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Introducing The "Brand" Name Portfolio

Posted: Jun 19, 2008 13:39 PM by Will Ashworth

Tickers in this Article: YUM, AYI, FO, HBI, LTD, IBI, INET, ICON, PBH, LCUT

If you do a stock symbol search for companies trading on the Nasdaq, New York Stock Exchange and American Stock Exchange with the word "brand" somewhere in the name, the total number comes to 27. For simplicity sake, I've omitted all those trading over the counter. Look closely at the roster of companies and you'll see 10 micro caps, 11 small caps, five mid caps and one measly large cap. It appears from the data that as businesses grow they tend lose the "brand" from their names. Hey, if you're a successful company you don't need to tell investors and customers you're a brand, they already know. I guess Yum Brands (NYSE:YUM) didn't get the memo.

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A Portfolio Of Brands
Many of the companies on this list of 27 own multiple brands that they market to consumers. By investing in a portfolio of 10 of them, you'll obtain the ultimate in diversification. Some would argue that what you actually get is an excessive overlap of similar businesses, most likely leading to mediocre returns. I would strongly disagree with this opinion and will demonstrate exactly why I feel this way. While the approach is no different from going to the racetrack and betting on horses with nice sounding names or by the look of the jockey's silks, I can almost certainly guarantee the results will be superior.

In the first instance, you're talking about a sport of chance; in the second, a group of companies full of talented people dedicated to making their businesses successful. It's possible I'm just naïve, but I believe the difference is immeasurable. (Reducing risk and increasing returns is all about finding the right balance in your portfolio. Read our related article Introduction To Diversification to learn more.)

Who Makes The Cut
At this point, it's easier to say who doesn't make the cut. Any stock trading under five dollars is out. It's not that I have anything against low-priced stocks, but often their liquidity is questionable. This knocks out eight, bringing the list to 19. Now I'll take away any stock with a trailing twelve-month EPS that's negative. This loses another six companies lowering the number to a manageable 13. Now only three more cuts and the portfolio is complete. The next to go is a simple choice. Global Brands Acquisition (AMEX:GQN) is one of those newfangled SPAC's (Special Purpose Acquisition Company) where the money is raised and then management has 24 months to make an acquisition or the funds in escrow are returned to investors. IPOs are tricky enough when you know what the company does. I could care less that CEO Joel Horowitz is the former top dog at Tommy Hilfiger. I pass.

Two Is The Loneliest Number
Two more stocks to go and we're done. However, before I do that I need to pick a few to stay, in order to make the portfolio work. Only one micro cap and large cap remain. Thus, restaurant chain Yum Brands and kitchenware business Lifetime Brands (Nasdaq:LCUT) are in. This leaves just four mid caps and six small caps. If we remove two of the small caps, we will have our brand portfolio. Prestige Brand Holdings (NYSE:PBH) gives us representation from three different sectors so it goes into the mix. The first deletion is Maidenform Brands (NYSE:MFB). Since Limited Brands (NYSE:LTD) competes in the same intimate apparel market, there's no need for two companies that do the same thing. This brings us to our final cut. It's Collective Brands (NYSE:PSS), known by most for its Payless Shoe Store division. It's not a bad company. Unfortunately, we already have a retailer. We're done.

The Brand Portfolio Revealed

Company	Market Cap	Sector/Industry
Yum Brands (NYSE:YUM)	Large	Services/Restaurants
Acuity Brands (NYSE:AYI)	Mid	Consumer Goods/Home Furnishings
Fortune Brands (NYSE:FO)	Mid	Consumer Goods/Home Furnishings
HanesBrands (NYSE:HBI)	Mid	Consumer Goods/Textile – Apparel Clothing
Limited Brands (NYSE:LTD)	Mid	Services/Apparel Stores
Interline Brands (NYSE:IBI)	Small	Services/Building Materials
Internet Brands (NYSE:INET)	Small	Services/Business Services
Iconix Brand (Nasdaq:ICON)	Small	Consumer Goods/Textile – Apparel Footwear
Prestige Brand Holdings (NYSE:PBH)	Small	Healthcare/Drug Related Products
Lifetime Brands (Nasdaq:LCUT)	Micro	Consumer Goods/Housewares

Bottom Line
There you have it, the one and only brand portfolio. Add it to your watch list. I'm confident that once the U.S. economy begins to recover, it will take off. Of course, I have no idea when that will be.

For a step-by-step approach to determining optimal allocations (with or without the word "brand"), read A Guide To Portfolio Construction.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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