27 great brands Credit Suisse believe will significantly outperform the market: the power of “Brand Investing”

Here’s an underappreciated investment thesis: great brands outperform the market.

There are few true competitive advantages in modern industry – scale, proprietary technology, monopolies, and network externalities come to mind.

The Credit Suisse brand framework believes “brand” is an equally powerful and even more sustainable advantage, but one often ignored by financial markets owing to its intangible nature.

Credit Suisse research indicates that companies focused on brand building consistently generate outsized long-term growth, profitability, and returns. An equal-weighted stock index of companies that spend at least 2% of sales on marketing outperformed the S&P 500 by more than 400 basis points annually since 1997; the top quintile of these companies outperformed the market by an amazing 17% per year.

The Credit Suisse brand filters help determine how and when to invest in brand stocks by:

1. identifying industry- and company- specific conditions necessary for brand success;
2. understanding the brand lifecycle and key inflection points. Using case-study analysis of dozens of brand stories from the past century, Credit Suisse found that most brands follow a similar arc with five distinct stages: emerge, hit the wall, transform and proliferate, dominate, and reinvent. While early-stage brands are exciting and offer the highest potential return, they can be risky. However, companies transforming from niche player into a powerful brand that can proliferate across new markets and categories offer investors highly attractive returns, and this is also typically the brand lifecycle stage where the largest absolute market value is created.

The Credit Suisse picks – using its framework and global network of analysts, it identified 27 Great Brands of Tomorrow at various stages of development that they believe will significantly outperform the market over the next three to five years as they build and leverage brand equity to grow in size, scale, and profitability.

Credit Suisse have created a portfolio of 24 next great brand stocks (plus three private company picks), identified by its framework and Credit Suisse analysts as stocks likely to outperform over the next three to five years as they grow in size, scale, and brand equity with consumers. Credit Suisse has created a Delta One basket that tracks an equal- weighted investment in the stocks (Ticker: CSGLBRND).

Key Ingredients for Brand Success

Using case-study analysis of dozens of brand stories from the past century, Credit Suisse developed two key filters to determine how and when to invest in brand stocks by: (1) identifying the industry- and company-specific conditions necessary for brand success; (2) understanding the brand lifecycle and key inflection points.

There are numerous paths to brand success and great brands of all shapes and sizes have leveraged a wide variety of strengths and attributes. Broadly speaking however, Credit Suisse believe there are three core sources of brand value: aspiration, innovation, and scale.

Each one of these attributes on its own can be enough to create a great brand (e.g. Four Seasons heavily relies on aspiration, while Microsoft is largely a scale-driven brand). However, the combination of these key brand strength attributes can elevate a brand’s power and longevity (e.g. Coke adeptly combines aspiration and scale, while BMW famously blends aspiration and innovation). And of course there is the rare brand that can combine all three qualities aspiration, innovation, and scale (e.g. McDonald’s, Apple, Goldman Sachs, Disney, and Nike for example). Great brand companies can leverage these core sources of strength via superb marketing, innovative new products, strong leadership, and quality end product.

Credit Suisse believe there are a handful of key attributes that all great brands must have, including:

• brand authenticity,
• quality product,
• a strong core market,
• operating in a brand-friendly industry, and
• developing a brand-centric corporate culture.

 But there are also many other traits that a strong brand company should aspire to (though not necessarily a precondition for success) such as:

• innovation,
• long-term thinking,
• effective marketing,
• taking a scientific approach,
• scale,
• aspiration,
• global reach, and
• cross-category leveragability.

Most brands follow a similar arc with five distinct stages: emerge, hit the wall, transform/proliferate, dominate and reinvent. Investing in companies that are transforming from niche player into a powerful brand that can be proliferated across new markets and categories offers investors extremely attractive returns, and is typically the phase in the brand lifecycle that generates the largest market value creation.

Watch an interview about the report at MSN Canada.

And download a copy of the report at www.credit-suisse.com