Investing in Brands I How to Choose Brands to Invest In I Kristal.AI
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The Power of Brands in A Digital World

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Updated: July 18th, 2019

Brands have consistently stood the test of time, increasing competition, and changing consumer preferences through one key act – turning consumers into loyalists. Today, a myriad of brands have turned from nouns into verbs, with consumers using phrases like “I’ll Google It” or “Let’s Netflix and Chill” as a part of their daily vocabulary. An average brand transcends into an empire only when it establishes a connection with its audience that goes far beyond the basic product and utility level.

Their ability to form emotional connections with their customers remains unquestionable, which explains why they understand their next steps and grow into larger names. However, irrespective of how great a brand may be, investors do circle back to one serious question – how do brands perform in the stock market?

Reviewing Recent Brand Performances in the Stock Market

As an investor, you may think of certain brands like Facebook, Uber, Netflix, and Amazon as giants that cannot go wrong in the stock market. You may even think that they are the perfect choice for investments as they can help you grow your funds. A blind belief in a brand’s performance based on its name can often lead to huge repercussions for investors. Let us look at how some of the major brands have been performing in the stock market:

Uber

Uber is a brand that has a strong presence in various countries. However, the brand’s recently launched IPO fared below expectations at Wall Street. Interestingly, Uber’s IPO was one of the most awaited ones, with traders assuming that the company will make a large profit. However, this was proven wrong pretty quickly with its IPO being one of the worst-performing ones in the last 40 years. The launch itself was quite underwhelming, with the shares priced at $45. However, right on the first day of trading itself, the stock fell by 7.6%, which the new price per share being $ 42. On paper, this meant a collective loss of a staggering $ 618 million for the investors.

Why did Uber fall? Many experts believe that the main reason for Uber’s disappointing performance was the fact that it is still not profitable. Uber raised a $8.6 million through its IPO; funds that the brand can use for future expansion, while also revealing in the process where the market stands vis-a-vis tech startups that may have a high valuation, but don’t actually bring money to the table.

Facebook

Once a darling of the stock market world, Facebook has been suffering many problems of late. After the Cambridge Analytica Scandal of 2017, Facebook’s stocks took a massive hit and have failed to recover since then. Recently, the company was excluded from the S&P 500 ESG index over concerns of privacy. There is even talk of directors trying to vote out Zuckerberg from Facebook to help the stocks improve, this is proving to be quite hard, as he owns a majority of the shares.

Despite paying heavy fees and all the controversies it has been embroiled in, the company has still posted a steady growth in the past years. The trend may change this year with assumptions that Facebook’s Q2 earnings may be muted. It may also be an indication that the company’s main revenue generator – its digital advertising arm – has taken a hit with the changing market landscape. Facebook’s new currency ‘Libra’, which was expected to be a boost in the arm, is currently being reviewed by Congress.

According to estimates, the general consensus is that Facebook’s Q2 reports will mirror the Q1 trend of steady growth but less earnings. The estimate for Q2 earnings per share (EPS) is $1.87 at the time of writing; an okay-ish 7.5% increase from the EPS of $1.74 from a year ago. On average, analysts expect Facebook’s sales to grow by 24.8% to reach $16.5 billion (revenue for the same quarter last year was $13.23 billion).

Tesla

Tesla is an interesting stock – it is largely considered as a dream come true for growth investors, but also a total nightmare for value investors! In March 2019, the stocks took a deep dive after Elon Musk predicted losses during Q1. Musk had also announced that the company will be laying off a number of individuals, which also contributed to the major dip.

However, recently, Tesla stocks have soared after the sales in June. Tesla closed the first half of 2019 at $222.59 but it, too, is expected to have a muted Q2. Despite producing a record number of cars in the last quarter, the auto-maker had to cut down the prices of its Model 3 sedan after a federal tax credit shrunk, and this move has raised concerns over whether the company will be able to sustain its business without government incentives in the future.

Are Big Brands Really Attractive Investments?

If you have read till here, you might be wondering if it still even makes sense to invest in these names. And this is where it gets interesting. Brand strength is determined by variables that go well beyond revenue and earnings. Take Wal-Mart for instance. For years now, consulting companies have been calling its death; predicting when it will lose to online giants like Amazon. Wal-Mart has been fighting its own battles – it’s online adventure is not going as well as it had hoped, and footfalls in a digital world have been dropping off slowly, but surely. In spite of these challenges, the retailer has raked in Q1-2019 earnings of $514.4 billion, whereas Amazon reported Q1 profits of $60 billion.

The brands that survive the market’s trials and travails are the ones that have a strong consumer-centric philosophy, and strive to maintain a positive connection with their clientele. Here’s an interesting article from the Forbes in which Taylor Greene (from the VC firm ‘Collaborative Fund’) talks about Baby Boomers focussed more on buying value, while millennials and Gen Z are aware of brand values and choose a brand to invest in because it represents a belief or value system that they are part of.

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. So, if you are looking to invest in the big brands of today, look for the following:

1. Consistent Performance:

Brands have created a strong niche for themselves, and this is mainly because they consistently out-perform stocks in the market. As a result, more and more investors lean towards purchasing shares of big brands, rather than other stocks. With brands accounting for at least 30% of the S&P 500 index, one cannot fault investors from wanting to buy their stocks.

2. Intangible Assets:

According to the World Economic Forum, “Three-fifths of chief executives said they believed corporate brand and reputation represented more than 40% of their company’s market capitalisation.” Intangible assets such as Intellectual Property, brand recognition, patents, and goodwill play a huge role in boosting the overall value of the brand.

Remember: 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.

3. Economic Moats:

The idea of an economic moat (a term coined by Warren Buffet) 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 its 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”.

4. Value Driven Stocks:

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.

5. Stability:

Markets tend to be volatile, with prices taking a huge dip due to multiple international factors. These factors affect asset based stocks the most, however, when it comes to brands, they tend to be more stable. This is one of the many reasons why investors pick brands over other stocks.

The Bottomline

2019 has been a volatile year across the board and even those brands or stocks we thought were untouchable have wobbled at least once from their pedestal. At the same time, 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 – by not just indulging in some number crunching, but also understanding the ‘staying power’ of said brand in a modern, click-of-a-button world.

At Kristal AI, we have years of experience helping our clients navigate the world of stocks. Get in touch with us today to build a portfolio of great stocks!

 

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.