Tuesday, July 17, 2012

How I Evaluate Stocks: Brands and Moats

So you found a great stock with an unbelievable chart and impressive earnings and revenue growth, but is this enough to sustain long-term returns in the stock? I think the next step that we all take as investors is to recognize if the company behind this great stock has a great brand and moat.

According to Wikipedia, a brand is a “name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers.” Good example of strong brands would be Pepsi-Cola which belongs to PepsiCo (PEP) or Arm and Hammer baking soda which belongs to Church and Dwight (CHD). These two brands that I have just mentioned happen to be strong brand names, but do their companies have a moat because of their brands?                          

We begin by defining what exactly a “Moat”, according to Investopedia, an “Economic Moat” is a “competitive advantage that one company has over other companies in the same industry.” Good examples of strong moats, in my opinion are harder to come by these days. Gone are the days when true moats such as AT&T (before the break up) are gone, but there are many companies today which are close to having some serious barriers to entry like Microsoft (MSFT) through its software that includes Office and Windows and then you also have Apple (AAPL) through its closed network using hardware like iPhones and software like iTunes. These are great companies with strong brands and moats, but it does not necessarily equal great returns, this is why investors must learn to first find great charts, earnings and revenue growth first and then they can top it off by confirming whether or not the company has a strong brand or moat.                                                                               

Some of the stocks that I am long that have strong brands and moats are Apple (AAPL), MasterCard (MA), PepsiCo (PEP), and Starbucks (SBUX). I have attached a chart courtesy of Yahoo! Finance comparing these four stocks to the S&P 500. All four companies have appreciated better than S&P 500 the last five years and this is without dividends reinvested.

Are these stocks with strong brands and moats? Let me know what you think.
Related articles: How I Evaluate Charts and Earnings/Revenues.

Disclaimer: All articles are written as an opinion of the writer or writers. The contributors on this website are not professional investment advisors. These articles are written to share investing ideas that may be of interest to the reader. Always seek the advice of a professional investment advisor before investing.

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