As inflation continues to whittle away the dollar’s purchasing power, investors everywhere have been seeking new ways to hedge the declining value of our currency.
Throw out traditional plays
Conventional wisdom says that the best way to combat inflation is to own hard assets. The theory is that certain things will always be in demand, and that these things will hold their value in the marketplace even as the value of the currency falls. Precious metals, commodities, real estate, or even fine art are among the popular assets to own during times like these.
However, looking at our current situation, many are concerned that metals and commodities are well into a bull run, and that a burst bubble may be lurking. We all know where the real-estate market stands, and as for fine art, most of us can’t tell a Monet from a Manet, let alone afford one.
That eliminates pretty much the entire list of assets that are traditionally turned to in times of serious inflation. So we need to step back and get more creative. Rather than focusing on the traditional hard assets, I actually believe that some intangible assets truly possess the ability to fight inflation.
Staying strong through tough times
Brand names are powerful in the eye of the consumer. And the amount of advertising and promotion necessary to build a strong brand will remain the same, even as the associated dollar costs rise with inflation. In theory, a brand’s value should rise, at least keeping pace with inflation.
Of course, you can argue it's possible to destroy a brand. Technology can become obsolete, while human capital that’s vital to the success of a brand can get up and walk out the door. Still, a brand’s value should be more persistent than other types of conceptual or non-tangible assets.
Another consideration is that a weak dollar effectively makes American goods look like a fire sale to foreign buyers. International consumers revere our pop culture, and brands associated with the U.S. are popular. So with our goods looking like bargains overseas, international sales for American brands will be strong.
Where to start
Valuing stocks involved with traditional inflation hedges like commodities can be somewhat tricky, as it involves dealing with spot prices and currency fluctuations. However, there are standard formulas that can derive a value. Valuing brands, on the other hand, is a bit more complex.
Luckily, a firm called Interbrand issues an annual list of what it believes to be the world’s most valuable brands. Comparing those estimates to the market values of the companies owning the respective brands gives some insight into which may be the more attractive investments for inflation-hedging purposes.
The top-listed U.S. companies are probably no surprise: Coca-Cola (NYSE:KO), Microsoft (NASDAQ:MSFT), and IBM (NYSE:IBM) all have market caps well above the value of their brands. Those market values may be reasonable, given the fundamental outlook for those respective companies. But for an inflation hedge, we’re looking to invest mostly in the brand as an asset, not pay for the enterprise value of the company.
Further down the list, some names start to look interesting. Anheuser-Busch’s (NYSE:BUD) Budweiser brand is there, valued at $11.6 billion. The recent InBev buyout offer of $46.4 billion for Anheuser-Busch is a multiple of about four times its brand value. Using that as a benchmark, the following companies appear interesting.
|
Company |
Brand Value (in billions) |
Market Cap (in billions) |
|---|---|---|
|
Kellogg (NYSE:K) |
$9.3 |
$19.6 |
|
Harley-Davidson (NYSE:HOG) |
$7.7 |
$9.1 |
|
H.J. Heinz (NYSE:HNZ) |
$6.5 |
$15.8 |
|
Avon Products |
$5.1 |
$15.8 |
|
Tiffany |
$4.0 |
$5.8 |
Sources: Interbrand, Yahoo! Finance.
Not an exact science
Admittedly, the methodology has some weaknesses. Companies with brands not listed in Interbrand’s top 100 are difficult to value. For example, Kimberly-Clark owns Kleenex, valued at $4.6 billion. But its other brands are nothing to sneeze at – Huggies, Kotex, Scott, Viva and Cottonelle, to name a few, all would presumably have some value to weigh against the company’s $26 billion market cap.
However, the best brands have always persisted through economic cycles, and they are presumably the ones that last for decades as they beat out the competition. Consumers recognize and value these brands as surely as they value any precious metal or commodity. Thus, it makes sense to look at the shares of these strongly branded companies when seeking a way to hedge inflationary pressures hindering your portfolio.
Further name-brand Foolishness:
