In 1997, I coined the phrase “faith-based investing.” It has nothing to do with religion or with picking stocks at random. The idea is that a company with a great brand, attractive products, a history of success and a solid balance sheet will find a way to prosper even if it makes mistakes or otherwise experiences tough times.
The “faith” part is that you may not know exactly how such a company will get back on track, but you have blind confidence that it will.
Faith-based investing (let’s call it FBI) should not be confused with “buying the dips,” the practice of purchasing shares of a stock when it temporarily falls in price, often because the whole market is down. Instead, FBI focuses on companies that are perceived as having a great past but a miserable future.
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Consider Starbucks( SBUX). The 53-year-old company has been a consistent winner for decades, planting 40,000 coffeehouses around the world. Shares, however, have been flat for the past five years while the S&P 500 index, the large-stock benchmark, has more than doubled.
Starbucks shares languished because profits stalled amid management failures. As a Harvard Business Review piece in June put it: “Starbucks is struggling. It has strayed from its successful strategy of offering customers exceptional experiences and, in the process, has commoditized itself.”
Worst of all, the chain was losing what former CEO Howard Schultz called its “soul.”
Still, Starbucks remains the largest global restaurant chain by far, and it has increased its dividend for the past 13 years in a row. How to fix the company? I really don’t know. What I do know is that this is the classic FBI stock, and it will find a way.
Challenge accepted
As I was writing these words, Starbucks surprised investors the way an FBI stock should by hiring a new CEO, Brian Niccol, the man who turned Chipotle around.
Starbucks stock shot up 25% in a single day, but it’s still cheaper than in the summer of 2019, and it’s a solid FBI buy.
FBI can produce big winners. A quarter-century ago, I encouraged investors to put their faith in what was then called Apple Computer. It was relatively new as FBI companies go, but it had innovative technology and a brilliant brand.
The first Mac, introduced in 1984, was a huge technology breakthrough, but by the ’90s, sales had fallen by one-third, and the company was a mess. In 1997, the board called Steve Jobs back as CEO.
No one knew whether Apple would even survive, but Jobs immediately set to work destroying the silos — the compartmentalized business-unit structure — that were stifling creativity and making the company tough to manage. Since then, the stock has risen by a factor of more than 600.
In 2012, I recommended that readers “consider Netflix, the firm that utterly disrupted the movie-rental business.” Shares had dropped by four-fifths in just four months after Netflix introduced a new pricing scheme that infuriated customers.
Again, I didn’t know how Netflix would recover, but I had faith that it would. And it did. An investment of $10,000 at the time would be worth hundreds of thousands today.
Another FBI stock from the same era was Merck, the pharmaceutical giant that had fallen from a high of $89 a share in 2000 to $39 in mid-2012. I pointed out then that Merck is “one of the strongest consumer brands in the world,” and although some of its best medicines were losing patent protection, I had faith the stock would come back.
With many FBI stocks, investors can collect a nice dividend while they wait for a revival. If you had bought Merck at $39, you’d have seen its annual payout nearly double, with the annual dividend yield on that initial investment rising to about 8%. The stock, meanwhile, now trades at $118.
Stocks for the faithful
Like Apple and Netflix, Merck can’t be called an FBI stock today. It’s doing too well. But look at Johnson & Johnson (JNJ). Over the past five years, its average annual return has been about half that of the S&P 500.
The company has suffered financial and reputational harm from health risks tied to its iconic brand of talc-based baby powder, and Stelara, its blockbuster immunology drug (accounting for 13% of revenues last year), is facing stiff competition from clones.
Wall Street seems to believe J&J has lost its shine, but I see a company that has raised its dividend for 62 straight years, weathered the Tylenol poisoning scandal in the 1980s and will get its mojo back — somehow.
The most obvious FBI stock today is Boeing (BA). Just to type the word makes me queasy.
In the past five years, two of the company’s 737 Max jets crashed, and a door blew off another in flight. More recently, doubts about the safety of Boeing’s Starliner are forcing two astronauts to spend an extra six months waiting to come down from space. Boeing has serious quality-control problems with its system of outsourcing the design, engineering, and manufacturing of most of its planes.
Shares are down by more than half over the past five years as each year the company sustained losses. Boeing last paid a dividend in the first quarter of 2020. For the first half of 2024, Boeing delivered 175 aircraft — 138 fewer than rival Airbus.
Amid these horrors, Boeing named a respected new CEO in August, but how will he fix a company with what seems like a sick culture? I don’t know the answer, but the FBI strategy holds that Boeing will thrive again. The business, more than a century old and vital to U.S. national interests, is too important not to.
Here are a few more FBI stocks I find attractive: 40-year-old Cisco Systems (CSCO), maker of internet networking products and trading below 2018 levels; McDonald’s (MCD), trying to find its bearings during one of its occasional periods of slow growth; and Walt Disney, with its stock flat for a decade and making mistakes such as losing 11 billion on its streaming venture but still owning one of the 10 most recognized brands in the world — plus the most famous mouse.
Finally, there’s my longtime favorite, Lululemon Athletica (LULU), buffeted by competition from new yoga-wear retailers and from a new-product flop (leggings) but unmatched in service and innovation. Unlike most FBI stocks, it’s showing powerful earnings gains (17.5% in the latest quarter compared with the same period in 2023).
Of course, the FBI strategy can’t guarantee winners. General Electric, now GE Aerospace, which I recommended in 2013, has risen less than 60% (cumulatively) over the past decade and trades 100 points below its 2000 high. Another recommendation at the time, DuPont, has returned just over 20% over the past 10 years.
There will be disappointments, even big losers. But the FBI strategy has paid off — big — in the past. Keep the faith.
James K. Glassman chairs Glassman Advisory, a public affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. Of the securities mentioned here, he owns Lululemon. You can contact him at JKGlassman@gmail.com.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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