Exercise Caution with Big Brand Stocks

Physician's Money Digest, January31 2004, Volume 11, Issue 2

New York Times

When it comes to stock selection, some physician-investors are attracted to famous brands like Coca- Cola or McDonald's because of their familiar names. But that's not necessarily the wisest strategy. According to a recent report, businesses with global brands, even the most highly regarded ones, are facing significant challenges in today's weaker economic climate. As such, professional investors are advising buyers to exercise prudence with their stock selections.

Brand Name Challenges

Analysts have their theories about why this has become a difficult time for popular brand name products. One is that consumers are less impressed by global brands and are more interested in those with a local flavor. For example, the Times article notes that consumers are asserting their individuality. They are tired of the same selections offered at McDonald's.

Times

In the case of McDonald's and other large restaurant chains, companies with popular brands tend to trade at premium prices compared with their lesser-known counterparts. As a result, they are also more sensitive to changes in consumer tastes. Some brands have felt consumer backlash as a result of attempted price increases. According to one analyst in the article, the giant cereal manufacturer Kellogg raised its prices so much that consumers eventually switched to generics. In today's environment, even a 1% price increase is inadvisable.

Consumer Inclination

What do the experts look for when it comes to brand selection? David Winters, chief investment officer at Franklin Mutual Advisers, says he looks for businesses that can maintain the signature characteristics that define their brands while perpetually refreshing them to appeal to new consumers.

One sector that investors speak highly of is personal care, where brands tend to have particular staying power. Neal Goldner, an analyst who covers consumer staples for State Street Global Advisors, notes that the Gillette razor and blade business is arguably the most valuable brand in the world. He reasons that with a product like Coca-Cola, consumers could decide tomorrow that they no longer want to drink that product, but they're not going to stop shaving. He adds that when it comes to personal care products, consumers are unlikely to switch once they find something they like.

So, contrary to popular belief, when it comes to investing in famous brands, bigger isn't necessarily better. Do a little digging and you just might uncover another Krispy Kreme or Starbucks that's poised to take off.