Long before GE (NYSE: GE ) was a global leader in financial services and health care, a major TV studio and water purifier, and a pioneer in the alternative energy and green technology spaces, GE was General Electric -- a Schenectady, N.Y.-based maker of electric lighting and appliances.
Yes, this was high technology back in 1892 when the company was founded (with roots back to Thomas Edison), but had GE stuck to its knitting in that niche, it would not be the nearly $300 billion conglomerate we know today. In fact, GE recently announced that it plans to sell its appliance business, and I've heard rumors that it also plans to get out of the legacy lighting business, due in part to pressure from low-cost Chinese manufacturers.
No way to conquer the world
Instead of being content as a lighting company, the people at GE decided to be an idea company. That's why GE became such an incredible success, and why it continues to churn out market-beating returns a century after its founding. Indeed, over the past 20 years, GE has returned more than 1,170% -- turning a $1,000 investment into nearly $13,000 today.
What gave GE the flexibility to move up the value chain? Besides hard work and know-how, it was the company's bulletproof reputation for high quality. In other words, it was the company's brand.
Big brands, big money
But GE isn't the only company that parlayed success in a single niche into global domination. Consider 3M (NYSE: MMM ) . This $52 billion blue chip, which makes everything from Post-its to precision optics, began as Minnesota Mining and Manufacturing -- when five guys in Duluth decided to start making sandpaper.
Even Nike (NYSE: NKE ) , a company that likely could have done just fine selling running shoes, has been able to slap its distinctive swoosh on everything from high-tech socks to high-tech golf clubs. How did a shoemaker get into the business of selling ultra-light titanium drivers? The answer, of course, is brand.
This is not a new phenomenon
While GE, 3M, and Nike have leveraged their brands to achieve extraordinary growth, the importance of a good brand to a business is not a new discovery. The Atlantic recently reported on a National Bureau of Economic Research paper by Gary Richardson called "Brand Names Before the Industrial Revolution."
Richardson found that even in medieval markets, "Buyers were willing to pay more for goods that came from reputable outlets, and this encouraged manufacturers to fashion their products with identifying features."
Entrepreneurs found out fast that brands are why companies can expand geographically, expand their product lines, and earn outsized returns for shareholders. After all, without its sterling brand, Coca-Cola (NYSE: KO ) would just make sugar water ... and as any five-year-old lemonade proprietor can tell you, that's no way to make milk money, let alone the $6 billion in profits Coke banked over the past year.
There's gold in them thar logos
It turns out that a strong brand is one of the few sources of sustainable competitive advantage in this world. And while brands can be difficult to value (the best way is to estimate their replacement value, or how much it would cost a competitor to earn the same trust and mindshare from consumers), they are one of the core traits we look for to find promising small-capitalization stocks for our Motley Fool Hidden Gems subscribers.
After all, if you can find a small company with a big brand, then that company has a much better than average chance of becoming a big company along the way. Sure, they could mess it up (things like profits and a strong balance sheet still matter), but a strong brand is a significant head start.
Companies with that head start
This is why Sotheby's (NYSE: BID ) , Under Armour (NYSE: UA ) , and Princeton Review (Nasdaq: REVU ) have all popped up on our Hidden Gems radar at one time or another. Each is capitalized at less than $2 billion, and yet how many other world-renowned auctioneers can you name off the top of your head?
Sotheby's brand is the reason the company could get into real estate, Under Armour's into football cleats, and Princeton Review's into subject tutoring. A great brand, in other words, can make a stock unstoppable.
If you're looking for more small companies with powerful long-term brand potential, sign up for Hidden Gems free for 30 days and see all of our research and recommendations. Our picks are beating the market by 22 percentage points on average, and you have no obligation to subscribe. Click here for more information.
Tim Hanson owns shares of 3M and Sotheby's. Princeton Review is a Motley Fool Hidden Gems recommendation. 3M and Coca-Cola are Inside Value picks. Under Armour is a Rule Breakers selection. The Fool owns shares of Under Armour. Writing witty lines about our disclosure policy is one of The Motley Fool's branding strategies.