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3 Stocks Anyone Can Understand

Reuben Gregg Brewer, Keith Speights, and Brian Stoffel, The Motley Fool

You may or may not know the names Dollar General Corporation (NYSE: DG), Tanger Factory Outlet Center (NYSE: SKT), and Netflix (NASDAQ: NFLX). But once you step back and think about their businesses, you'll agree that they are pretty easy to understand. That, however, is only part of the allure here. Each of these easy-to-understand stocks has worthwhile appeal as a stock investment, too. Here's what you need to know to decide if one of these stocks is right for your portfolio.

A new twist on an old idea

Keith Speights (Dollar General Corporation): Years ago, small, locally owned stores dotted the landscape in small communities across America. But as larger chains rose to prominence, these smaller stores eventually went by the wayside for the most part. That's changing now. And Dollar General is leading the way.

People talking in silhouette with digital-looking imagery superimposed showing a globe.

Image source: Getty Images.

Dollar General's strategy is to place small stores in convenient locations, similar to the local stores of yesteryear. The company uses a cookie-cutter model that allows it to wring out cost savings that locally owned stores could never achieve. And it passes those savings along to customers.

If you've seen one of Dollar General's stores, you've pretty much seen them all. Each store is 7,300 square feet and stocks similar products, including food, snacks, health and beauty aids, cleaning supplies, basic apparel, housewares, and seasonal items at low prices.

Most of its stores perform quite well. Dollar General CEO Todd Vasos stated in the company's third-quarter earnings call that same-store sales growth during the quarter was 2.8%, its highest two-year stack in 11 quarters. Overall customer satisfaction scores also are increasing.

Wall Street analysts expect Dollar General to deliver average annual earnings growth of 14% over the next five years. The company should be able to achieve this by aggressively opening new stores and focusing on driving profit margins higher through initiatives such as showcasing more lucrative private brands. With this level of solid growth combined with its modest dividend, Dollar General is the kind of easy-to-understand investment that should pay off for investors over the long run.

Not as bad as it looks

Reuben Gregg Brewer (Tanger Factory Outlet Centers): The death of the mall, egged on by the overhyped retail apocalypse, is greatly exaggerated. Some malls are indeed facing troubles as anchor tenants close stores. But not all malls are the same. Which is why real estate investment trust Tanger Factory Outlet Centers and its fat 6.3% yield should be enticing to income investors.

Tanger is pretty simple to understand once you dig in a little. It owns 44 outlet malls, none of which has an anchor tenant. In addition, its costs are low because the malls are all outdoors and, by design, simple to make changes to. So not only can it quickly adjust along with changing trends, but it is also one of the lowest-cost options, rent-wise, for retailers. Its outlet malls, meanwhile, are designed to attract bargain hunters with well-maintained properties in prime locations, often near vacation spots.

Tanger is facing headwinds, for sure, since smaller retailers are closing up, too. But it is using a playbook (i.e., temporary rent concessions and bringing in new, on-trend tenants) that it has executed successfully for nearly 40 years to keep occupancy consistently in the 95% range or above. And it's operating from a position of financial strength, with an investment-grade balance sheet, interest coverage of 5.3 times, and total debt at roughly 50% of total adjusted assets. The fat dividend, meanwhile, only eats up around 45% of the REIT's funds from operations.

SKT Chart

SKT data by YCharts.

Basically, financially strong Tanger, with a stock that's down 30% since peaking in 2016, looks like it is the proverbial baby getting thrown out with the mall bathwater.

Everyone knows how to Netflix

Brian Stoffel (Netflix): Of all the stocks I own, I believe that Netflix is the easiest to understand. Given that the service has around 150 million subscribers worldwide -- and remember, those subscribers are most often "households," not just "individuals" -- I'm guessing you're familiar with the company, too.

The basics of the business are simple enough to understand. There are two ways that Netflix grows: by adding subscribers or by raising prices on subscriptions. Over the past 10 years, it has shown a remarkable ability to do both. And because the monthly subscription is so affordable and often automatically charged to your credit card without any effort, you'd need a pretty good reason to go through the trouble of canceling your subscription.

Things get a little more complicated -- though still not impossibly so -- when we start to evaluate what more users means for existing users. You see, with each additional person that signs up for Netflix, the company has more money to spend on original programming. People love that programming (ahem: Bird Box), and it brings in even more subscribers, which leads to even more original programming. This is called the "network effect," and it helps Netflix cement its place in our living rooms for the long run.

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Brian Stoffel owns shares of Netflix. Keith Speights owns shares of Dollar General. Reuben Gregg Brewer owns shares of Tanger Factory Outlet Centers. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.