.
In this case of Sysco, there is plenty of ground to cover before the stock is fully valued. That’s a good thing. Unfortunately, the shares are traveling by horse-drawn wagon to get there. I prefer to recommend stocks to my Market Advisor subscribers that are travelling by supersonic jets that can scream from point “A” to point “B'”in a hurry.
That’s why I don’t recommend a single stock to my subscribers unless it has a solid catalyst in place. And preferably, it has more than just one…[ad#Google Adsense]Catalysts are the high-octane fuel that make such speedy gains possible. Basically, a catalyst is something that creates a dramatic impact on a company’s fortunes — and triggers a rush into its stock.
This might be the launch of a new product, or expansion into a booming market, or a favorable regulatory change. It might be a fat government contract for a defense company, a major new oil discovery for an energy producer, or long-awaited FDA approval for a pharmaceutical firm.
Some catalysts are company-specific, like a clever acquisition. Others play on larger macro-economic themes, such as interest rates, consumer spending patterns and foreign currency fluctuation. Many of the strongest catalysts don’t fit neatly into any category at all.
For example, the collapse of electronics retailer Circuit City put billions in sales up for grabs, and Best Buy (NYSE: BBY) is grabbing it. Vodka maker Central European Distribution (Nasdaq: CEDC) is benefiting handsomely from Russia’s crackdown on illegal bootlegging.
Another example: I flagged Comtech (Nasdaq: CMTL), the No. 1 supplier of satellite-based transmission systems less than two months ago. As of today, it has already delivered a +21.7% gain and is within just a few dollars of my fair value target.
These are the type of events I prize — and they have led to quick gains.
Action to Take –> If your portfolio seems to be asleep, perhaps it’s time to wake it up. Look for catalysts like the ones I mentioned above if you want to get from point “A” to point “B” in short order.
I’ll even get you started with a tip I recently shared with my Market Advisor subscribers: China’s BYD Company (NYSE: BYDDF.PK).
Odds are the lithium battery maker supplied the parts for your iPhone and iPod. The firm is also an emerging leader in wind and solar power storage, as well as electric and hybrid vehicles. From smart grid infrastructure to sales-spurring tax incentives, the firm has too many catalysts to count on one hand — but they translated into +255% earnings growth last quarter.
The stock could trek from $70 to $105 — and unlike Sysco, I don’t think it will dawdle on its way there.
— Nathan Slaughter