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3 Stocks Anyone Can Understand

Jamal Carnette, CFA, John Bromels, and Rich Duprey, The Motley Fool

Investing can often seem complicated, but it shouldn't be that way. If you don't believe me, take legendary investor Warren Buffett's advice to "never invest in a business you cannot understand."

However, easy-to-understand businesses are often overlooked in favor of overly complicated companies claiming to be "the next big thing." With that in mind, we asked three Motley Fool contributors to identify high-quality companies with simple business models. Here's why Five Below (NASDAQ: FIVE), Target (NYSE: TGT), and Oshkosh (NYSE: OSK) made the cut.

Stackable blocks with upward pointing arrows.

Image source: Getty Images.

Easy enough for kids to understand

Rich Duprey (Five Below): While there are plenty of deep-discount retailers and dollar-store chains, only Five Below is targeting the tween and teen market. It's a simple strategy: As its name indicates, everything it sells is priced at $5 or less, giving parents guilty-free agency to let their kids shop without breaking the bank.

And it's working! Five Below saw sales grow 23% in its fiscal fourth quarter to over $602 million after adjusting for the extra sales week in 2018, generating profits of $1.59 per share, a 35% jump over last year's $1.21-per-share outing.

Five Below's business gives it a vast playground to grow in, and the store that focuses on what it calls "trend-right" products, or the hot, must-have items of the day for kids -- think fidget spinners or Silly Bandz -- is embarking on an expansion spree to open as many as 150 new stores this year to give it around 900 in total.

Because its items are so cheap, though, it is able to open new stores relatively close to existing ones because parents won't necessarily drive out of their way to seek them out, so cannibalizing comparable-store sales growth is not really a problem. Comps were up 4.4% in the fourth quarter and 3.9% for the year, and similar growth is forecast for the first quarter and the year.

While relying on one-hit wonders could be a risky proposition, it also has a stable of evergreen products that keep sales growing when there is no breakout toy, as has happened since the fidget spinner craze faded. It is also testing out bins or aisles of goods that are priced at $10 or less, giving it the opportunity to increase the quality of the items sold, but also boost its own bottom line. Five Below should be an easy winner for years to come.

Man shopping in the grocery section of a supercenter store.

Image source: Getty Images.

Target is hitting the bull's-eye

Jamal Carnette, CFA (Target): Target operates in an industry so simple that elementary school students understand it: retail, or the ability to buy a product for one price and sell it for a higher one. However, simple isn't easy as the combination of location, product, customer segmentation, and sales channel has become increasingly difficult amid intense competition.

Until recently, the biggest issue facing Target was its channel strategy -- more specifically, the lack of a digital channel. Target, Walmart, and other big-box retailers essentially ceded the digital channel to Amazon.com, allowing it to command tremendous market share on its way to becoming one of the most valuable companies on the planet. This lack of foresight was perhaps the biggest failure in retailing in the last 50 years.

Although Target was late to the party, CEO Brian Cornell is aggressively playing catch-up by significantly investing in the digital channel and in customer experience. In 2017, Target spent $7 billion in upgrades. The results have been positive: Target reported fourth-quarter comparable sales up 5.3%, its highest total since 2004, with digital sales increasing 31%.

Despite growth, the market is wary as Target trades with a dividend yield of 3.5% and 12.8 times forward earnings, both at a significant discount to the greater S&P 500. Income-oriented value investors would be wise to put the stock on their shopping lists.

Keep on trucking

John Bromels (Oshkosh): Manufacturers are just about the easiest businesses in the world to understand. They make things and sell them, hopefully for a higher price than the component materials, labor, and overhead. In particular, manufacturer Oshkosh Corporation -- named for the Wisconsin city in which it's headquartered -- makes specialty trucks. 

The company's trucks fall into four main categories: 

  1. Access Equipment: These are trucks used by industries like construction and utilities. They include telehandlers -- think forklifts on steroids -- and aerial work platforms, like you see linemen using to reach the tops of utility poles. 
  2. Defense: Oshkosh manufactures light trucks for the U.S. military and other foreign customers. Their primary products are the mine-resistant all-terrain vehicle (M-ATV) and the joint light tactical vehicle (JLTV). 
  3. Fire and emergency: You guessed it -- it makes fire trucks through the company's Pierce subsidiary. It also manufactures airport emergency equipment, snowplows, and snowblowers.
  4. Commercial: primarily cement mixers and garbage trucks.

While there's still some competition in these industries, there aren't as many companies manufacturing specialty trucks as there are manufacturing, say, pickup trucks. This has allowed Oshkosh to become an industry leader that consistently grows sales and earnings. Its diverse portfolio of offerings has allowed it to flourish even when individual industries take a hit. And its current price of about 10.9 times earnings is the lowest it's been in five years. 

Now looks like a good time to consider picking up shares in this easy-to-understand American manufacturer.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Amazon and Target. John Bromels owns shares of Amazon and Oshkosh. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.