W W Grainger Inc (NYSE:GWW) $GWW

W.W. Grainger, Inc. distributes the products needed to keep a large business running smoothly. It sells light bulbs, motors, gloves, screwdrivers, mops, buckets, brooms, and literally thousands of other products.

The most important thing to understand about Grainger is the nature of the orders customers are placing with the company. The orders can be fairly random looking – almost every business needs a mop, a screwdriver, a small motor, a light bulb, etc. even if it’s far from the core business. The average order size is small, but needs to be filled rapidly. Customers often require next day shipping on most items. This means Grainger has to keep a lot of inventory on hand. They also have to offer credit terms to customers. So Grainger has a lot of inventory and a lot of receivables. It has low turns. But, it has high margins. This surprises some people. Investors and analysts see 40% gross margins and wonder how that can be. Can a middleman really mark-up basic, boring products like we’ve talked about here – mops, buttons, motors, light bulbs, etc. – by 50% to 70% over the price they paid for that product? The answer is yes.

Grainger has grown 10% a year since going public 40 years ago. And, it has grown sales to large
businesses by more than 8% a year since the financial crisis. Earnings grow even faster than sales. So, Grainger is a growth stock. In fact, it’s a growth at a reasonable price stock.

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Omnicom Group Inc. (NYSE:OMC) $OMC

Omnicom Group Inc. (NYSE:OMC) is one of the world’s largest “marketing services” companies. It is a publicly traded holding company that owns many different agencies. Omnicom breaks its revenue down into four categories: advertising (50% of revenue), customer relationship management (34%), public relations (9%), and specialty communications (7%).

All of the global creative agencies are great businesses and Omnicom is no exception. When run right in terms of costs, capital allocation, etc. all these companies can make for great long-term investments. All of them will be great businesses in 5, 10, and 15 years from now. They’ll have many of the same clients. If we had to pick one best stock in the ad industry though it’d be Omnicom. It’s the company with the best financial results. It has the best history of capital allocation. And Omnicom’s agencies win more awards than anyone else. It's also the cheapest.

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