ACOM Ancestry.Com Inc. (MM)

Legendary mutual fund manager Peter Lynch made the "buy what you know" mantra popular in the 1980s and 1990s.

He told stories of his wife coming home from a shopping expedition in the mid-1980s with bags in hand raving about a new store called "The Limited" which he subsequently bought shares in just as the stock took off.

In Love With Starbucks

Similarly, I have a friend who, in the early 1990s, starting going to a coffee shop that had recently opened in Illinois called "Starbucks."

She used to go so often that her kids told her, "you should buy the stock." She did and, well, it certainly paid for all those coffee runs over the years.

Any of us can apply the "buy what you know" strategy to our own investing portfolios.

It can be a fun way to invest because you actually KNOW something about the product and, in some cases, may passionately believe in it. (Apple anyone?)

Is It Really That Easy?

Peter Lynch made "buy what you know" seem easy. If you love the store, and others do too, just buy the stock and ride it to riches.

But is it really that easy? Some big stock flameouts from the last few years come to mind, including Krispy Kreme, which had an enormous cult following but whose stock originally never lived up to the hype.

There are always pitfalls to any investment strategy but there are some things you should consider with "buy what you know".

Remember to Check Fundamentals

1. Always check fundamentals first.

Perhaps you are the only person who really loves the store or the product. Is the company growing? Does it have solid fundamentals?

2. Don't be blinded by the brand.

Many investors fall "in love" with a company and its products and miss signs a company is changing and might not be as "great" anymore. Keep checking the fundamentals, even after you buy a company you love.

Where Do You Start?

Think about where you shop, where you eat, what products you love. For example, are you excited when a Chipotle opens a block from your office?

Some products and their brands are just really hot right now. You know which ones they are. Go with your gut!

My colleague, Bill Wilton, recently wrote about how guys should buy what they know in: Guys: Buy What You Know.

I thought I'd take a look at what type of stocks women can buy if they buy what they know. Of course, the stocks will depend on your interests and they're not exclusive to men or women.

Buy What You Know

lululemon athletica inc. (LULU) is a super hot men's and women's clothing retailer. The company is famous for its yoga pants and other active lifestyle clothes.

During the recession, many doubted that consumers would continue to buy the $99 yoga pants, but those naysayers were proven wrong.

In the fiscal first quarter same store sales were up 16%. The company also continues to open up new stores, adding 5 stores in the first quarter for a total of 142 stores in North America and Australia. The Canadian-based company isn't even in Europe yet so there continues to be further growth potential.

Earnings are expected to grow 38% in fiscal 2011 and another 25% in fiscal 2012. They'd better, though, because this stock is not cheap. Now trading at all-time highs, this Zacks #1 Rank (strong buy) has a nose bleed P/E of 58.

Ancestry.com Inc. (ACOM) is like facebook for people who want to look up their family history. Not only can you look up your own family tree in over 6 billion online records, but you can help others who may be interested in the information you've found.

Have you ever been on the website? I hope you have a few hours, or days, because it is addicting, indeed.

The company is growing quickly as its subscriber base grew by 33% in the first quarter to 1.615 million from the first quarter of 2010. Subscriptions are available monthly or yearly.

Earnings are expected to grow 50% in 2011 and another 24% in 2012. But like lululemon, this Zacks #1 Rank (strong buy) is also not cheap. Shares trade at 38x forward estimates and are near a new multi-year high.

Ulta Salon Cosmetics & Fragrance, Inc. (ULTA) operates 394 retail stores in 40 states selling affordable beauty products including cosmetics, fragrances, skincare and styling tools.

The company has 8 million members in its loyalty program which provides coupons and discounts to return customers. Cosmetics are a relatively cheap buy for many women who have otherwise cut back on expenses in other areas.

Ulta is not seeing a pullback in its customers. In the first quarter, net sales were up 20.6% and same store sales rose 11.1%, higher than the first quarter of 2010 which saw a 10.8% increase.

Earnings are expected to rise 40.5% in fiscal 2011 and another 25% in fiscal 2012 as the company expands locations. Much like lululemon, Ulta is still in the expansion mode.

Once, again, however, this Zacks #1 Rank (strong buy) isn't cheap. It has a forward P/E of 40 as shares are near 52-week highs.

Lots of Companies You Can Buy

In addition to the three highlighted here, perhaps you're a fan of Coach (COH), a Zacks #2 Rank (buy), which is trading at 20x forward estimates. It is also expected to produce double digit earnings growth this year.

Maybe you like to eat out at Red Robin Gourmet Burgers (RRGB). It's a Zacks #2 Rank (buy), is expected to see earnings growth of 75% in 2011 and trades at 25x.

None of these are "cheap", in terms of value plays. But you're buying the growth.

Keep an open mind about what companies to buy. Check fundamentals. If a stock seems too pricey for you, wait for a pullback.

There are always hot brands and products. Why not cash in?

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Insider Trader services. You can follow her at twitter.com/traceyryniec.

 
ANCESTRY.COM (ACOM): Free Stock Analysis Report
 
COACH INC (COH): Free Stock Analysis Report
 
LULULEMON ATHLT (LULU): Free Stock Analysis Report
 
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
 
ULTA SALON COSM (ULTA): Free Stock Analysis Report
 
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