For Market-Beating Investments, Look at Brand Value

If people like you, they will listen to you, but if they trust you, they'll do business with you. -- Zig Ziglar 

That quotation from sales guru Zig Ziglar is all about brands. Many investors don't pay much attention to brands, and that can be a mistake, because a strong brand can be a strong competitive advantage for a company, driving market-beating results.

Image source: Getty Images.

Thinking about brands

Try a thought experiment: Imagine that you can book a flight on either of two airlines, for the same price. One is Southwest Airlines, and one is Sky Coach. You'll probably choose Southwest, right? That's because you're familiar with it and have a reasonably good (or even great) opinion of the company, too. That's the power of its brand, at work.

Next, imagine that you want to watch a movie with your kids. Your options are a movie from Disney or a movie from Screen Magic. If that's all you know about the films, you'll likely go with the Disney offering -- because its strong brand will have you assuming that the movie will be made to high standards. If you want to send money to someone, will you prefer to use PayPal, Venmo (which belongs to PayPal), or a newcomer on the scene, ZipZipFunds? The better-known -- and better-trusted -- names will be favored.

Imagine that you want to own and run a restaurant. You might open a small business of your own, but alternatively, you might buy a franchise. One option isn't necessarily better than the other, but the franchise offers the benefit of a known brand. Good or bad, consumers will probably be familiar with the brand, and will have an opinion of it. If you start a McDonald's franchise location, or one for Subway or Dunkin' or Taco Bell, on the first day that you're open, consumers will immediately know what items you sell and what they think of them. Many will be fans of your offerings and will become customers.

Companies without strong brands can still succeed, but they will have to work harder to get the attention of consumers. Meanwhile, companies with strong brands will not only win business, but they'll often be able to charge higher prices for their offerings, as people will frequently pay up for brands they prefer. Plenty of blue-chip companies have strong brands that helped them achieve blue-chip status.

The most valuable brands

Once you respect the power of brands, you'll likely find brand rankings of interest -- and you'll be in luck, because there are many such lists. Here are the top recent results from one annual ranking -- Interbrand's 2020 Best Global Brands.

Source: Interbrand.com. 

The list above makes it clear that great companies tend to have great brands, and that focusing on top brands can lead to market-beating results. Apple, Amazon.com, Microsoft, and Alphabet, for example, are among the top companies with the greatest market value. A 2019 study by Gregor Dorfleitner, Felix Rößle, and Kathrin Lesser titled "The financial performance of the most valuable brands: a global empirical investigation" found that "the most valuable brands outperform the market during the overall period from 2000 to June 2018 as well as during different market conditions." It also found, though, that much of the outperformance stemmed mainly from certain industries: business services, retail, sporting goods, and technology.

It's worth looking at such lists of brand value now and then, to see how companies in which you're invested (or in which you want to invest) are ranked, brand-wise. Note, too, how their rankings change over time. Interbrand's 2020 list, for example, showed Amazon.com's brand value surging by 60%, while Apple's jumped by 38%. Google's dropped by 1%, though, while Disney's slipped by 8%.

Brand value can rise or fall due to how well-received new products are, how wide the company's global reach is, and how well a company is competing with rivals, among other things. The folks at Interbrand explain their methodology: "There are three key components to all of our valuations: an analysis of the financial performance of the branded products or services, of the role the brand plays in purchase decisions, and of the brand's competitive strength."

Of course, brand value should never be the only metric of interest when you're evaluating a company, but it's worth including it among the factors you consider. A strong brand can give a company a nice tailwind as it grows.