Look beyond a Good Brand Name for the Best Returns
FAMOUS brand name does not necessarily represent a good investment, especially in volatile sectors such as technology and telecoms. You need to look beyond the name when investing in equities.
In the January sales you could have taken your pick of high-end PCs at previously unheard-of prices. Investors may now be tempted by the shares of manufacturers that make these increasingly sophisticated machines, which in recent months have been trading at seemingly bargain-basement prices.
Investors considering such a purchase should start by taking a long, hard look at the companies behind the products if they hope to avoid losing their shirts in a very volatile sector.
Take Sony and Dell, for example. On the surface, Sony, with a great product range and enviable brand image, might seem an excellent long-term bet. But scratch beneath the surface and you will find a company that looks likely to record the same profit this year as it did in 1992.
What are technology stocks? At the moment, a technology stock looks like nothing more than a cyclical investment, with a cycle we have seen many times before. First, a new technology creates consumer demand. The share prices rise in anticipation of better company returns, which also prompts the emergence of competitors.
With their purchases made, and with an increase in both choice as well as boredom with the original technology, demand falls. Meanwhile, the cost of capital rises, returns on capital fall and there is a painful retrenchment.
Out of retrenchment is born the next generation of product providers, from which the winners will be found.
One issue for investors is that they often seem to have focused on company products and short-term news flow - not sustainable shareholder value.
Sony is a good example. The company undoubtedly makes great products - just think of PlayStation - but the sad problem for shareholders is that, despite technical prowess and great brand image, the problem of recording virtually no profit growth from 1992 to the current year is worrying.
The performance of Sony at an income level is mirrored by its performance in terms of return on equity.
The company is now talking about "valuation creation management" and "economic value-added". But, notwithstanding this bold talk, its attitude to shareholders in recent years can perhaps be better gauged by the scale of dividend growth. There has been scant move from [acute accent]25 per share for the past decade.
Worse still, free cashflow from which to pay future shareholder benefits looks to have been diminishing in recent years and net margins have been poor. These are hardly trademarks of high-growth stories.
Indeed, even a superficial review of Sony's annual report shows that while the company is a world leader in product provision, with considerable brand strength, operating margins in its electronic businesses are volatile and generally low.
We can only guess that while the consumer has been benefiting from the involuntary generosity of Sony's shareholders, so the company's musicians, performers and actors have also been more than well treated. …