Every year a series of research firms and publications (such as Millward Brown and Business Week) choose the most recognizable brands in America. The top ranked company fluctuates from year to year ,but it typically includes household names like McDonald’s Corporation (NYSE:MCD), Microsoft Corporation (NASDAQ:MSFT), and The Procter & Gamble Company (NYSE:PG).
What makes a “good” brand is, to some degree, a matter of opinion, but I think investors should follow the most recognizable brands. A good brand gives a company a “brand moat, a competitive edge by a sheer label alone.
In my opinion these are the best brands of the “most recognized” list. They have the strongest and most loyal followings.
The happiest place on earth
Google Inc (NASDAQ:GOOG) has the happiest workplace on earth. Well, that’s at least what Vince Vaughn would have us believe. I recently saw “The Internship,” and I’ve seen the 20/20 specials showing workers taking naps and playing ping pong, so I have to believe that there’s some truth behind the humor. Yes, with free food, motorized scooters, and massages, working at Google Inc (NASDAQ:GOOG) seems like a vacation for most of us.
I don’t mean to belabor this fact but it should matter to investors as much as any numbers do. Google Inc (NASDAQ:GOOG)’s “workplace” creates a unique brand that’s synonymous with excellence and this resonates both with top tech candidates and consumers. You need to have the best talent to win in tech and Google’s 17% ROE, combined with 25% growth in revenue and EPS, prove that Google Inc (NASDAQ:GOOG) has it.
Google Inc (NASDAQ:GOOG)’s a really unique company because it’s increased earnings even as its costs have skyrocketed. That’s not supposed to happen. Increased costs typically are an excuse for flat EPS, just look at Amazon.com, Inc. (NASDAQ:AMZN) over the past decade. But the difference lies in how Google has spent money: on good talent and its brand. So the next time Google announces mass hiring or a new and expensive “project” like Google glass you should rejoice! Money spent on building a brand of “excellence”, has a really high return on investment.
Refreshing brands
The food and beverage industry is filled with many “commodity businesses,” that don’t offer much different than their competitors. These business rely on winning customers by having the lowest price, which is the kiss of death for investors. But surprisingly, despite being tied to this industry, Starbucks Corporation (NASDAQ:SBUX) and The Coca-Cola Company (NYSE:KO) are two of the best brands in the world.
These companies have very different brands but they share two things in common–passionate fans and dominant “best of breed” status. Starbucks Corporation (NASDAQ:SBUX) “brand passion” starts with their iconic CEO Howard Schultz and his love for coffee, while The Coca-Cola Company (NYSE:KO)’s is lead by its loyal fan base and “secret formula” recipe.
Starbucks Corporation (NASDAQ:SBUX)’s staggering 29% return on equity is an absolutely ludicrous number for a coffee company. The company has been on an unheralded run since Schultz returned as CEO and it starts with that love and passion that he has for the product.
In 2008 Schultz ordered a worldwide shutdown of all Starbucks Corporation (NASDAQ:SBUX) stores for training. The move was criticized by many investors as it cost Starbucks Corporation (NASDAQ:SBUX) a ton of revenue. But shutting down during peak hours to work on “perfecting the art of espresso” was just the kind of message that Schultz loves to send to the market. Like Google, this company is willing to spend a little money in the short-term if it means that the market will associate it with excellence.
Some say the stock looks expensive now, but it also did at $30 and at $16. This company will always look expensive, all it does is sell coffee and tea, but you should think twice before betting against these guys.
Speaking of expensive, every quarter it seems like The Coca-Cola Company (NYSE:KO) is growing earnings and setting a new record for its stock price. Earnings for this company have grown near 10%, along with revenues, over the past five years. Even better, the dividend growth has matched earnings and revenue growth.
While this company may not be the first business you think of as a “growth stock,” its insurmountable moat is what helps its expansion. This business built such a strong following that its fans literally revolted when it tried to change its taste to be more “Pepsi-like.” With new, and healthier, products like Vitamin Water and Odwalla now complimenting their rabid The Coca-Cola Company (NYSE:KO) fan base, this brand leader should keep delivering refreshing returns.
The best brands always win
This is my short-list out of the “most recognized” list. These brands are the best of the best. The “brand moat” they enjoy just means that their logos are so recognizable that customers buy them out of habituation.
The “habituation effect” of these brands gives these companies distinct competitive advantages. They get to skip advertising costs and charge more than competitors, two advantages that pad margins. They also find it easier to increase prices, something that helps in periods of inflation.
So ask yourself this, if we can agree that great brands enjoy these advantages, why would you want to invest in anything else?
Adem Tahiri owns shares of Google and Starbucks. The Motley Fool recommends Coca-Cola, Google, and Starbucks. The Motley Fool owns shares of Google and Starbucks.
The article These 3 Stocks Have Wonderful “Brand Moats” originally appeared on Fool.com and is written by Adem Tahiri.
Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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