Investment Shastra

How to choose good stocks: Look for strong brands

Companies with great brands have an unbreachable moat

Brands are represented by a name, phrase, sign, symbol or a combination of these. It is the unique identity, association or emotion which a product or service creates for itself in the minds of consumers. A Brand connects emotionally with consumers and becomes an integral part of their lives. Companies which have a brand as a moat can generate profits consistently in the long run and emerge as winners even during tough times.

Brands become synonymous with the products and services used by consumers. For example, Band-Aid is actually the brand name for Johnson & Johnson’s adhesive bandages. Its popularity across countries has made the brand name synonymous with the product. Other examples are Cadbury for chocolates, Fevicol for adhesives and Maggy for noodles.

When a company creates a successful brand, it creates a set of loyal consumers. When consumers are happy and satisfied with a brand, they are unlikely to switch to another brand. For example, take Amul butter. When happy consumers talk enthusiastically about their favourite brand, they help the brand attract more consumers at virtually zero marketing cost. This leads to higher sales, profits and higher profitable market share.

Brands make the process of taking decisions easier for consumers and give them peace of mind. As consumers love the brand, they do not mind paying a premium for its products and services. For example, take Asian Paints. It is a classic example of a successful brand which charges a premium in the paints category.

Successful brands break through the advertising clutter and become a part of the consumer’s consideration set, i.e. the shortlist of brands a consumer will consider buying from. For example, Maruti Suzuki will certainly be a part of every consumer’s shortlist when buying a small car.

A company with a strong and successful brand also has the ability to expand to other product and service categories with ease. For example, Titan is one such brand. It is the largest manufacturer of watches in the organized sector in India. Over the years, Titan has diversified to other categories like Jewellery and Eyewear quite successfully.

A strong Brand gives the company the ability to increase its sales and command a premium price for its products, which ultimately results in higher profitability. This helps the company remain a Winner in the long run.

Although a successful brand is a moat, it takes additional effort to translate it into an outstanding financial track record.

First, while brands can earn money, they cannot prevent companies from taking poor investment decisions, spending disproportionately to achieve short-term results, giving away more than what is required to channel partners, succumbing to price wars, etc. Every category has competition. When successful brands do not evolve and fail to maintain their edge over the competition, over a period of time they get diluted, and the brand ceases to be a moat. However, the process takes time, and corrections are easier to make. This means brands require innovation and investment in the long term. The management that fails to act on this ends up losing an asset that has taken years to build.

When you look at any product category, look at the top two or three brands. Find out which companies own these brands. Then. look at the six critical parameters to know the financial track record of these companies. These are the stocks you should consider buying; naturally, at the right price. Add them to your Stock Watchlist.

Just some food for thought—Can any of your current investments boast of Brand as a moat?’

Read the next article on Moat-2: A company with Patents/Trade Secrets is well protected from competition


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