Harnessing the Power of Magnetic Brands

 | Apr 11, 2013 | 1:00 PM EDT
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On Thursday I discussed the value of investors knowing their limitations, and most important, why avoiding losses is more important than capturing gains. Since this is Master's week, I used a simple golf analogy: Players who avoid bogeys and double bogeys stands a good chance of finding themselves on the leaderboard.

Now let's talk a bit about branding. I was at Augusta National yesterday and, like seemingly everyone else, I picked up a golf shirt, a hat and a mug from the merchandise shop. While there was nothing special about these items, they all did come embroidered with that instantly recognizable logo: the shape of the U.S. in yellow with a red flag sticking out from Augusta, Ga. The Masters tournament is only place you can buy official Master's merchandise, so patrons tend to buy like crazy, and all so people can own items with that little yellow logo. Thanks to that logo, Augusta generates millions of dollars in merchandise revenue, ticket sales and sponsorship associations.

A top brand is quite valuable. Consumers are creatures of habit, and they want to feel good about what they buy -- and top brands make that possible. If you look at shareholder returns through the years for the leading brand stocks, they are outstanding. Coca-Cola (KO) is the obvious example. The brand name is the why Coke generates operating margins in excess of 20% and return on equity of nearly 30%. Nike (NKE) is another valuable brand whose swoosh logo is recognized the world over as the No. 1 choice for the world's top athletes.

It's not surprising that shares of both Nike and Coke are trading at 52-week highs. More important, both of these names make shareholders money over long periods. It's why Warren Buffett hasn't sold a share of Coke since buying in more than 20 years ago.

It takes decades for a brand to establish itself -- and, in doing so, that company creates one type of competitive advantage. Deere (DE) is another great brand instantly recognized by its green agricultural equipment, with shares currently trading at a modest valuation. Two other brands with enormous intangible value are MasterCard (MA) and Visa (V).

The trick with brands is that they can't be easily quantified on the balance sheet like other assets and liabilities. But the best brands possess an enormous amount value, as they can generate consistent sales and earnings if managed and marketed appropriately.

Don't rule out brand stocks -- not even now.

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