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Five Stock To Own In The New Rates Environment

The interest rates are up by 25 basis points as of today. It is official now. The markets across the globe actually reacted positively to this news and ended in the positive territory today:

(Source: WhoTrades)

Now, what typically happens in the long-run when rates go up? Keep in mind that Yellen is not doing this rate hike in isolation - it is most likely going to be a series of increases over the next year or so. In the short-term, market are typically down, according to David Callaway, a USA Today reporter. Over the long-run, however, "stock markets more than withstand the turn in a rate cycle, benefiting more from the strength of the underlying economy than the reduction of demand for more debt". So debt is typically not a problem for companies, although higher refinancing rate definitely put a dent to corporate earnings. 

On the other hand, interest rates heavily affect currencies. Namely, the US dollar will most likely keep appreciating against world currencies after a strong 2014-2015 performance. This means that companies with a lot of international operations, especially in countries with resource-based economies, will likely suffer from Forex headwinds. We already see this happening with multinationals like Procter & Gamble (PG) and Colgate (CL). It is going to be worse. Hence, investors should concentrate on companies that get revenues inside the US and/or import goods for sale from overseas (lower COGS in this case). In order to help readers pick a few stocks for the next 5-10 years, I have decided to compile a list based on these three criteria:

(1) Zero long-term debt;

(2) US (mostly) revenues;

(3) Revenue CAGR in excess of 5% for the last five years (I like growing companies, including GARP).

I used Capital IQ to filter the stocks and picked out FIVE names I recognized:

- Buffalo Wild Wings Inc. (BWLD) - 23.8% revenue CAGR over the last 5 years, a market cap of over $3B, and a P/E ratio of 33.8x.

Natural Grocers by Vitamin Cottage, Inc. (NGVC) - revenue CAGR of 22.5% of the five-year period, a market cap of $450M, and a P/E ratio of 28.9x.
Country Style Cooking Restaurant Chain Co., Ltd. (CCSC) - top line CAGR of 16.5%, a market cap of $127M, and a P/E ratio of 29.8x

Monster Beverage Corporation (MNST) - 16.0% revenue CAGR over the last 5 years, a market cap of over $30B, and a P/E ratio of 53.2x.

Whole Foods Market, Inc. (WFM) - revenue CAGR of 11.3% of the five-year period, a market cap of $11.3B, and a P/E ratio of 22.6x (lowest on the list).

I am not going to go into too much detail here but I want to outline one big thing I like about each company and one thing I dislike:

Whole Foods Market, Inc. (WFM) - the stock is currently trading just 17% above the 52-week lows (in fact, at the levels of 2011). What I do not like about it is that it has not been growing dividends very effectively, even though the company generates sufficient cash flows to increase payments by 30%-50%, according to my calculations.

- Buffalo Wild Wings Inc. (BWLD) - in 2016, the company will start making money from franchise acquisitions, according to Motley Fool. BWLD spent $160M to acquire franchise locations which had a negative impact on earnings: about $0.13 per EPS. The investment will start paying off next year. On the other hand, the cost of chicken wings (i.e. a major COGS item for the company) remains high: "the price for traditional wings -- which comprised around 21% of total revenue in the quarter -- came in at $1.79 per pound in Q3, or a 19% increase from the same year-ago period" (Source: Motley Fool). Hopefully, the cost will start going down in the mid-term. 

-  Country Style Cooking Restaurant Chain Co., Ltd. (CCSC) - the company is a leading QSR chain in Southwestern China, according to its latest presentation. The company has a mission to become a #1 QSR chain in China. To do so, it needs to have about 1000 restaurants across the country - a far cry from the current number of 355 locations. Also, CSCC has a "Chinese company" stereotype when investors are skeptical about the numbers and the quality of reporting.

Monster Beverage Corporation (MNST) - according to Wall Street Observer, the company forecasts a 42% growth in EPS (!) over the next year. This is a very impressive amount. In fact, this is precisely why the stock is valued at a premium to peers: at a P/E ratio of 55x (the industry's average is a P/E ratio of about 30.0x). On the other hand, because the company has such a high P/E ratio, any negative notion about its expected earnings growth can send the stock tumbling, let alone some actual missed estimates. Essentially, the stock lives quarter-to-quarter and poses quite a lot of short-term market risk.

Natural Grocers by Vitamin Cottage, Inc. (NGVC) - the company is growing really fast: it has shown a 20% revenue growth in fiscal 2015 and expects to show a sales growth of over 25% in 2016 (22%+ coming from new store openings and 5%-7% - from SSS), according to the recent press release. A number of investment houses also rates the stock as a strong BUY. On the other hand, the company operates in a very competitive environment with bigger companies taking the lead. The organic food market is hot right now but it is also getting saturated. For example, Whole Foods Market, a company on this list, is a direct competitor with a market capitalization 20x bigger.

I hope readers take a further look into some of the stocks I outlined above. Let me know what you think about the list, as well!

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