What Great Companies Do

It is one of the defining characteristics for a great company: It can raise prices just about any time, and it doesn’t affect sales volumes. It starts with a quality product that, in turn, builds a powerful brand and harnesses a loyal and devoted customer base.

Think about people who buy Ford trucks. They’d rather ride a mule to work than suffer the embarrassment of being seen in a Chevy. If you like Coca-Cola, you’d probably rather drink water (perish the thought) than a Pepsi. 

One of my favorite examples (in part because my Wealth Advisory readers have a 155% gain on the stock) is Starbucks. Starbucks brand loyalty is just amazingly strong. If it’s Starbucks you want, it’s the only thing that will do. Dunkin Donuts is simply not an adequate substitute. And I can attest to this. I’m not a coffee snob, exactly. But I do have standards, one of which is that I only drink iced coffee anymore. Even in the dead of winter.

So if I’m on a road trip and I need a coffee, I’m not hitting the first truck stop I see. And I’m not hitting McDonald’s or any of the other chains that sell coffee. I now only drink iced coffee, and so I hold out for Starbucks. Even if it means I have to drive 30 more miles. And I can tell you, too, that I have no idea what that 30 oz. iced coffee costs. I know it’s around $4. But $4.10? $4.25? No idea. So, if they raised the price 10%, I wouldn’t care, and I might not even know. 

Think about the brands you like most, or the restaurants you visit. How much do you care if the price goes up 10%? Is that enough to make you switch? Usually it’s about quality and getting what you expect or what you are familiar with. If you buy a certain deodorant or kind of socks, you tend to get comfortable with that and don’t want to change. I’ve found that I love Adidas socks, and nothing else will do (though I did buy some Under Armour golf socks that I like). 

If you’ve got your brain tuned right, you can usually get an early read when some brand is storming into mass popularity. This is what Fidelity’s famous Peter Lynch meant when he said, “Buy what you know.” We are all consumers. We buy stuff, go out to eat, shop online. Maybe you hear about a hot new restaurant from a friend, maybe your kids are ga-ga for some new show. Pay attention.

Success Breeds Success 

I’ll never forget the first time I saw the ads for Apple’s iPod, I think it was 2004. It featured U2’s “Vertigo” played with monochrome silhouettes of dancing people carrying iPods. It was incredibly cool, and I immediately recommended Apple call options to my subscribers at the time. We made well over 300% in no time.

Of course, I had no idea how big Apple would become. The iPhone was still on the drawing board, and the Blackberry was still very popular. But when you can get an early read on a product that’s growing like gangbusters, well, you get in and see what happens. Because truly successful companies that can get their finger on the pulse usually aren’t one-trick ponies. 

Oh, and prices for the new iPhone X are going up, reportedly to $999. And the indications are that people want the X much more than they want the more reasonable iPhone 8. 

Fifteen years ago, Netflix was mailing DVDs to people. I knew plenty of people who subscribed. You probably did, too. The stock was $2 or $3 back then. It’s nearly at $200. Of course, nobody knew Netflix would be the dominant online streaming service, but again, success breeds success. And yes, just last week, Netflix said it was raising prices for the first time since 2015. 

Dominant companies tend to stay dominant. The key is to catch them when they are still on the rise. That’s where you make the big money. And what fun is it buying Apple or Facebook or Google now? It’s hard to even call these tech stocks anymore, as they are now embedded into our daily lives so deeply. Apple doesn’t have to innovate much to stay successful. It’s got a hammerlock on its market. Samsung makes more as an Apple supplier than it does on its own phones these days.

For Apple, it’s more about supply chain management, carrier relationships, and getting the upgrade cycle right. Sure, there will come a time when the technology cycle takes another leap forward, and maybe virtual reality (VR) becomes a real factor. But Apple has a VR app on the new iPhone X.

An “Also Ran” That’s Running

Dominant companies tend to stay dominant. And the “also rans” tend to stay runners up.

Take a look at Nvidia for the last 15 years. It always had the best graphics chips. But the company could never break into any other area. Intel dominated PCs. And Nvidia couldn’t get its smartphone chips to take hold, either. Except for one run in 2006–7, the stock was basically stuck between $10 and $20 for 15 years.

Then, in 2015, the artificial intelligence market started hitting, and Nvidia was finally ahead of the curve. The stock is now pushing $190.

That brings me to another “also ran” that’s piqued my interest lately: Advanced Micro Devices (NASDAQ: AMD). AMD has been second in graphics and second in CPUs for two decades. But it’s making inroads in graphics. I don’t really care too much about the PC market; it is very commoditized at this point. Margins are poor for CPUs. 

However, there are two spots where AMD has an opportunity. It is doing OK in the AI market, chips for autonomous cars. And then there’s the data center server CPU market. Right now, Intel has that market in a stranglehold. Intel has better than 95% market share. That is crazy high and seems unlikely to last.

AMD has gotten partnerships with China’s Baidu and Amazon Web Services to provide chips to each. If successful, well, success will breed success. Right now, AMD has a market cap of $18 billion. Nvidia is $11 billion, and Intel is $185 billion.

I’m not telling you AMD is suddenly gonna ramp up five or 10 times to match these monsters. But I think there’s a big opportunity for AMD to do well over the next couple of years.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.