Altria's Future

Does Altria have a future as an investment?








Morningstar.com
Are Big-Name Stocks Always Wise Investments?
Friday January 31, 7:00 am ET
By David Kathman


Dear Analyst:
I have never participated in any stock transactions before. Would it be a wise decision to start out with a company that is well-known and has been around for years--for example Kodak, Sony, Honda, Kraft, Blockbuster, etc.?
When I took economics way back in high school, our class had a stock-picking contest. Each of us picked one stock that we thought would do well over the next few months, and the person whose stock performed best over the course of the semester would win. In those days, I was a complete novice with no idea how to pick stocks, so I went with Gannett (NYSE:GCI - News), the publisher of USA Today. My parents liked reading USA Today (as they still do), and it had recently become established as a national newspaper. I figured its parent company must be a good stock to own. I was also attracted by the fact that the stock had risen 50% over the past few months.

However, Gannett stubbornly failed to skyrocket. I think it actually went down during the period of the contest. To be fair, it did turn out to be a good stock in the long run, but that was largely dumb luck on my part, since in retrospect I was quite naïve in my methods. I picked Gannett based on a product I liked (or thought other people would like), but I didn't do any research into the fundamentals of the business. Also, I paid no attention to valuation; in fact, the stock's previous runup should have made it less attractive because it was pricey.

These are common mistakes for beginning stock investors: buying based on familiarity rather than research, and ignoring valuation. That's not to say that familiar companies can't also be great stocks, but familiarity isn't enough by itself. And even if you find a great company, that doesn't automatically make it a great investment. These principles are a fundamental part of what every beginning investor should learn, but they're worth reiterating even for experienced stock-pickers.

Research Before You Invest
In his bestselling book One Up on Wall Street (written with John Rothchild), legendary fund manager Peter Lynch told investors to "invest in what you know." But he didn't mean that you should simply buy stock in any company that makes a product you like; that should only be a starting point for your research. You also need to ask some key questions, such as: Does the company have a good business model? Does it have a competitive advantage over its rivals, also known as an economic moat? Is it profitable enough to compensate for the risks involved? These are the types of questions that Morningstar stock analysts routinely consider in evaluating a stock.

Take the first company on the above list, Eastman Kodak (NYSE:EK - News). It's certainly a well-known name, virtually synonymous with photography. But digging a little deeper reveals that Kodak faces some very tough challenges as consumers move away from traditional film toward digital cameras, a field in which Kodak is far from dominant. Polaroid, another former blue-chip due to its dominance of instant photography, has been hurt so badly by the rise of digital cameras that it went bankrupt in 2001. Kodak isn't in such bad shape, but its future is still rather uncertain.

Of the other well-known companies in Mdawn's list, none looks like a particularly compelling buy. Sony (NYSE:SNE - News) has performed very erratically in recent years, since it's sensitive to both economic forces and pop-culture tastes. Blockbuster (NYSE:BBI - News) has already saturated the United States with its stores, and it faces a looming threat from video-on-demand services. Kraft Foods (NYSE:KFT - News) is in somewhat better shape because of its strong roster of brands, although it's tainted in some people's eyes because it's majority-owned by Altria (NYSE:MO - News) (which, until this past Monday, was known as Philip Morris). Honda Motor's (NYSE:HMC - News) stock has been flat over the past five years, and the auto industry is notoriously volatile.

Most importantly, none of these companies has a wide economic moat, one of the key features shared by most of our favorite stocks. Kraft has a narrow moat, while Kodak, Sony, and Blockbuster have no moat. (We don't cover Honda, so it doesn't have a moat rating.) That means that these companies will probably have a tough time sustaining their profitability over the long haul, which makes us wary of investing in them without a significant discount.

Pay Attention to Price
Even if you find a company you've heard of, and it's a good business with competitive advantages, that doesn't mean you should automatically go out and buy it. Always pay attention to a stock's valuation, because the price you pay for it is one of the biggest factors in your total return. It's best to buy a stock at a discount to what it's worth, but even if you decide to pay up for a great company, you should at least be aware of what you're paying.

There are many ways to determine whether a stock is expensive or cheap, but here at Morningstar, we do it based on the fair value estimates that our analysts calculate for each stock. A star rating is assigned to each stock based on whether its current price is above or below its fair value estimate, with 5 stars being the best (cheapest) and 1 star being the worst (most expensive). I won't go into all the details here, because I've covered them in previous columns (entitled "How Morningstar Values Stocks" and "What To Do With 1-Star Stocks").

Using our Premium Stock Selector, I found 31 stocks that have a wide moat and a rating of 4 or 5 stars. You may not have heard of some of them, but there are some that you most certainly have, such as Coca-Cola (NYSE:KO - News), PepsiCo (NYSE:PEP - News), Home Depot (NYSE:HD - News), and Pfizer (NYSE:PFE - News). (Altria also made the list.) If you're a novice stock investor looking for familiar names to invest in, this is a good place to start


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