Jubak Journal

Four Stocks Peter Lynch Would Like

 

Before you turn up your nose at the idea of buying a retailer of used games, consider this: Used games sell for a higher profit margin than new games. That has helped GameStop increase operating profit by 2.4 percentage points in the fiscal year that ended in January 2003. Thanks to its 1996 bankruptcy reorganization, the company carries almost no debt and showed $3 a share in cash at the end of 2002. Cash flow is positive, and the company is buying back shares. In the conference call after its May 21 earnings report, the company projected earnings per share of $1.03 to $1.06 for the fiscal year that ends in January 2004.

Longs Drug Stores

In a substitution economy, I expect consumers will try to curb impulse buying. But I don't expect them to succeed very well, despite their best intentions. The attempt, though, will shift where impulse buying takes place. In a slow-growth economy, the buying will likely occur in a store that consumers enter to buy necessities.

The humble drugstores, the place most consumers have to go to get prescriptions filled, should reap a disproportionate share of that impulse buying, and no drugstore chain is better set up to snare those impulse dollars than Longs Drug Stores (LDG). The company's stores are larger than those of CVS (CVS) and Walgreen (WAG), and managers already have the power to customize inventory to local tastes. That produces higher-than-average per-store sales of high-margin items such as cosmetics and greeting cards. The stock trades at 17 times projected 2003 earnings per share.

The more substitution stocks to study like these come out of your own experience, the less likely this kind of analysis will feel fuzzy to you. For example, I've personally spent a lot of time shopping for games, so I know the retail choices frustratingly well, and I've spent more hours than I care to admit in our local GameStop with my son. I feel I have a Lynchian personal understanding of this part of the consumer market that makes me confident enough to add GameStop to Jubak's Picks.

>To order reprints of this article, click here: Reprints

Jim Jubak appears Wednesdays on CNBC's "Business Center" at 6 p.m. EDT. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Longs Drug Stores, Microsoft and Whole Foods Market.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.

TheStreet Premium Services

Jim Cramer
Jim Cramer's Action Alerts PLUS:
Trade right alongside a Wall Street pro — enjoy access to his Charitable Trust portfolio and be sent trade alerts BEFORE he makes a move. Learn More
OptionsProfits
OptionsProfits:
Get 50+ trade ideas a week from the industry's top options experts. Plus — exclusive commentary on market trends and essential trading tools. Learn More
Real Money
Real Money:
Our team of professional Wall Street Pros — including Jim Cramer, Doug Kass, and Nicholas Vardy — delivers intelligent analysis, timely trade ideas, and colorful commentary. Learn More
Stocks Under $10
Stocks Under $10:
Break into the market with small- and mid-cap stocks... all $10 or less! David Peltier tells you exactly which low-priced stocks he's buying and selling. Learn More
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
blog comments powered by Disqus
Dow Jones S&P 500 NASDAQ 10-Year Note
12,419.86 1,313.32 2,837.36 16.25
Oil *
103.00
DOWN
160.83
DOWN
19.10
DOWN
33.63
DOWN
1.06
10 Yr
1.62%
SPDR Gold
151.91
-1.28%
-1.43%
-1.17%
-6.12%
Data delayed 20 minutes

Top Stories and Tools

Articles From

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

We respect your privacy.
Podcasts

Connect with TheStreet