Luís Lobo Jordão, CFA and Hirena Mehta
Since decades brands have survived the test of time, changing consumer preferences and increasing competition by creating a lasting impression in the minds of the people and turning them into loyalists.
We have reached a point in time where some Brands are referred to as adjectives rather than just proper names! Take for example, Google – How many of us use the term ‘Let’s Google it!’? Brands are built because they can connect to people beyond the product utility level. They have the power to connect with consumers emotionally, taking into consideration what do people want, how do they grow, and a powerful brand will always grow along with its consumers, and will stand out in a constantly changing landscape.
But here’s the most important question.
HOW DO BRANDS PLAY OUT IN THE STOCK MARKET?
What power do brands have in the stock market, and subsequently when an investor looks out to diversify her/his portfolio? We at Kristal.AI, along with Stoik Capital, dived deeper into the investing strategies, and have listed down for you, why brands play a very powerful role.
1. Attractive Investments
Brands have created a niche for themselves and have proved their worth by out-performing the markets on the returns they have generated for their shareholders. The Economist reported data asserting that “Brands account for more than 30% of the stock market value of companies in the S&P 500 index.” This should not be surprising considering that reputed brands translate into stable businesses with strong fundamentals which eventually increase their worth in the markets.
2. Power of Intangible Assets
Goodwill, patents, brand recognition are some of the items that increases a brand’s value in the industry. It is a result of constant R&D, innovation, and a drive to grow it’s reputation through good practices. Brands feed on consumer trust and attachment. Brand value is one of the reasons why the market capitalisation of so many companies exceed the value on its book value.
In a survey conducted by the World Economic Forum and public relations firm FleishmanHillard, “Three-fifths of chief executives said they believed corporate brand and reputation represented more than 40% of their company’s market capitalisation.”
3. Value Driven
It is not surprising then that consumers and employees have become more sensitive to associating themselves with companies that uphold strong values and are purpose driven. Gone are the days when cost was the only factor that decided the fate of a business. Today, success is defined by multiple variables including CSR, gender – neutral policies, equal pay and so on.
Jim Stengel, former CMO of Procter & Gamble, asserts that an investment in a portfolio of firms driven by purpose and values would have been 400% more profitable than an investment in the S&P 500.
4. Economic Moat
The term ‘Economic Moat’ was popularised by Warren Buffet. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period of time. This generally comes from a company that can manage to out do it’s competitors by staying one step ahead of them.
This is true for any popular brand such as Coke, Apple, Amazon – brands that are evolving faster than their competitors through new products, mergers, or using cost efficient technologies. Naturally, a company that is protecting its place in the industry would be a good investment bet. Like Warren Buffet has said, “A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable”.
5. Creating a Portfolio of Brands
Studies have shown that after adjusting for risk, an investment portfolio of companies with strong brands, for example, yields an average monthly return of more than 1 percent higher than a benchmark selection of companies from major stock exchanges. To add to it, as mentioned before, well-established brands generally have stable fundamentals which reduces the risk associated with these investments. They are closer to maintaining their target capital structure, meeting debt payments and generating better return on equity.
When markets get turbulent, more often not, quality businesses tend to provide stability to the portfolio and the drawdown on these stocks are also significantly lesser. They also tend to take advantage of tough market conditions to make acquisitions of financially weaker competitors
Bottomline : Invest in Brands
There has been no better time than the current period where consumer voices are louder than ever thanks to technology and digital penetration. It is getting harder than ever for companies to sustain with poor quality products or service since every complaint that a consumer has can be heard loud and clear through social media platforms. This is a boon for investors to separate the good business from the bad and understand which company is in a better position to generate sustainable profits.