Zahir Shaikh
Sure, the U.S. economy is choppy, and one can argue that the recovery may have stalled, but that doesn’t mean one should shy away from individual stocks as part of a balanced portfolio. The difference between investing during a period of general economic growth versus investing during economic uncertainty is that choppy economic times require more diligence in choosing blue chip growth stocks. In a period of solid economic growth, everyone expects to make a decent return, and many put their money into market indices. As the saying goes, a rising tide lifts all boats. However, uncertain times call for smart stock picking.
Let’s study why certain companies have not only survived, but thrived through economic downturns and turbulence in the stock market. Two companies very familiar to all of us are Procter & Gamble and Pepsico. Both are consumer products giants, and both are very well run, with strong corporate cultures that live and breathe their consumer brands. P&G and Pepsico have also thrived over the past 30 years, maintaining their value during the economic downturns of the late 80’s and early 90’s, and even growing during the recent economic upheaval over the past four years.
So what makes these companies so successful? Here are three major tenets followed by both:
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Laser-like focus on building and growing the core business through product innovation.
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Making smart acquisitions that are a natural fit for their core business, and divesting what does not fit.
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Global brand positioning, to capitalize on growing middle and upper class populations across developing markets.
Not only is it important for a successful company to have a competitive advantage within its industry, it has to be a sustainable, insurmountable advantage. Obviously, P&G and Pepsico are giants in their industries, and while they have their big arch rivals, namely Unilever and Coca-Cola, they still have a “durable” advantage through product innovation and focused industry leadership.
In the next issue of this newsletter, we will explore in more detail the above three tenets.
One may question why I did not consider Apple, Google, Microsoft or Intel in my above analysis, and that is a fair question. One key reason is their current stock prices are quite high, especially for Apple and Google; they are relatively expensive due to both companies’ popularity. Another reason is that I wanted to cover a very long time horizon (30 years) of relatively stable growth. As you know, the technology companies’ share prices experienced periods of extremely rapid growth in the 90’s, followed by a fall back to earth when the post 2000 technology bubble burst. And Google is a relative newcomer to the party.