There is always tremendous risk in investing in an area that you don't understand. If you look at the top money managers of the past century (Buffett, Graham, Fisher, Lynch, Klarman, Miller, etc) the general theme is that they all invested in areas that they understood well. Warren Buffett and Peter Lynch made an entire career out of "own what you understand."
Thus, investing in an area where you have no understanding is a terrible idea and a mistake consistently made by rookies and bandwaggoners.
That being said, the area of non-cyclical consumer products is unique because some of the big names of today (Coke) as well as of the past (Gilette, acquired by Proctor & Gamble) are tremendous brands. Mary Buffett, in the book "Warren Buffett and the Interpretation of Financial Statements discusses companies that have a "Durable Competitive Advantage." Although she discusses various factors, some of the key ones are:
- High Gross Profit Margin (over 40%)
- Tremendous earnings power
- High earnings to debt ratio
- Globally recognized brand name
There are many other factors, but those are some of the key ones, especially for the non-cyclical consumer product area since the products are generally low cost so profit is made on volume and breadth of influence.
Like you accurately said, saturation is an issue, but not in the sense you're thinking. Coke has a worldwide presence and there's no way it will grow like it did in the 80s-90s, but it will still be a strong company. Gillette will be solid as long as people need to shave i.e. forever :) Buffett talks about companies with a "moat" - high barriers to entry, competitive advantages. Although coke won't grow as fast as it did, nobody is going to be displacing coke because of the extensive coke network.
Now the question is: how does the investor identify the next Coke and Gillette. First of all, you need to refocus your attention. If you only focus on firms that can maintain high sustainable cash flow be sure to add the "with a positive inflow," because plenty of firms have high cash flow but with more cash flowing out than in!
What you want to go for is firms that have the potential for high sales volume, since the marginal profit compounds into a tremendous cash inflow. If you focus on companies that are already very profitable in the area, you will end up with Coke, Proctor & Gamble, and the like. While they are solid companies, they will not be generating tremendous returns.
Thus, you need to focus on companies that:
Target an area that isn't dominated. Saturation isn't an issue because an excellent firm will beat an average firm, but if there is already a firm in the market that is dominant and growing, then it will be tough to displace.
Target companies with a growing global presence. Unlike some professionals, I believe that America will still be a ground for tremendous growth, but there is also great potential internationally. As the global middle class grows, so does consumption, and that is where the aforementioned industry shines. Look for firms expanding globally.
Brand. In this industry, brand is far more significant than in other areas. If you go to China and you have to pick between China+ Gum (made up) or Wrigley's, which will you take? When product differentiation isn't very strong, brand is what holds up the product. I drink Coke, not Bob's cola. Look for companies with a solid brand or a growing brand.
The obvious risk is that your analysis will be wrong. You find a superior product with an international presence and a growing brand name and three things can happen: 1. It is already strong (i.e. coke) and you make money as Coke continues to dominate or 2. It becomes strong and you become very rich (i.e. Coke investors 40 years ago) or 3. The more likely outcome - it never dominates.
Often times, you will find a strong company that becomes stronger, but very few will ever go on to become the "Coke" of their area. These types of companies grow by sales volume, so it's important to read news, 10-K's, and management reports to see what's going on in the company. It is rare for a company to just become bankrupt or take a sharp loss because the losses are generally gradual, but the astute investor will always be alert for signs of fiscal weakness, which can be a time to leave.
But I cannot stress this enough: you must do your homework. It is literally impossible to find an elite company before it becomes elite unless you do extensive research and analyze the market, see what's happening, and be able to piece it together to select the winners of the next decade(s). Even then, your mileage will vary. Best of luck!