Investing In America's Hottest Brands

By Will Ashworth | April 15, 2010 AAA

Advertising Age magazine ran an article last November about the hottest brands in America and the people behind them. Some are small businesses few have heard of but many are developed by large publicly traded corporations. I'll look at the brands whose stocks trade on American exchanges. By the end, you'll know whether to invest in the entire group or in several select companies. Either way, it's important to understand that today's stars quite possibly are tomorrow's dogs. Tread carefully.

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Best of the Brands
Out of 40 brands mentioned in the article, 18 are from companies publicly traded on American exchanges. Procter & Gamble (NYSE:PG) has two brands on the list (Cover Girl and Pepto Bismol) and thus the portfolio is comprised of only 17 companies. In terms of diversification, three sectors are represented with four companies from technology, six from services and seven from consumer goods. I personally wouldn't have a problem leaving out financials, health care and basic materials from the portfolio but many would. Thankfully, diversification is not the primary purpose of this article.

Top And Bottom Three Performers - America's Hottest Brands

Company YTD Return
Diamond Foods (Nasdaq:DMND) 24.5%
Panera Bread (Nasdaq:PNRA) 19.5%
Viacom (NYSE:VIA.B) 19.4%
Coca-Cola (NYSE:KO) -5.6%
General Mills (NYSE:GIS) 0.7%
Walmart (NYSE:WMT) 0.9%

Reasonable Performance
In the table above, I've included the three best and worst performers. As a group, the portfolio has outperformed the S&P 500 by 260 basis points year-to-date. If you exclude Coca-Cola, which only made the list because of its minority investment in the coconut water drink Zico, the return is actually one full percentage point better at 10.5%. It's not spectacular but you'll definitely sleep easy at night.

All-Cap Performance
The top three performers in the portfolio are Panera Bread, Diamond Foods, and Viacom. Interestingly, one is a small-cap, one a mid-cap and one a large-cap. I'm a firm believer that your portfolio should represent every size of company, not just the biggest. The reason: You never know who your stars are going to be at any given time. You limit your performance by focusing solely on larger companies or overdoing risk by concentrating on smaller ones. In this particular instance, large-caps comprise 70.6% of the holdings making it very similar to any large-cap fund. That's not a terrible thing. If I did have a concern with the portfolio, it would be the lack of mid-sized companies in the mix. Prima Capital did a study from 30 years of data that shows mid-caps outperformed both small- and large-cap companies by about 2% annually. This is too significant to ignore.

The Top Three
I like all of the top three mentioned above, but I'd probably have to go with Diamond Foods 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, its working. I'm not as familiar with Panera Bread but their stock did grow 35% annually over the last decade and same-store sales continued to grow during the recession. As for Viacom, its strong first quarter earnings demonstrates advertising revenues are recovering. Unfortunately, its Paramount Pictures film-making subsidiary is a money loser and drain on overall profits.

Bottom Line
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. (The glitz and glam of Hollywood could help put some more glitz in your pocket. For further reading, see Analyzing Show Biz Stocks.)

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http://finance.yahoo.com/news/Viacom-profit-jumps-as-apf-1776857315.html?x=0&.v=11 Viacom Q1 results

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