Advertising Age magazine ran an article in November about America's hottest brands and the people behind them. Some come from small businesses that few investors have heard of, but large, publicly traded corporations are behind many of the brands.
I'll look at companies whose shares trade on U.S. exchanges. By the end, you'll know whether to invest in the entire group or in select companies. Either way, it's important to understand that today's stars quite possibly are tomorrow's dogs. Tread carefully.
Of the 40 brands mentioned in the article, 18 are from companies publicly traded on U.S. exchanges, including Procter & Gamble (PG, news, msgs), the only company with two brands (Cover Girl and Pepto-Bismol). Procter & Gamble is one of seven consumer-products companies on the list. Six provide services, and four are tech companies.
I don't have a problem leaving out financials, health care and basic materials, but others would want representatives from those sectors in the portfolio. Thankfully, diversification is not the primary purpose of this article.
| Company | YTD change as of 4/30 | ||
|---|---|---|---|
24.5% | |||
19.5% | |||
19.4% | |||
0.7% | |||
-5.0% | |||
-5.6% | |||
In the table above, I've included the three best and worst performers from the Advertising Age list. As a group, the portfolio has outperformed the Standard & Poor's 500 Index ($INX) by 2.6 percentage points this year. If you exclude Coca-Cola (KO, news, msgs), which made the list only because of its minority investment in the coconut water drink Zico, the return is actually a full percentage point better, at 10.5%. It's not spectacular, but you'll definitely sleep easier at night.
In this instance, large caps constitute 70.6% of the holdings, very similar to any large-cap mutual fund. That's not a terrible thing. If I did have a concern with the portfolio, it would be the lack of midsize companies in the mix. Prima Capital did a study from 30 years of data that show midcaps outperformed both small and large caps by about 2% annually. This is too significant to ignore.
The bottom line
I like all of the top three mentioned above, but I'd probably have to go with Diamond Foods (DMND, news, msgs) as my favorite. I think CEO Mike Mendes is doing a fabulous job transforming the former walnut cooperative. Its recent acquisition of Kettle Foods is but one example of his vision for a bigger and better business, and, most importantly, it's working.I'm not as familiar with Panera Bread (PNRA, news, msgs), but its stock did grow 35% annually over the past decade, and same-store sales continued to grow during the recession.
As for Viacom (VIA.B, news, msgs), its strong first-quarter earnings demonstrate advertising revenue are recovering. Unfortunately, its Paramount Pictures film-making subsidiary is a money loser and a drain on overall profits.
Even though it's possible some of the stars of today will fade away, one thing is clear: Investing in America's hottest brands has more upside than down.
