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
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 $150 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 3M
Even Nike, 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
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 when finding 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
Sotheby's brand is the reason the company could license its name for real estate, Under Armour's into football cleats, and Princeton Review's into test prep for any test you can think of.
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 3M and Sotheby’s. Sotheby’s, Under Armour, and Princeton Review are Motley Fool Hidden Gems recommendations. UA is also a Rule Breakers pick. 3M and Coke are Inside Value picks. The Motley Fool owns shares of Under Armour. Writing witty lines about our disclosure policy is one of The Motley Fool's branding strategies.
