One Sign of a Strong Stock

Think about your favorite company, the one you believe in the most. Now imagine getting its logo tattooed on your bicep.

What's your immediate, knee-jerk reaction? I'm going to guess you think it's a bad idea.

Even so, thousands upon thousands of Harley-Davidson (NYSE: HOG  ) owners have done it -- it's one of the oldest and most popular brands-as-permanent-affiliation. And they aren't alone.

So what's the difference between the company you thought of and Harley-Davidson? And why should it matter to your investing?

4 ways to get ahead
There are lots of things that make a great company: strong financials, excellent management, well-produced products or services. But however great a company is, it won't last unless it has some kind of competitive advantage, some way to protect its market share and grab more.

Competitive advantages come in many forms:

  • Economies of scale, which allow bigger companies to offer products for less. Think Wal-Mart (NYSE: WMT  ) , which can use its mammoth size to bargain for better rates.
  • Network effects, which make the value of the service increase the more people use it. eBay (Nasdaq: EBAY  ) , for example, is the place to buy and sell oddments because of the sheer number of buyers and sellers who congregate there.
  • Intellectual property, such as patents. Drug companies like Merck (NYSE: MRK  ) , for example, are dependent on drug patent protection to recoup the costs of research and development as well as ensure a steady stream of customers.
  • High switching costs, which make it difficult for customers to trade one company in for another. Microsoft's (Nasdaq: MSFT  ) Windows operating platform, for example, is so ubiquitous and so well-known that it's unlikely PC users will suddenly switch to Linux.

But not every company can avail itself of these gold-standard competitive advantages. Other than economies of scale, those competitive advantages are largely predicated on industry membership.

Everyday retailers don't have intellectual property rights, nor are they likely to have network effects or high switching costs. What they do have is brand.

Standing out in the crowd
A brand is the conglomeration of all of those "soft" associations customers have with a company or a product, the totality of the experiential and psychological aspects of their interactions.

Brand may be difficult to measure with any confidence, but it points toward something important: the customer's attachment to this particular product as opposed to all of the other options he or she could pursue.

Think about Nike (NYSE: NKE  ) -- people pay hundreds of dollars for athletic shoes that get far more wear on the street than they do on the court. Abercrombie & Fitch can sell a T-shirt for $50 simply because it has the Abercrombie logo on it, while an identical shirt minus the logo would fetch a fraction as much.

But brand loyalty on the basis of style fads aren't sustainable over the long term; remember when Gap was the brand of choice?

The strongest retail brands are the ones that express people's identities -- and continue to do so no matter what happens in their lives. Harley-Davidson clearly has it; if you're a Hog lover, you aren't going to accept a Honda.

Are you sure you don't want that tattoo?
Every company will claim it has a strong brand, but the real test of a brand is how well it holds up through the slings and arrows of an outrageous economy. Many food and household products, for example, have excellent name recognition and substantial customer loyalty, but nearly 60% of Americans are currently forgoing their favorite brands for store brands.

Even in the worst economy since the Great Depression, however, Apple (NYSE: AAPL  ) has continued to hit it out of the park with the iPhone, based largely on the way its sleek design and continued innovation feed into an identity people want to claim, and it's up 73% since the turn of the year.

It's that kind of market performance that demonstrates the importance of a strong brand to a great investment -- no matter what the economy.

You may not want to tattoo a company's logo on your body, but if you can't imagine trading its products in for those of its competitors, then that's a company worth investigating further.

A strong competitive advantage, including brand, is one of the things David and Tom Gardner look for at Motley Fool Stock Advisor. Their picks are currently beating the market by 42 percentage points on average. If you'd like to see what they're recommending today, you can take a free, 30-day trial to the service by clicking here. There's no obligation to subscribe.

Already subscribe to Stock Advisor? Log in at the top of this page.

Julie Clarenbach owns shares of Apple and has two tattoos -- but neither of them are brands. Apple and eBay are Motley Fool Stock Advisor picks. Wal-Mart, eBay, and Microsoft are Inside Value choices. The Motley Fool's disclosure policy is considering getting a tattoo of Select Comfort. Not.


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  • Report this Comment On July 25, 2009, at 4:48 PM, madmilker wrote:

    One sign of a un-American company...

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

    quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

    People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

    50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

    quote*”Considering that there are over 30,000 ships at sea this morning,” writes James Carlton, director of the Williams College-Mystic Seaport Maritime Studies Program, in an e-mail, “the total number of organisms and species in this global ‘bioflow’ on the morning your readers read your piece could be staggering - billions of individuals, and thousands of species.”

    Indeed, scientists have long considered ballast water the primary way invasive aquatic organisms are introduced. From the zebra mussel’s arrival in the Great Lakes, to an American jellyfish severely disrupting Black Sea fisheries, the potential costs of accidental introduction of a species to new homes can be tremendous. Aquatic invasives cost the US $9 billion yearly, according to estimates by David Pimentel, professor emeritus of ecology and evolutionary biology at Cornell University in Ithaca, N.Y. Zebra and quagga mussels (a cousin to the zebra) alone cost the $1 billion annually.*end quote!

    tat is $9 billion a year in hidden taxes to all Americans…

    cheap ain’t chic and it cost America…………jobs!

    “Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what’s in the best interests, and we should make sure that trade is not only free, but fair too.”

    http://www.worldthinktank.net/pdfs/TheFlowofTrade.pdf

    and when it comes to all them ther turnips in D. C. ….they all need to red…oops! read George Washington’s farewell address after only eight years of serving his country…

    Retail makes nothing! ….and until the American people get off their lazy @ss and start to demand…”made in America”….all the retail jobs will be sitting in a foreign land.

    The dang government makes only debt…like all it knows is spend…spend…spend. The turnips ain’t never past a dang “saving” bill. They go up on tat big hill and play banker with my dang tax dollars and every dang one of them is one sandwich short of a picnic when it comes to balancing their dang check book.

    National Debt from 1776 to 1910 wus only $2.6 billion and tat wus without a income tax. After the stiff-shirt “my sh!! don’t stink” bankers met in 1910 at Jekyll Island tat debt wus put in high gear in 1913 and even with a income tax and now a tax for every dang thig a person touches…even the air he/she breaths tat debt has mushroom to over $10 trillion in 2008.

    Now….we the people in the past 7 months has taken on another $1 trillion and tat person in tat big white house is saying the car is going to slow…well…maybe he needs to get out off the dang thig and walk.

    http://dailybail.com/home/the-national-debt-road-trip-video-...

    And with America being over $57 trillion in debt….a little walking wouldn’t hurt them either. People….it ain’t no place in the Constitution tat states the government is suppose to take care of you….not one dang sentence. The word “cheap” ain’t no place to be found either. If you don’t buy American made…you don’t have jobs cause RETAIL makes nothing.

    Quit thinking in terms of a jack@ss and elephant….they the ones tat put US in tis mess….think in terms of character, faith in God, love of Country, your State, your town, your family and your dang job. Spend a month…maybe two red…oops! reading Michael Hodges “Grandfather Economic Report” series learn learn how the people from above has pull the wool over the eyes of “we the people” for the past 96 years.

    “Our constitution was made only for a moral and religious people. It is wholly inadequate for the government of any other.” - John Quincy Adams, 6th President of USA.

    “I hope our wisdom will grow with our power, and teach us, that the less we use our power the greater it will be.” - Thomas Jefferson

    “No generation has a right to contract debts greater than can be paid off during the course of its own existence.” - George Washington to James Madison 1789.

    “support your town…shop around.” - madmilker

  • Report this Comment On July 27, 2009, at 11:11 AM, Stephanie2045 wrote:

    Merck is poisoning your children and your future with their Gardasil. Boric acid contains heavy metals.The aluminum adjuvant is a neurotoxin. The investors are buying up these toxic companies. I can not believe my own eyes.

  • Report this Comment On July 27, 2009, at 11:23 AM, Bamafan68 wrote:

    Yes, boric acid does contain heavy metals. By definition, boron is a heavy metal. Other things containing boric acid other than Gardasil: sea water and most fruits. Maybe we should not let our children bathe in the ocean or eat any fruit?

    Cervical cancer and cervical dysplasia kill and disable far more women than Gardasil.

  • Report this Comment On July 27, 2009, at 11:30 AM, mikecart1 wrote:

    LOL @ "Boric acid contains heavy metals"

    That is like saying "Helium contains gases"

    Everything can kill you. If you live your life in fear of every little disease, you aren't living at all. We all die anyways at some point so who cares.

  • Report this Comment On July 27, 2009, at 5:20 PM, 102971 wrote:

    Let's get back to dealing with stocks and leave the chemical analysis to others. I like Merck as a stock and I've never even heard of boric acid.

  • Report this Comment On July 31, 2009, at 3:29 PM, albersdg wrote:

    Learned about Boric acid in high school chemistry.

    It is also used, I believe, as an eye wash.

    Nothing is too big to fail, including:

    Harley-Davidson

    Merck

    Microsoft

    Nike

    Apple

    Research in Motion

    Companies lose their way, such as:

    GM, Chrylser, Lockheed, McDonnell Douglas, Circuit City

    Tatoos are a bad idea that is new again.

    My father had friends that had tatoos. Post-WWII or post-Korean War, It was not something that caused the owners to exude pride or garner stature.

  • Report this Comment On September 05, 2009, at 5:02 PM, dividendgrowth wrote:

    MRK's dividend is higher than its bond yield.

  • Report this Comment On September 16, 2009, at 1:00 PM, Investable1876 wrote:

    You should ignore analysts on TV, the radio, the newspaper and all other TALKING HEADS when it comes to investing!

    What stocks do they talk about? - The same old group, every day of every year - Why? Because they don't know any better, they are sheep like the general public, repeating what every economic textbook says and every other economist tells them to say. Everyday, the same companies are highlighted on the evening news -

    WHY?

    They aren't going anywhere. Some of the stocks that make the headlines every night were leaders of the market 20 years ago. New cycles bring new leaders; this has been proven year in and year out. So many of these TALKING HEADS shout out about "buy and hold" but what are they really holding? They hold old high-flyers that were superstars but have now become fallen stars that sit 20%, 50% or even 90% off of their all-time highs (some may have given you a small return - 10% or less over the past 5 years - WOW - BIG DEAL!). Yes, maybe over 15 or 20 years, you will get your money back - but what is the point? Many of these "so-called" investors tell you how they own XYZ stock and it has returned them 65% BUT they leave out the key factor that it has taken 16 years to get to that point.

    One of the strongest and most promising stocks of the early 1900's (1920 decade) was RCA - this stock was one that people claimed you put in your portfolio and hold it till near death - it will NEVER fall and if it does, hold on because it will come back. Well, let's take a look: RCA soared over 1100% during the 1920's and crashed with the rest of the market in the early 1930's. It went from a low 0f $8.70 to a high of $106 to a crash level of $3.00. Some said to hold, some said buy on every dip. - Guess what, it didn't climb back to pre-crash levels until 1963! 30 years to break even for some. Maybe that stock in your portfolio is the RCA of yesterday; history always repeats itself because human nature is always the same!

    ---------------------

    Money is like muck, not good except it be spread.

    http://www.topinvestingtips.com

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