Consider Brand Loyalty and Devoted Customers When Which Picking Stocks To Invest In

There are tons of metrics that you should consider when looking for individual stocks to invest in.  I have discussed many of them here on Own The Dollar before…characteristics like: P/E ratios, insider buying, analysts recommendations, moving averages, and many other factors.  But, one issue that I have not talked about before is brand loyalty.  You may remember that I said that being loyal to a company that you love because of its product, reputation, etc. may not be the most profitable idea.  But, what about brands and companies that customers are loyal to even during the recession.

Investors have recently thought that defensive stock plays in companies such as Wal-Mart, Dollar Tree, Dollar General, and the like were the way to go during the stock market’s recent downturn.  The thought behind the theory is that customers will flock to cheap stores with inexpensive goods and alternatives to what they normally purchase in order to make their dollars stretch.  This is a sound safety strategy, but it will not help you reach the financial goals you may have.

For example, Wal-Mart (Stock Symbol: WMT) was trading at $47.06 at the market’s peak in October 2007.  At the lowest point during the recession, the stock was trading at $48.91.  Currently the stock is hovering around $49.90 the past few days.  That equates into a 2% increase in approximately five months since the recession started.  Not the real barnstormer you would hope for if people are supposed to be flocking there to buy low cost goods, driving up revenue, and therefore spurring new profit growth. 

Now if you take companies that loyal customers have continued to patronage like Coca-Cola, McDonalds, General Mills, Procter and Gamble, Chipotle, etc., the results are much better.  Chipotle Mexican Grill (Stock Symbol: CMG) was trading at $127.54 at the market’s peak in October 2007.  At the lowest point during the recession, the stock was trading at $49.19.  Now, the stock is currently trading in the $94.77 range for the past few days.  That equates into a 92% increase over the last five months.  Because of brand loyalty amongst their most devoted customers, companies like Chipotle have ridden out the tough times with stellar performance.

According to a recent study by Catalina Marketing Corp, 48% of highly loyal consumers stayed that way during the study period between 2007 and 2008, while 19 % reduced their loyalty and 33 % completely defected to another lower cost brand.  As investors, we can earn a bigger return during a recession by investing in companies that have a huge customer loyalty and following.  But, remember, loyalty in a company because you love its products will only get you so far in investing and then it will disappoint you.  But, piggybacking off of other consumers’ loyalty can help you make money investing even in the worst recessions and bear markets.

Disclaimer: This post is not a recommendation to buy any one particular individual stock in a company.  You should do your own due diligence and research when investing. I do not own any of the stocks discussed in this post.

Tagged as: Investing