5 stocks with strong brands and high return potential

Credit: Bellamy's

In October 2015, Blackmores Limited (ASX: BKL) and Bega Cheese Ltd (ASX: BGA) announced the establishment of an equal-share partnership to develop and manufacture a range of nutritional foods through Bega’s subsidiary Tatura.

The killer-product amongst all this of course was the production of high-quality infant formula.

If you can turn your mind back a year ago or so, you’ll remember the press repeatedly reporting the supply shortage of infant formula on Australian stores and the ever-present “daigous” – Chinese personal shoppers stocking up on the ‘white gold’ of baby formula to be sold to parents in China via the grey market.

The demand for infant formula was through the roof, and Blackmores decided they’d like a piece of the action, hence their entry into the Australian and Chinese markets.

The shares of Bellamy’s Australia Ltd  (ASX: BAL) peaked at $16.50 late last year before it dawned on the market that Bellamy’s now had another competitor to deal with – albeit in a market exhibiting strong growth – and its shares almost halved in value by mid April this year.

So, how has Blackmores’ infant formula market foray played out?

In the Australian market, Blackmores is selling around 1,600 units a week since the launch in January (which equates to $2.5m per year in revenue assuming an optimistic selling price of $30 per tin) and it has been forced to discount its products to attract customers.

There’d be no need for this if the Blackmores brand had strong consumer engagement which is where Bellamy’s appears to be succeeding.

Yes, Bellamy’s will be affected by the same factors in China affecting Blackmores’ sales of infant formula, but the Bellamy’s brand, I believe, will prove strong enough to remain a long-term player in the Chinese market.

According to a presentation slide at their recent AGM, the Bellamy’s Organic brand has ranked first in social engagement rankings across the internet, including on Facebook, Instagram, and Twitter. With more than double any competitor’s visibility on Google within the Australian formula and baby food space, I agree with Bellamy’s that their brands resonate very strongly with their customers.

Blackmores’ brands in the infant formula space, on the other hand, are nowhere to be seen.

Strong brands positively impact shareholder value

In November of 2015, US valuation and strategy agency Brand Finance released a press release to quantify for the first time the effect that powerful brands have on increasing shareholder value.

A key finding of their research is that an investment strategy based on the most highly branded companies (those where brand value makes up a high proportion of overall enterprise value) would have led to a return almost double that of the average for the US S&P 500 as a whole.

To illustrate, in May 2000 Platinum Asset Management Limited (ASX: PTM) released its Platinum International Brands Fund and, up to September 2016, it has provided investors with a compound annual growth rate (CAGR) of 12.2%.

In contrast, the Australian All Ordinaries (INDEXASX: XAO) and the US S&P 500 have provided 3.38% and 2.61% returns, respectively.

5 companies with good brands that have the potential to drive shareholder returns

To take advantage of strong branding and shareholder returns in the years ahead, I believe investments in Bellamy’s at today’s price will continue to provide shareholders with a reasonable return in the years ahead. Its “organic” unique selling proposition (USP) should provide shareholders with enough protection from competitors given how stringent organic certification processes can be.

Another four companies with strong brands that I like include:

  • Cochlear Limited (ASX: COH) and its marketing to patients as well as clinical partners,
  • Class Ltd (ASX: CL1) focuses its attention on SMSF administrators for its customer-base,
  • Premier Investments Limited (ASX: PMV) for its Smiggle and PeterAlexander store brands, and
  • Webjet Limited (ASX: WEB) for its travel brand

Each of these companies use branding to support their USP as a promise that the products or services their customers are buying have quality baked in.

Foolish takeaway

The quality of a company’s brand/s is only one element to be factored into the worthiness or not of a business you wish to buy the shares in.

It’s also potentially a decades-long endeavour judging the effectiveness of a brand, so you’ll need a business owner’s mind-set to think about any investment in terms of many years.

However, if Brand Finance’s research and Platinum’s investment returns mean anything, the concept of branding in the eyes of customers is one angle that needs to be examined closely if you’re serious about finding above-average returns in the share market.

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Motley Fool contributor Edward Vesely owns shares of Bellamy's Australia and Class Limited. The Motley Fool Australia owns shares of Bellamy's Australia and Class Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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