“Companies that invest in building valuable brands grow their topline faster; and organic top-line growth is the greatest determinant of total shareholder return”

— BrandZ Top 100 Global Brands Report 2019

Why doesn’t every firm, every analyst, and every investor focus on determining the most relevant, innovative brands? It remains a mystery and one we are happy to be focused on alone.

DEFINITION:

The definition of ICONIC from Webster’s dictionary: “Widely recognized and well established”.

Identifying iconic brands is not difficult. By the above definition, SEARS & JC Penney are iconic brands. Have they been great investments? Not unless you are a short-seller!

I’ve talked a lot about investing in the most important and powerful brands serving U.S. and global consumers as being important from an investment perspective. So if analyzing “iconic” brands offers little value, how is one to determine which brands might offer a great investment?

BRAND RELEVANCY IS THE KEY.

That’s our special sauce. Each December we go through a rigorous quantitative & qualitative process to identify 200 of the most relevant and innovative B2C brands serving U.S. and global consumers which includes the most relevant B2B brands that are vital to the consumption supply chain.

Why? If you’re going to track an important theme (global consumption), you need a dedicated investment universe from which to choose. A key component of identifying these great brands is determining which brands are most RELEVANT in the eyes of their customers and to the general population in general. If you’re a relevant brand, every day offers an opportunity to gain a new customer once she understands the value proposition the brand offers.

BRAND RELEVANCY:

To determine the brands that are most relevant, there is a rigorous process, as you might imagine. This process is both qualitative and quantitative. The quant process is pretty straightforward and fairly easy, the qualitative component requires a significant amount of research and adds some important subjectivity. In future blog posts, I’ll expand more on the components of this proprietary brand relevancy scoring system but here’s a list of some of the important characteristics that help zero-in on the best brands from an investment perspective.

Quant factors:

• Revenue growth

• EPS growth

• Operating margins and trajectory

• Return on invested capital

• Dividend growth

• Quality measures like: debt, debt coverage, debt repayment

• Cash flow measures like: FCF generation, FCF growth, FCF per share, cash as % of market cap

• Superior price momentum over multiple time periods.

• Traditional valuation metrics like: Price/Sales, FCF Yield, P/B, P/FCF.

Qual factors:

• Industry leaders - current & emerging.

• Companies participating in large secular themes that are unstoppable.

• Domestic and/or global opportunities.

• Demographic relevance - appealing to every demographic group is ideal.

• Empowered corporate Culture.

• Corporate responsibility.

• Innovators and willing to self-disrupt.

• Strong and deep management teams.

• Corporate insiders that have high incentives to succeed because they own significant stock..

• The brand is consistent with the current business model.

• High Investor Relations acumen & focus to tell the story to investors.

• Relentless focus on the customer & adding new follow-on products/services.

• High creativity factor.

• Consistently ranked as a top company to work for - happy employees are more productive.

• Aspirational within the peer group.

• High customer loyalty.

• High brand love.

• Business models that are expensive and too complex to replicate offering an economic moat.

• Large patent and trademark portfolios.

• Maintain a house of highly relevant brands under 1 roof that offer a compounding effect.

• Unique & differentiated store aesthetics.

• Products & services worth paying for and that offer pricing power.

• Recurring revenue and/or subscription based models.

• Heavy emphasis on physical and online experience.

• Great story-tellers.

• Produce products/services that make people look & feel good and keep them entertained.

BOTTOM LINE:

• Consumer spending is a $40+ trillion yearly phenomenon - it warrants dedication.

• Brand loyalty is a key driver of consumer purchase decisions - you have to identify what drives loyalty.

• To build high brand loyalty, a brand must be highly relevant to it’s customers - we created a proprietary “brand relevancy audit” that is used to identify high brand relevancy.

• To my knowledge, we are the only group of investors that run a dedicated strategy identifying the most relevant brands serving the massive global consumption theme.

The prize for the being a highly relevant brand is most often superior operating metrics & high brand loyalty which is highly correlated with significant shareholder returns which is short for having much better odds at beating “the market” as measured by the S&P 500.

• TRACKING CONSUMPTION MATTERS

• BRAND RELEVANCY MATTERS

• GENERATING ATTRACTIVE RETURNS REALLY MATTERS