Recently, the market's had some major mood swings. It's up one day and down the next, which can be very stressful.
So what's an investor to do during these uncertain times? Invest in assets like real estate and precious metals? Stuff cash under the mattress? No, we need a timeless business model that is known to create value -- like branded commodities.
You already know the best brands
Branded commodities are the security blankets of the stock market: We already know the best brands, and we can sleep more comfortably at night knowing that these companies have been around for years and will be around for many more.
In fact, I'm pretty sure you already know these branded-commodity companies listed below, along with some performance results over the past 10 years. Compare their annualized returns to the 6.4% per year generated by the S&P 500.
|
Company |
Sales |
Avg. Return |
Annualized |
|---|---|---|---|
|
General Mills (NYSE:GIS) |
7.6% |
19.6% |
10.7% |
|
PepsiCo (NYSE:PEP) |
4.8% |
20.5% |
8.1% |
|
Altria (NYSE:MO) |
2.4% |
27.4% |
13% |
|
Coach* (NYSE:COH) |
23.2% |
38.6% |
53.2% |
|
Procter & Gamble (NYSE:PG) |
4.9% |
18.2% |
11.1% |
All data supplied by Capital IQ.
Easy to understand
Another reason to love branded commodities: Their businesses are easy to understand and create lots of value.
Their first step is to transform commodity-type inputs into great products that customers can't live without. Take General Mills, which, among other things, turns grains into cereals, or Coach, which turns leather into handbags. It doesn't get much simpler than that.
The magic begins when marketing enters the scene. Effectively communicating the greatness of the product and reinforcing its experience attracts and creates loyal customers. Pepsi sells snacks as well as beverages, because nothing goes better with salty snacks that an ice-cold soda.
Done correctly, these companies can grow for long periods of time, maintaining pricing power while benefiting from lower costs due to economies of scale. That's how they create great returns on invested capital over time for their shareholders.
Easy to exploit
So when we have a business model that we understand, one that creates value, we need only to take advantage of great prices when the market is in one of its moods. It's tough to be patient, especially during times of uncertainty. But you can do it, and your patience will be rewarded.
Take Procter & Gamble, for example. P&G issued an earnings warning in March 2000 that sent the stock down 30% in a single day. That's right, this huge blue chip was down 30% in one day. But when you combine rising material costs with the announcement of a huge restructuring plan, it's easy to see why investors fled. That gave patient value investors a great opportunity to invest in a wonderful company.
The Foolish bottom line
Branded commodity companies are some of my favorite companies to watch. They're simple but effective businesses that, when run well, tend to outperform through good markets and bad. And their timelessness helps investors sleep well at night -- while generating market-beating returns on their hard-earned cash.
That's why advisor/analyst Philip Durell included Colgate-Palmolive (NYSE:CL) in the Inside Value portfolio, which has produced solid 31% returns since its recommendation in November 2004.
If you're looking for reliable companies that generate market-beating returns, there's plenty more where Colgate-Palmolive came from at Inside Value. Best of all, they're all merely a click away when you sign up for a free 30-day trial.
Fool David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy .
