Kellogg's (NYSE:K) third quarter results reveal that brand loyalty really does matter. Despite a quarter of flat sales growth, Kellogg managed to boost its net profit by 6%. That's a fantastic quarter, and mirrors the way that consumer giant Procter and Gamble (NYSE:PG) performed in its fiscal first quarter.

IN PICTURES: 20 Tools For Building Up Your Portfolio

No Substitute for Your Favorite Cereal
Apparently saving 50 cents or so was not enough to entice people to buy cheaper cereal, as sales of Kellogg's brand name products like Rice Krispies and Special K cereal remained strong. This an excellent competitive advantage to have. There's no doubt that it is aided by the fact that cereal is a relatively inexpensive good. This is very similar to the brand loyalty of Coca-Cola (NYSE:KO), where loyal drinkers aren't going to drink something else to save the relatively small difference between the two.

Blue Chip Advantage
With this year's rally having been more generous to the share prices of smaller, and often inferior companies, I've now assumed the viewpoint that larger blue-chip type quality companies are fantastic places to put your money to work considering the economic uncertainties that lie ahead. Both P&G and Kellogg, two blue chips that provide more essential consumer products, are reporting great numbers considering the environment and both are now more confident about the future. (For more, see The Value Investor's Handbook.)

Quality Still Rules
I would not take this to mean that all business forecasts will be this way. In fact, over time, we may begin to see a decoupling where the quality names continue to gain market share and deliver solid profitability while the rest have a tougher time of things. Quality does not have to necessarily mean large multi-billion blue chip, although as an asset class these names trade at very attractive valuations relative to the overall market. Zinc producer Horsehead Holding (Nasdaq:ZINC) should be able to hold its own, for example. It's a $340 million company with $70 million in cash and has one main advantage: it produces zinc at an extremely low cost.

Bottom Line: It Comes Down to Jobs
Despite these favorable outlooks, the economy as a whole will remain crippled without some meaningful signs of job creation over the next year. If that remains the case, don't take earnings from non-discretionary companies that all well for the U.S. economy. (For further reading, see Earnings Quality Means Everything.)

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center