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November 10, 2015

Stock Market Showdown: Rivals on Wall Street

Editors Note: The following article originally appeared in U.S. News & World Report. You may view the article on the U.S. News website here.

Consumers who bet heavy on brand loyalty can get into some heated arguments. Just try pitting a Mac acolyte against a Microsoft minion. Or a Coke quaffer versus a Pepsi person. Or a Starbucks sipper versus a Dunkin' Donuts diehard.

But when the marketplace in question is the stock market, allegiances can flip in a heartbeat when one stock outperforms another. In other words: Who cares whether the java's gritty when the returns are pretty?

"I happen to personally prefer Dunkin' coffee to Starbucks, but prefer Starbucks stock," says Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania. "Personal brand loyalty should not drive investment decisions. But consumers' collective brand loyalty is definitely a factor that should be considered in investment decisions."

So how do the consumer titans stack up against each other in terms of investment muscle? Here we look at six pairings to determine which ones emerge as Wall Street winners.

Dunkin Brands Group (ticker: DNKN) versus Starbucks Corp. (SBUX). While both are coffee behemoths, they differ dramatically in size. Starbucks has a market capitalization more than 23 times larger — $93 billion compared to Dunkin's $4 billion. And while DNKN stock has a much higher dividend (2.54 percent versus 1.28 percent), Starbucks has an aggressive global growth strategy. "Coffee consumption in China is growing at a 15 percent annual rate," Johnson says. "Starbucks realizes this and plans on doubling the number of stores in China in the next five years." 

Winner: SBUX stock. "It has a terrific business model and more loyalty among the burgeoning millennial generation," Johnson notes.

Apple (APPL) versus Microsoft Corp. (MSFT). Though Steve Jobs and Bill Gates no longer run the companies they helped start, the rivalry persists as an outgrowth of the Mac versus PC divide. "The fates of Apple and Microsoft will always be inextricably linked," says Kyle O'Dell, managing partner at O'Dell, Winkfield, Roseman & Shipp in Englewood, Colorado. While Microsoft concentrated on workplace solutions, "Apple gained a fanatical cult following — an army of consumers who impatiently wait for every product announcement. They expect not just functional work computers, but also revolutionary technology products that inhabit all areas of life." And they're not going away, as evidenced by the brisk sales of the iPhone 6S and 6S plus. 
Winner: AAPL stock. "When looking to invest, bet on Apple for its toehold on the retail market and its reliable army of consumers who will line up to buy."

Amazon.com (AMZN) versus Alibaba Group Holding (BABA). These web retail giants both reported blockbuster quarterly earnings last month, sending shares of both companies higher. "Amazon's gross merchandise volume in North America captured more than a third of all retail growth this year through September, by one analyst's reckoning," says Jesse Cohen, senior editor at Investing.com, a global financial portal. "On the other hand, Alibaba earned 57 cents per share in the three months ending Sept. 30, beating the average analyst estimate of 54 cents." So by any reckoning, both companies are kicking butt in the e-commerce world, with market caps of more than $200 billion. Yet with Alibaba, "Concerns over an economic slowdown in China and worries over the health of the country's middle class have weighed on the stock in recent months." 
Winner: AMZN stock. "Looking forward, Amazon looks like a better pick between the two e-commerce giants," Cohen says.

Wal-Mart Stores (WMT) versus Target Corp. (TGT). Both companies have faced their share of issues in the past few years, says Gary Tsarsis, a clinical assistant professor at the University of Pittsburgh's Katz Graduate School of Business. For Target, the woes have ranged from the Big Data Breach of 2013, which whacked 40 million customers, to failed expansion into Canada. At Wal-Mart, struggles with labor have made headlines, resulting in a negative perception of the retail chain. Pay raises will put a dent in profits, and meanwhile, "of the 33 analysts who cover the company, only five have buy ratings, 25 have holds and three have sells," Tsarsis says. At the same time, Target has rebounded under new CEO Brian Cornell, who closed the Canadian operation and has focused on transparency with the U.S. customer base. "In the past year, the stock is up almost 29 percent," Tsarsis says. "Of the analysts on Wall Street who cover the company, 12 have buys, 16 have holds and only 2 have sells." 
Winner: TGT stock. "I believe the momentum that Cornell has built and the goodwill within his company will continue," Tsarsis says.

The Coca-Cola Co. (KO) versus PepsiCo (PEP). Both blue-chip beverage giants boast numbers with plenty of fizz, as Pepsi's market cap is at $147.8 billion, while Coke wins out at $183.4 billion. "They've both shown consistent growth and solid dividend yields for some time, and have grown roughly 9 percent annually over the last decade," says Eddie Miller, chief strategy officer at GreenRush and CEO of eCann. "Ultimately, the decision over which company to invest in comes as a result of Pepsi's high debt-management risk and Coca-Cola's superior dividend yield." It's currently standing at 3.13 percent compared to Pepsi's 2.78 percent. 
Winner: KO stock. "It's Coca-Cola, given their lower debt management risk and superior dividend yield," Miller says.

Walgreens Boots Alliance (WBA) versus Rite Aid Corp. (RAD). Once just a Chicago fixture, Walgreens has extended its imprint across the U.S., with more than 8,000 stores and a global profile after completing a purchase of the Swiss company Alliance Boots in 2014. And as the fortunes of Walgreens rose, Rite Aid stalled. "Both Walgreens and Rite Aid were profitable, but Walgreens performed significantly better in terms of growth and profitability," says Ravi Madhavan, professor of strategy and director of the International Business Center at the Katz School. "This was reflected in their stock performances as well, with Rite Aid's stock languishing somewhat." So there's a clear champ, right? Well … 
Winner: It's a tie. Walgreens announced plans in late October to buy Rite Aid for $9.41 billion. That's in cash, even though your local Walgreens also takes debit cards.