Investing in Brands

Posted on July 23, 2009

A company's worth is rarely equal to the sum of its assets. Most corporations hold intangible value. An important case in point: brand image. At the 2004 World Economic Forum, 59% of top executives said brand represents more than 40% of a company's market capitalization. The past year has made all too clear that a company's image is no guarantee of future performance. But data show top names tend to outperform over the long run. In the short term, spin-offs are a likely winner: Once separated from a parent company, the new entity's management can focus better, improve efficiencies, and realize untapped brand potential.

Related Story: The Rush to Grab Orphan Brands
Video: Investing in Brands

STICK WITH THE BIG NAMES
Research shows that brand power can account for as much as 10% of the change in a company's stock price. The top companies on the BusinessWeek/Interbrand 2008 Best Global Brands list have beaten the S&P 500 by seven percentage points on average so far this year. Since 2004, eight of these brands topped the broad market, with McDonald's outshining the S&P 500 by an average 20 percentage points a year.

CONSIDER THE CASTOFF
When a parent company sells off a brand, investors in the new brand tend to benefit—especially over the near term.

2009 SPIN-OFFS

Mead Johnson Nutrition (MJN) Bristol-Myers Squibb unloaded this formula maker back in February. Shares of the new company have since jumped 33%.

Changyou.com (CYOU) Shares of this company, formerly a gaming unit of Chinese search engine company Sohu.com, have nearly tripled since its April IPO.

Government Properties Income Trust (GOV) This REIT was a subsidiary of HRPT Properties Trust. The stock price is up 2% since its initial public offering in June.

Top Ten Brands footnote: *Total return as of July 17, 2009; multiyear returns are annualized; returns in blue beat the S&P 500 for the time period **Since IPO in August 2004 (Data: BusinessWeek, Interbrand, Bloomberg)

By Tara Kalwarski