1 Secret to Finding Great Stocks

Have you ever noticed that some brands define who a person is? Recently, I've noticed people wearing Toms Shoes, a company that donates a pair of shoes for every pair purchased. Whenever I see someone wearing Toms Shoes, I feel like I understand a core part of who they are.

This brand image is so powerful that it has helped Toms grow quickly and develop a loyal customer base. While Toms is not a public company (somehow I think donating a free pair of shoes for every pair sold would make Wall Street's head spin) I began thinking, what is it about some public companies that allows them to build such a strong brand?

The best brands develop a very specific image built on what I like to call "exclusive accessibility." Everyone is able to buy these brands, but the image and the message only appeal to a specific subset of customer. They maintain a level of exclusivity in the message the brand communicates.

These brands express an image that is very clear to customers and, as a result, only appeals to customers who want to show that image. Lastly, the most successful brands embody what a person wants to be and the image a person wants to show the world. There is an aspirational hint to many successful consumer brands.

So what are some of the best brand stories out there?

The best of brands
lululemon athletica
(Nasdaq: LULU  ) makes exercise clothing for women and has built a following of aspiring exercisers and genuine yoga fanatics. The company made itself into a brand for people who are trying to get in shape and want to show others that they are getting in shape. While anyone can go and buy their clothes, only a certain type of person does.

I saw a girl walking down the street in lululemon clothes (I recognized the logo) and I got a very specific picture of who she was trying to be. Just seeing this brand told me a lot about this person. Now, I may just be someone who jumps to conclusions a little too quickly, or there could be more to this.

A company's brand comes from the identity that people try to show the world. While Honda (NYSE: HMC  ) created a hybrid out of its popular and well-known Civic brand, it was the Toyota (NYSE: TM  ) Prius that has become the icon for "green" driving. The hybrid Civic looked exactly like a regular Honda Civic, so no one could tell that it was hybrid. The Civic didn't scream, "I'm green!" It did not let environmentally conscious people show off their environmental consciousness, whereas the Prius did. The message these two cars communicated was very different and that message became the deciding factor for environmentally conscious buyers.

The company that made the jump
Arguably, Apple (Nasdaq: AAPL  ) has become the symbol of this generation's version of cool. With the iPod, iPhone, and iPad, Apple morphed from a company with a small but loyal customer base to a behemoth that symbolizes everything that is hip in technology. Since 2000, Apple stock has destroyed the S&P, increasing almost 14 times in that same period.

For many years, Apple developed this aura that brought Apple-philes -- its most loyal customers -- along with every new venture and product (even if they were terrible). Apple-philes liked defining themselves as different. They liked that they were part of an exclusive group that challenged the status quo.

With the iPod, Apple grew beyond just this subset of Apple-philes to become a brand that almost everyone seems to love. It was able to make the jump from a small customer base to reach nearly everyone in the U.S. while still maintaining its strong brand image. Apple could grow beyond its small core because it maintained a clear, defined message that people could universally identify with and had a great product to match. As a result, it crosses boundaries and has become a unifying brand among much of the U.S. population.

The Foolish bottom line
In each of these examples, the companies defined their brands in a way that created a specific image with which customers could identify. By creating such a strong message, these brands appealed to a core customer group that allowed the brands to maintain a feeling of exclusivity that made their customers feel special. There is no confusion about what each brand signifies to people, and that is their strength.

As investors looking for great stock ideas, a strong, clear message that speaks to a specific core customer base is key to finding the best of brands. In a subsequent article, I'll be looking for more companies where exclusive accessibility exists.

Reza Handley-Namavar does not own shares in any of the companies in this story. The Motley Fool owns shares of Apple and lululemon athletica. Motley Fool newsletter services have recommended buying shares of Apple and lululemon athletica and creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 23, 2011, at 8:09 PM, midnightmoney wrote:

    So do you have any numbers on how people who just couldn't see the car they'd purchased or were being driven around in felt about the honda civic hybrid vs the prius? Did they feel distinct and distinguished but somehow more aloof from the image paradigm you've identified? Just curious, but I agree that appearance is really important when you're spending 40,000 biguns on a set of wheels. Appearance and image, of course, which is why you'd want to wear brand name sunglasses at all times. I'd imagine that people who hadn't seen their cars wouldn't be affected by the look of the car they're driving or being driven around in, that's why I ask. Lastly, do you think that honda will use this information to redesign an automobile that can compete with the prius, or do you think that they can't design outside the box, and should therefore stick to non-electric vehicles?

  • Report this Comment On August 23, 2011, at 8:55 PM, RetroAlum wrote:

    Good points about the conspicuity of thoughtful consumerism, but product design has to run deeper in the long term.

    The Toms model is a good example: It SEEMS all green and touchy-feely to give a kid some new shoes, but step back a bit... They're some crummy loafers that would be outlasted by a pair of thrift store basketball shoes (likely with more 'street cred'). A pair of hand-me-downs beats the Toms for carbon footprint, to boot. [pardon the multipun]

    Once the emperor has no clothes, your brand may have no value.

  • Report this Comment On August 24, 2011, at 9:42 AM, russkr wrote:

    Similarly, the article could be extended to include a brand such as UnderArmour, which has managed to build a brand so strong that it is bought by its actual core group (athletic, active people) AND a wider audience (out of shape people who have delusions [and/or aspirations!] of being/becoming an athletic/active person).

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