Given the current turmoil in the market, it's clear that you can stop these stocks … but not 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 $250 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, 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, turning $1,000 in 1998 into nearly $11,000 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 McDonald's
Brand is also the reason Bank of America
Finally, brand is the reason why companies such as Marriott
This is not a new phenomenon
GE, McDonald's, Merrill, and Marriott 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 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 quickly that brands are the reason companies can expand geographically, expand their product lines, and earn outsized returns for shareholders. After all, without its sterling brands, Diageo
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 Bare Escentuals
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 20 percentage points on average, and you have no obligation to subscribe. Click here for more information.
This article was originally published on June 20, 2008. It has been updated.
Tim Hanson owns no shares of any company mentioned. Bare Escentuals is a Motley Fool Hidden Gems and a Rule Breakers recommendation. Bank of America and Diageo are Income Investor picks. New Oriental is a Global Gains selection. Writing witty lines about our disclosure policy is one of The Motley Fool's branding strategies.
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