Use the Product? Buy the Stock!

Legendary investor Peter Lynch used to talk about buying stock in the companies whose products you use. In some ways, this makes a lot of sense. Back in 2001, I put together a portfolio of companies whose products I use all the time, with an emphasis on vice, habit and hobby-related products.

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The original list was composed of steakhouses such as Outback, Mondavi wine company, tobacco stocks, book publishers and retailers, as well as companies that owned sports franchises. The portfolio did amazingly well over the years, with several of the companies being taken over along the way. With the market clearly in the doldrums and far off the highs, this might be an interesting way to look for cheap stocks.

My biggest hobby or vice, depending who you are talking to, is reading. I consume books at a rapid rate. Now that I no longer have an office right across from a mall, I order most of my books from Amazon. I love the company and use it constantly. As you know, the company recently issued a great earnings report.

Amazon is literally changing the face of retail. For stock purposes, however, the stock has done a little too well. I am just psychologically incapable of paying 40 times earnings for a stock.

When I do go to a bookstore, it is usually a Barnes & Noble. With that stock trading at less than tangible book and yielding north of 5%, I can add it to my lifestyle portfolio. The company may struggle in the consumer recession, but the balance sheet is solid, with a debt-to-equity ratio of less than 0.15.

I'm probably the world's last unabashed, unapologetic smoker as well. My brand of choice is manufactured by Reynolds American. The stock is cheap at 8 times earnings and sports a dividend of over 8%. Ordinarily, I might just buy this stock for the long term. However, the tobacco industry has some challenges in the near future. It is almost certain that there will be a federal tobacco excise tax passed. Over 40 states are also said to be raising the tobacco tax. In addition, it is now highly likely that tobacco will come under the purview of the Food and Drug Administration. All of this will keep pressure on the shares.

I believe Philip Morris International is a better buy at these levels. The company pays a dividend of more than 5% and does not face the regulatory pressure in its key overseas markets that the domestic companies do. Because it is a large-cap company, I believe the market has further downside, so I would wait until we get a somewhat steeper decline.

There are not any direct publicly owned sport franchises anymore that I can find. In years past, I took great delight in owning shares in franchises such as the Boston Celtics and Cleveland Indians. Unfortunately, there just are not any right now. Even the Tribune has finally reached a deal to sell the Chicago Cubs.

To represent my sports fixation, I'll go with the owner of the television channel that is on once the market closes. I have watched ESPN since the network first came on years ago. With the college basketball season in full swing, it is a staple in the evening. There is nothing better than spending a winter evening reading, with ESPN on the TV.

Not only that, shares in the network owner, Walt Disney, are cheap. Disney is at its lowest level in five years. Investors with a long-term time horizon who are willing to accept the risk of market declines would do well to buy Mickey and friends. This is a world-class franchise that will survive the recession and thrive in the recovery.

I have been known to enjoy a distilled adult beverage or two. The brands I enjoy are primarily distributed and imported by Diageo. The U.K.-based company is one of the world's largest liquor distributors, and it has a wide range of brands across all price levels. The liquor industry is somewhat recession-resistant, and sales have held up so far. Revenue was actually up slightly in 2008. This is another of those "buy a little and forget it for a few years" stocks. Diageo is an industry leader, and the dividend yield pays you well while you wait for the recovery.

I ruled out Fortune Brands. for inclusion. The company has exposure to the home and leisure markets, and its latest earnings report was horrible

Looking at the stocks of companies whose products you use is a valuable exercise. In a selloff like we have experienced, you may find that the shares have become cheap enough to include in a long-term portfolio. In tumultuous times, it is far easier to hold shares in companies you know and use. No matter what your hobbies and habits are, you are spending your money on the things you enjoy. Odds are you are sending that money to the coffers of a public company. A bear market gives you a chance to buy some of these companies at prices that even a value investor can love.