It Takes All Three

By Jon Quast - August 6, 2012 | Tickers: AAPL, BAC, FB, MSFT, NFLX | 0 Comments

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I get overwhelmed sometimes with the sheer number of publicly traded companies.  There are thousands upon thousands of publicly traded businesses all vying for your investing attention.  With so many options to choose from, what should be the criteria for you investing your hard earned cash by buying shares of a company?

If we were to boil it all down, we simply want our shares to appreciate in value right?  Whether it is through the shares going up in price, or a dividend, we don’t want the value of our positions to be the same in 5 years as they are today.  To guarantee success, we would have to predict the future, which isn’t exactly a human capability.  But I see at least three common tendencies in companies that make their shareholders money.

Good Product

The first question you should ask yourself is “how good is the product being offered to the consumer?”  This is probably a no-brainer, yet frequently no-brainers escape our attention.  This is where companies like Apple (NASDAQ: AAPL) and Johnson & Johnson shine.  Apple’s products simply work.  I know that I’ll get comments from the Google Android crowd, but I can personally attest to Apple’s ability to deliver.  I am not a computer guy, yet I was editing movies of my kids for their grandparents on my iPod Touch in minutes.  There was no learning curve, it just worked.  That means a lot to someone who’s not tech savvy like me.  Johnson & Johnson’s products are so good that they have become the everyday word usage.  Consider that we don’t say “acetaminophen;” we say “Tylenol.”  We don’t say “adhesive bandages;” we say “band-aids.” 

Some companies don’t get to first base.   Microsoft (NASDAQ: MSFT) has delivered good products at times, but I wouldn’t call it a consistent trend.  The only thing consistent is the string of hit or miss products.  I believe that this is what eventually paved the way for Apple to be the new champ in this sector.  I can’t tell you the amount of times I have argued with Microsoft Word on how I want to format my document.  I have many friends that upgraded to Windows Vista, only to re-install Windows XP.  Even now the discussion on whether Windows 8 will be worth anyone’s time looms.  Why is it even a question?  Because we’ve seen product fails before.  Notably the stock has stagnated over the past decade.

Great Leadership

It’s not enough to just have a good product, although that is the first step.  It is the getting to second base where other companies stumble.  You also need great leadership.  There are companies who succeed where others fail.  Netflix’s (NASDAQ: NFLX) CEO Reed Hastings has proved what a good leader he is time and time again.  Admittedly people where calling him the CEO gaffe of the century with the whole Qwickster fiasco, but as fellow fool Anders Byland points out in his article it is starting to come to light that maybe he wasn’t wrong, just early.  LinkedIn’s directors also proved in their recent quarterly report that they are capable of making money in a historically difficult sector.

This is where Facebook (NASDAQ: FB) trips up.  It’s not that they don’t have a great product.  They arguably have the best product out there right now.  And it’s not, as we are about to discuss, that they aren’t popular.  People bet their life savings on this company it’s so popular.  Unfortunately, Mark Zuckerberg has shown time and again, that when it comes to running a business, he falls short.  Nothing proves this more than Facebook’s recent acquisition of Instagram for $1 Billion.  That’s a terrible business decision, and one that decreases shareholder value rather than increasing it.

Popularity

Not only does a company need to have a good product and great leadership, they also need a popular stock.  Why do I say that?  Much of the stock market today is driven by feelings.  That is why we can have violent swings in the market with relatively insignificant news.  Today people feel pessimistic, so the stock market goes down.  Tomorrow people feel optimistic, so the stock market goes up.  This creates a feast or famine scenario for day traders.  For those of us who are buy and hold kind of people, we can weather day swings because we are in for the long haul.  But sometimes, the market just loves to hate certain stocks.

In my opinion, this is where Bank of America (NYSE: BAC) is at right now.  One could argue that they don’t have the greatest product, and I’m with you on that one.  But do they have a good product?  I’d say yes.  Just being able to go anywhere in the country and be near your bank is a huge competitive advantage.  They also have great leadership in Brian Moynihan.  Buffett would agree with me on that one (or I guess I’m agreeing with Buffett) as he cited Bank of America’s new leadership as a reason for his recent investment in the company.  However, BOA stock has been in the gutter ever since public opinion turned against the company in the height of the financial crisis.  After 5 years, I’m wondering what they have to do to win investors back.

I’m not talking about pessimism in regards to earnings.  Those people are always around and can be definitively proved or disproved come quarterly reports.  What I’m talking about is pessimism towards a company in general.  Listen to what people are saying about the company you want to invest in.  Enough pessimism can affect the stock’s price.

Conclusion

Picking good investments isn’t easy, and shouldn’t be done on a whim.  But there are plenty of great companies out there trading at great prices.  You just have to figure out which ones.

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