Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: A popular investment mantra is to, “Invest in what you know.” In a way, you put that concept to the test in your latest Sector Watch report by looking at the stock performance of the most well-recognized brands in the world. How have they fared?
Stovall: Actually, they fared better than I thought they would. My concern was that, while these companies have very well-recognized names, it couldn’t simply be a popularity contest and that from an investor’s perspective, these might not be the best companies to have in your portfolio. However, I was pleasantly surprised to see that those companies identified by InterBrand, a global brand consulting firm, as the top 10 brands around the world did very well on the whole when compared with the S&P 500. They also did well as compared with the S&P 500 Dividend Aristocrats, which are the best brands from the perspective of those companies that have consistently raised their cash payouts to investors in each of the last 25 years.
Going back to Dec. 31, 1999 through the end of March 2012, the average of all 10 best brands was a cumulative total return of a just under 288 percent. During that same period, the total return for the S&P 500 was 20 percent, and the S&P 500 Dividend Aristocrats was 162 percent. So without a doubt, the return for all 10 of these best brand companies was something to sit up and take notice about.
EQ: Two of the top 10 brands— General Electric (GE) and Hewlett Packard (HPQ) –underperformed the S&P 500 and the Dividend Aristocrats in the three comparisons. Is this enough evidence to create some doubt on the effectiveness of a “best brand” strategy?
Stovall: It’s a good point because my first answer dealt with the top 10 brands on the whole, but if you then start peeling away the leaves as if you are trying to dig to the bottom of an artichoke, you might find that some of the individual members were not as strong as the overall group itself. One reason is because one of the top 10 companies, ranked at number eight, is Apple (AAPL). As we know, Apple has done exceptionally well recently, but it has done even better since 1999, posting a total return in excess of 2200 percent. Only one other company, McDonald’s (MCD), posted a total return in excess of the Dividend Aristocrat. The remaining companies posted total returns that were less than that of the Aristocrats, with four of them posting negative total returns.
In particular, since 1999, Microsoft (MSFT) was down nearly 29 percent. General Electric was off almost 44 percent, Intel (INTC) was down 16 percent, and Hewlett Packard was off nearly 38 percent. Google (GOOG) is the only company in the top 10 that does not have a track record going back to 1999.
So individually, what you find is that most of the companies posted good results, certainly better than the S&P 500 itself, but only two of the 10 had returns that were better than the Dividend Aristocrats. The reason why I keep bringing up the Dividend Aristocrats is because it really depends on how you define a “best brand.” For an investor, the best brand is the one that provides them with the best return, and if it happens to be a well-known name then that’s good. But if they’re not a well-known name but still provide a very strong return, then that’s even better. So the final arbiter is how well they performed. So if you exclude Apple, you find that from 12/31/99 through 3/31/12 the best brands posted a total return of 41 percent.
EQ: We discussed Apple’s impact on the overall market last week. Have you ever seen another stock with this much influence on the market’s performance?
Stovall: A lot of people do complain that the S&P 500, being a cap-weighted index, is dominated so much by only a handful of companies, and in last week’s article we discussed the old saying of, “Don’t get mad, get even.” Certainly in the latter part of the 1990s, when we were at the tail end of the tech bubble, you found that technology stocks were among the better performing companies within the S&P 500, and so companies like Intel were the real stellar performers, but I cannot specifically think off hand of a particular stock in recent memory that has had the influence that Apple has had.
EQ: Lastly, first quarter earnings have been exceptionally strong thus far when compared with what Wall Street had been expecting. Should this be a cause for excitement for investors?
Stovall: Looking at the S&P Capital IQ consensus data as of mid-day Wednesday, April 25, 2012, what we find now is that earnings are expected to rise 6.4 percent as compared with the sub-1 percent that was expected at the beginning of the first-quarter reporting period. Also, instead of seven sectors posting year-over-year declines, we now have seven sectors that are expected to post year-over-year advances. Of the more than 200 companies that have already reported, we now have a beat rate of 75 percent, meaning three out of the four these companies have posted earnings that were better than expectations. So I would tend to say that this has started out as a very good quarter, indicating that a sub-1 percent expectation set the bar exceptionally low. Using a baseball analogy, you don’t think that a player is going to hit .400 for the full season if they’re doing well in the first couple of months of the season, but I think you would like to be hopeful that they would. My expectation is that the beat rate comes down to the long-term average of about 67 percent.
