What should you look for when seeking terrific investments? Well, for our Motley Fool Inside Value newsletter, Philip Durell looks for very undervalued companies with excellent management, great assets, strong cash flow, and a competitive advantage. These may be "good companies that have had a bad quarter or two, are turning around after troubled times, or are moving toward the high points of their business cycles." He looks for an attractive price and a margin of safety. And it's working for him -- his picks have roughly doubled the S&P 500's return. For our Motley Fool Income Investor newsletter, Mathew Emmert looks for "rare stocks that pay substantial dividends and have the potential for hefty capital gains." (His average return topped that of the S&P 500 by about two percentage points, last time I checked.)
When you look for outstanding investments, it's important to examine the effectiveness of management, the fiscal health of the company, and the stock price. Another important factor, one that I suspect our analysts also consider, is the strength of a company's brands. Brandweek magazine studies the level of loyalty customers have to various brands, and each year it announces the (take a deep breath) "Brandweek Customer Loyalty Awards Powered by Brand Keys."
Why does loyalty matter so much? Well, according to Brandweek, "It costs seven to 10 times more to win a new customer than it does to keep an existing customer. An increase in customer loyalty of only 5% can lift the lifetime profitability of a customer by as much as 95%. ... In certain sectors, an increase in loyalty of just 2% is the equivalent of a 10% across-the-board cost saving." Impressive, eh? As the folks at the magazine explain, "Loyal customers purchase products and services over and over again. They increase the volume of their purchases, speak well of you, and are even willing to give you the benefit of the doubt in time of 'crisis.'"
Here are some of the magazine's winners for 2005:
- Airline: JetBlue
(NASDAQ:JBLU) - Bank: Wachovia
(NYSE:WB) - Beer: Coors [by Molson Coors] and Miller (tie)
- Car Rentals: Cendant's Avis
- Clothing Catalogues: L.L. Bean
- Coffee and Doughnuts: Starbucks
(NASDAQ:SBUX) - Computer: Apple
(NASDAQ:AAPL) and IBM(NYSE:IBM) (tie) - Gasoline: BP
- Long Distance Phone Service: Verizon
(NYSE:VZ) - Online Brokerage: Toronto-Dominion Bank's TD Waterhouse
- Parcel Delivery: UPS
(NYSE:UPS) - Retail Store: Target
If you're interested in any of these categories as an investor, think of the winners' competitors. Note, for example, that Target won among retail stores. This tells us that Wal-Mart did not win (among many other retailers) and suggests it has some room for improvement in customers' minds and hearts. Likewise, note that firms such as Dell, FedEx, and ExxonMobil also didn't win in their categories.
Think of your own loyalty to various brands and products. Which companies have your strong support? Which products and services do you rave about to friends? This kind of dedication is worth real money to companies and real profits to investors. It's worth examining.
Share your thoughts on brand loyalty on our Motley Fool Take discussion board.
JetBlue, FedEx, and Dell are Motley Fool Stock Advisor recommendations. Cendant is an Inside Value pick.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. She's loyal to her Lucky Charms cereal.
