I was recently asked a simple but thought-provoking question: What stockwould I buy if I could buy only one? At first, it seemed like a simple enough query, as all I had to do was choose one from the many that I already own and/or follow. The more I thought about it, though, the more complicated it became.
Follow along to see which stock I chose and my reasons for doing so.
My initial strategy
My initial strategy was to identify stocks with massive upside potential. The first to catch my attention were SodaStream International (Nasdaq: SODA ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) -- the prognosticators of at-home soda and single-cup coffee makers.
It isn't an exaggeration to say that these companies were the darlings of Wall Street for much of 2011. SodaStream nearly tripled in price at one point, going from $27 a share in January to more than $77 a share in August. And over roughly the same period, Green Mountain had gone from $33 a share to more than $110, an increase of 218%!
In addition, both companies employ the favorable razor-and-blades business model. Owing its name to the Gillette Co., the maker of disposable razors, this model refers to any business practice in which a company offers a one-purchase product that is complemented by additional components that the consumer must buy repeatedly in the future, e.g., blades for a razor.
In the case of SodaStream and Green Mountain, the one-time products are the soda- and coffee-making machines. The additional products are the refills. In either case, you can't have one without the other. And in this way, both companies have sought to shore up future revenue streams by means of repeat sales.
But what giveth may also taketh away; despite their early allure, the price of both stocks cratered in the latter half of last year. SodaStream plummeted from more than $77 at the beginning of August to around $28 by the end of November, falling as much as 26% on a single day. Green Mountain followed suit, going from $110 a share down to $40 a share in less than two months.
If I were to buy only one stock, in turn, it couldn't be either of these, as I'd never be able to sleep at night while my capital was vulnerable to such caprice.
Getting more realistic
The fact that I wouldn't risk everything on a speculative growth stock, of course, doesn't mean that growth isn't important. Indeed, capital appreciation is the name of the game. It's the reason I invest, and I suspect it's the reason you do, as well.
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