The Greatest Stocks of the Next Generation

Let me ask you a question.

Do you miss Circuit City?

Me neither. That's the question Roy Spence asked when he visited Fool headquarters, and it got me to thinking: Why do we feel this way? Why don't we care when stores like Circuit City or Linens 'n Things -- stores we all likely spent money in at one point or another -- go belly-up?

More than just numbers
Yes, they mismanaged their finances. But it turns out that was only a corollary to the real problem those companies faced.

At the end of the day, they lacked purpose. They lacked any defining characteristic that made consumers like you and me want to shop there. Without differentiation, we didn't much care whether we bought a comforter at Linens 'n Things or Wal-Mart (NYSE: WMT  ) -- it was who had the lowest price.

And, let's face it, competing with Wal-Mart on price has proven to be a losing game for countless retailers.

Why is that?
Wal-Mart can win on price time and time again because it has a well-defined purpose: "Saving people money so they can live better."

Even though this exact phrase didn't come about until years after the stores began, it was nevertheless founder Sam Walton's guiding principle from day one, and it has guided and directed every decision Wal-Mart has made to this day.

The mission is communicated in every Wal-Mart ad, in every store, and even on the top of the company's website. In the end, you may not choose to spend your money at its stores, but you can't avoid knowing that Wal-Mart is the company that's determined to save you money so that you can live better.

In his recently released book It's Not What You Sell, It's What You Stand For, Spence, whose agency helped companies as diverse as Wal-Mart, Southwest Airlines (NYSE: LUV  ) , and John Deere (NYSE: DE  ) articulate their purpose, cited a study by Jim Collins and Jerry Porras that found that "organizations driven by purpose and values outperformed the market 15:1 and outperformed comparison companies 6:1."

Now, that's something I can warm up to as an investor.

A helping of purpose, please
When you think about it, privileging purpose makes sense.

The greatest companies of our generation all served an unmet market need with a product or service they were passionate about.

  • Starbucks (Nasdaq: SBUX  ) wanted to introduce gourmet coffee and espresso drinks to everyday Americans who had been accustomed to freeze-dried and bland coffee. Their purpose: "To inspire and nurture the human spirit -- one person, one cup, and one neighborhood at a time."
  • Google (Nasdaq: GOOG  ) exists "to organize the world's information and make it universally accessible and useful." It has become a $189 billion behemoth by combining simplicity, innovation, and functionality to allow Internet users to more quickly find what they are looking for on the Web.
  • Whole Foods (Nasdaq: WFMI  ) set out to "provide choices for nurturing the body, the community, and the planet" and brought organic food into the mainstream.

Each company, despite some natural bumps in the road, has converted its passion and purpose into superior shareholder returns since its IPO.

Why might this be? Another study, by Harvard Business School faculty members John Kotter and James Haskett, found that purpose-driven companies have other benefits as well.

  1. Lower employee turnover -- keeps costs low
  2. Higher productivity -- superior efficiency
  3. Better pricing power -- helps maintain profit margins

In addition, a clear purpose helps us as investors evaluate the company's decision-making. For example, when Starbucks got involved in the 2006 movie Akeelah and the Bee, it was a wise time to reconsider your investment in Starbucks itself. The movie had nothing to do with selling coffee, so it was a clear sign that the company was running out of ideas and losing its focus as a business. I don't think it's a coincidence that 2006 marked the peak of Starbucks stock.

Finding companies with purpose
The greatest stocks of the next generation will be companies with a tremendous sense of purpose, led by passionate executives who are guided by that purpose and not solely by profits. The trick is finding them early in their growth cycles -- think Starbucks in the early '90s or Wal-Mart in the 1970s -- while they still have room to grow.  

Finding them is harder than you might think, what with the thousands of publicly traded companies out there declaring their purpose to be "maximizing shareholder value." Hey, I like maximizing shareholder value as much as the next investor, but I'm concerned with maximizing long-term shareholder value, and that requires a business purpose that can carry on for decades, not quarters.

But a purpose alone isn't enough -- you want a purpose-driven company with excellent management and strong business practices as well. To figure out if a given company fits the bill:

  • Read the company's annual report. Does it have a simple and defined purpose that guides all the business decisions? What's the ultimate objective as a company? What greater good does it serve?
  • Read the SEC proxy filings. How are executives rewarded? Is it based on short-term or long-term results? Is the CEO also a founder?
  • Read the financial statements. Is the company financially strong enough to deliver on and spread its purpose?

These are all things that Motley Fool co-founder David Gardner looks for when recommending stocks for his Motley Fool Rule Breakers service. One of the current "best buy" stocks, for example, is Under Armour (NYSE: UA  ) . It has built a tremendous brand of athletic apparel, has a defined purpose ("To make all athletes better through passion, science, and the relentless pursuit of innovation"), is led by a passionate founder/CEO in Kevin Plank, and is trading at a great price.

To hear more great ideas from David's Rule Breakers team, sign up for a free 30-day trial by clicking here.

Fool analyst Todd Wenning wishes you a happy new year. He does not own shares of any company mentioned. Under Armour is a Motley Fool Hidden Gems pick. Google and Under Armour are Rule Breakers selections. Starbucks and Whole Foods Market are Stock Advisor recommendations. Wal-Mart is an Inside Value recommendation. The Fool used to own shares of Starbucks. The Fool owns shares of Under Armour and has one heckuva disclosure policy.


Read/Post Comments (6) | Recommend This Article (55)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2009, at 3:20 PM, madmilker wrote:

    cvvt

  • Report this Comment On December 17, 2009, at 4:02 PM, dbwolfe2010 wrote:

    My book Firms of Endearment (I'm a co-author) profiled 18 "purpose" companies over a 10-year, 5-year and 3-year period. (See page 138). Over a 10-year period their stock price increased nearly 1100%, way out performing Jim Collins' "Good to Great" companies and eclipsing S&P index even more.

    During this recession, these companies have also significantly outperformed the S&P. The companies we identified as "firms of endearment" have more going for them than just a "purpose." They have adopted a multiple stakeholder relationship business model whereby they align the interests of five core stakeholder groups. Stakeholders return the courtesy with stronger loyalty -- one of the reasons that Whole Foods, an FoE, continues to baffle Wall Street even as American consumers become more economy-minded.

  • Report this Comment On December 17, 2009, at 5:33 PM, greedwhenfearful wrote:

    I don't miss Circuit City and I won't miss Wal Mart or Whole Foods when they are gone either.

    Those companies with purpose will survive longer, but if you are just a middle-man (like those above) your days are numbered.

    For my IRA, I primarily invest in companies with not just brand recognition, but intellectual property too. Warren Buffet calls it a "large moat" as you all know.

    I invest in the companies that make products the middle-men sell.

    Coke, Microsoft, Intel, P&G, Ford, etc. That's your good long term bet.

  • Report this Comment On December 17, 2009, at 5:34 PM, greedwhenfearful wrote:

    I don't miss Circuit City and I won't miss Wal Mart or Whole Foods when they are gone either.

    Those companies with purpose will survive longer, but if you are just a middle-man (like those above) your days are numbered.

    For my IRA, I primarily invest in companies with not just brand recognition, but intellectual property too. Warren Buffet calls it a "large moat" as you all know.

    I invest in the companies that make products the middle-men sell.

    Coke, Microsoft, Intel, P&G, Ford, etc. That's your good long term bet.

  • Report this Comment On December 17, 2009, at 11:52 PM, Chinastocks55 wrote:
  • Report this Comment On December 24, 2009, at 11:48 AM, tomd728 wrote:

    This is a comment that would have served those arrogant louts at GM et al well.

    They would not have listened but hey......it was there.

    I won't miss GM either.

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