Many investors use screens to whittle down the universe of investable ideas to those worth researching in depth. Screens, though, are highly quantitative, and they can fail to pick up the nuances of a business with tremendously valuable intangibles, such as brands. To try to combat this outcome, I sometimes simply screen for consumer-facing companies with market caps under $1 billion and then scan the list for brands I would have thought commanded a higher market valuation.
Here are some notable names from a recent run of this screen:
Market Cap (Millions)
|Papa John's (Nasdaq: PZZA )||$861|
|Peet's Coffee & Tea (Nasdaq: PEET )||$817|
|Revlon (NYSE: REV )||$781|
|WD-40 (Nasdaq: WDFC )||$753|
|Skechers (NYSE: SKX )||$727|
|Quiksilver (NYSE: ZQK )||$538|
|Caribou Coffee (Nasdaq: CBOU )||$277|
This is a pretty diverse list -- we have two coffee shops, two clothing brands, a beauty brand, and a pizza shop.
I think WD-40 is the one that surprises me the most on this list. After all, depending on where you live, you might never have encountered Caribou Coffee or Peet's. Maybe the Skechers and Quiksilver brands aren't really your style -- and maybe personal beautification isn't, either. But who hasn't heard of (and used) WD-40?
Also, it's impressive that we all know what WD-40 is despite its actual name. Great brands that become synonymous with their products is nothing new-- think Kleenex, Xerox, or Google. But those are more memorable names (specifically, they're bolstered by hard consonants -- the same reason founder Paul Orfalea named his copy shop "Kinkos"). WD-40, on the other hand, isn't exactly catchy. That we know what it is -- and that the name has stuck -- is testament to what a great product it is.
Under the hood, the WD-40 financial engine is far from rusted. The company has run about 50% gross margins for more than two decades. Cash flow is strong, and it takes almost no capital reinvestment to keep the company running. Actually, therein lies the obstacle to meaningful growth -- though the company practically mints money, it doesn't have many high-return places to deploy that money. Smartly, management has chosen to return most of that capital to shareholders through dividends.
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