You Can't Stop These Stocks

Admittedly, this is a bit of an odd title to be rolling out here and now. Given the current market turmoil, it's clear that you can stop just about every stock. But I submit that there's a group of stocks the market can't stop for long. Which stocks am I talking about? Let's take a step back before we go forward.

See, long before 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 going back to Thomas Edison), but had GE stuck to its knitting in that niche, it would not be the nearly $200 billion conglomerate we know today. In fact, GE recently announced that it plans to sell its appliances business, and I've heard rumors that it also plans to get out of the legacy lighting business, in part because of 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. Though it has struggled of late, the company has still crushed the market over the trailing-20-year period.

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 Nike (NYSE: NKE  ) , which was founded to sell running shoes. Now it has carte blanche to sell highly engineered golf clubs, sunglasses, basketball shoes, and technical apparel anywhere in the world. Why? Because it's carefully cultivated a brand that is well-known and respected among consumers.

More recently, a trusted brand is also the reason why names such as Amazon.com (Nasdaq: AMZN  ) and Google (Nasdaq: GOOG  ) have been able to enter the market for cloud computing. Amazon is also manufacturing and selling the high-tech Kindle reader, and Google, because it's proved its engineering capabilities when it comes to search, can now compete with Microsoft (Nasdaq: MSFT  ) in offering applications for word processing and spreadsheets.

Finally, brand is the reason why companies such as YUM! Brands (NYSE: YUM  ) , which owns Pizza Hut, KFC, and Taco Bell, are able to franchise their names out -- quite profitably -- to independent operators. Consumers trust most of the names that they already know.

This is not a new phenomenon
GE, Nike, Amazon, Google, and YUM! have all leveraged their brands in different ways, but 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 titled "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 quickly that brands are the reason companies can expand geographically, enlarge their product lines, and earn outsized returns for shareholders. After all, without its sterling brands, Diageo would just have a product portfolio of easily replicable distilled grains. That's no way to make the $3 billion in profits Diageo 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 Chipotle (NYSE: CMG  ) and Colombia Sportswear (Nasdaq: COLM  ) have each popped up on our Hidden Gems radar at one time or another. Each is small, yet both have developed loyal followings among their customers.

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. Click here for more information.

This article was originally published June 20, 2008. It has been updated.

Tim Hanson owns shares of Chipotle. Colombia and Chipotle are Motley Fool Hidden Gems recommendations. Chipotle and Google are Rule Breakers picks. Micrososft is an Inside Value pick, and Amazon.com is a Stock Advisor selection. Diageo is an Income Investor pick. Writing witty lines about our disclosure policy is one of The Motley Fool's branding strategies.


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