Contrary to what Wall Street brokerage houses and the financial media may have you believe, investing in the stock market doesn’t have to be overly complex and complicated. In fact, many of the best investments come from personal observation — finding a company that has made a positive difference in your life and whose products or services you admire. Of course, it always helps to have this insight early in a company’s growth phase, but frequently even that is not necessary.
Warren Buffett and Coca-Cola
Consider for example Warren Buffett‘s investment in The Coca-Cola Company (NYSE:KO) for Berkshire Hathaway in 1988. At the time, Coca-Cola was the world’s leading beverage company, an established and preeminent brand, and the stock had gone up nearly 20% a year for eight years in a row. Although Wall Street thought Buffett “was downright crazy,” Berkshire Hathaway’s $1 billion stock purchase is now worth around $14.5 billion with billions of dollars in dividends paid out over the years.
Although few individual investors are likely to rack up a track record like Buffett’s, his Coca-Cola bet is informative for amateur and professional stock pickers alike. Essentially, Buffett purchased a stake in a leading global brand equity with a highly successful and easy-to-understand business at a compelling valuation and held on for the long-term.
This investment method can certainly be repeated by individual investors today. With this in mind, this article will examine four leading companies with three things in common — a brand which displayed impressive growth in 2012, a stock which is trading at a reasonable valuation and a business that is both easy-to-understand and has compiled a track record of success.
While this one may seem like a no-brainer, the recent steep pullback in the stock may be causing some investors to pass on a great opportunity. According to data taken from interbrand.com, the Apple Inc. (NASDAQ:AAPL) brand experienced a staggering 129% growth rate in 2012 and is now the second most valuable brand in the world. Behind who else? Coca-Cola, of course!
A powerful brand serves as a durable competitive advantage for a company, or as Buffett likes to call it, a “moat” around the business. In addition to a highly valuable and growing brand, Apple Inc. (NASDAQ:AAPL)’s business is one that can be understood by most investors. In fact, many people use its leading products, iPod, Mac, iPhone, and iPad, on a daily basis.
Finally, Apple’s stock is extraordinarily cheap using traditional metrics. In fact, Apple Inc. (NASDAQ:AAPL) may be the world’s cheapest large-cap tech stock. The shares are currently trading at a trailing P/E of under 10, a forward multiple of below 9, and a PEG ratio of 0.51.
When you back out the massive pile of cash that the company has on its balance sheet, the operating business is trading at a considerably lower valuation. Although nothing in the stock market is a slam dunk, Apple Inc. (NASDAQ:AAPL) fits the criteria laid out above perfectly and will likely provide solid returns for investors for years to come.
According to data from interbrand.com, the Google Inc (NASDAQ:GOOG) brand added 26% in value in 2012 and is now the fourth most valuable in the world. It is ubiquitous and has attained an enviable cache with global Internet users. This moat that the company has been able to create around its business makes the stock a sound investment with upside.
The company’s core business is also fairly simple and straightforward — an attractive quality in any investment. Google Inc (NASDAQ:GOOG) dominates the Internet search market and has leveraged this position into a dependable and lucrative stream of ad revenue. Furthermore, until very recently, the stock was trading at an extremely compelling valuation which implied very little innovation premium.
Over the last year, Google Inc (NASDAQ:GOOG) shares have jumped roughly 34%, and now the stock is reasonably priced. Before the large rally, this was a very undervalued stock. Even at today’s prices, however, Google Inc (NASDAQ:GOOG) still appears to be an attractive investment. At current levels the shares trade at a trailing P/E of just under 26, a forward multiple of roughly 15.5 and a PEG ratio of 1.35.