Editor's note: Stock markets are unpredictable. That's why I keep a mix of what I call "sleep well at night" (SWAN) stocks in my portfolio.
SWAN stocks are companies and businesses that held up in the latest recession and are improving as the global economy sputters along. They have strong balance sheets, good cash flows, and long histories of rewarding shareholders with dividends and buybacks. These companies are also often leaders in their industries.
If a company meets these criteria, I'm interested in investing. It's even better if I can buy a SWAN stock when it's trading at a discount.
Today, I'm sharing an essay from my good friend and colleague, Steve Sjuggerud. Steve talks about the importance of investing in the best, whether you're looking for your next stock investment or investing in memorabilia. And how you get an even better deal when you can buy a first-rate product for a second-rate price.
In 2005, I (Steve Sjuggerud) bought autographs of The Beatles...
At the time, The Beatles autographs were by far the most expensive "pop" artist autographs. I could have spent less money and bought autographs from less-iconic artists... For example, autographs of The Eagles were less than half the price. (The Eagles are most famous for singing "Hotel California.")
But I didn't. It's a good thing...
Signed Beatles photos are up 517% from 1997 through 2015. Today, The Beatles autographs go for around $15,000... (This price is from Fraser's Autographs, where I bought my Beatles autographs.) The last set of "Hotel California"-era Eagles autographs would only cost you $450.
The Beatles are THE iconic band. Fifty years from now, The Eagles may be forgotten... But The Beatles will not be forgotten. They changed rock 'n' roll.
I'm not telling you this so you'll go out and buy Beatles autographs. I'm telling you this to make an important point about iconic names and investing...
Iconic names ALWAYS trade at a premium to the market. They always seem a little expensive, compared to the other companies in their industry.
However... right now is a moment when it is completely worth it to step up and buy the slightly more expensive name... in order to own the iconic brand.
When it comes to the stock market, "The Beatles" (the iconic brands) only trade at a tiny premium to "The Eagles."
In short, we have a crazy-good opportunity to buy the iconic brands for cheap – we can buy Beatles autographs at Eagles prices, so to speak.
In 1972, iconic brands like Coke and Disney sold for upward of 70 times earnings. Yet today, they're at a much smaller premium over the rest of the stock market than they were in 1972... Take a look:
|1972 P/E||2016 P/E|
|Johnson & Johnson||57.1||20.6|
|S&P 500 Index today||16.1||17.5|
Since 1973, the four companies in the table have traded at an average premium of 51% to U.S. stocks. Today, the premium is just 28%.
This is a historically tiny "spread" over the regular names. I expect this spread will widen again – and that someone will make a lot of money when it does.
I can't tell you if that will happen in three months or three years... But I can tell you that Coca-Cola is an iconic brand... so much so that people who drink Coke only drink Pepsi when, quite frankly, there is no Coke around.
But right now, Pepsi is selling for a small premium above Coke, based on their price-to-earnings ratios.
To many people, Coke is The Beatles, while Pepsi is The Eagles. When you have the chance to invest in "The Beatles" at "The Eagles" prices, you must take advantage of it.