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In this conversation, 7investing Lead Advisor Matthew Cochrane sits down with Eric Clark, a brand strategist and dedicated investor in leading global consumer brands. Clark believes that a strategy solely dedicated to investing in the world's best consumer brands.
April 27, 2021 – By Samantha Bailey
In this conversation, 7investing Lead Advisor Matthew Cochrane sits down with Eric Clark, a brand strategist and dedicated investor in leading global consumer brands. Clark believes that a strategy solely dedicated to investing in the world’s best consumer brands. Clark does not think that a portfolio solely dedicated to consumer brands is limiting but is a distinct advantage. With consumer spending topping about $40 trillion a year, Clark believes the world’s greatest companies are found in this space, and there is little competition that focuses exclusively on this sector.
Clarks breaks down brands into three categories:
Mega brands represent the core of the portfolio, and all have a real chance to reach a $1 trillion market cap. These companies are highly recognizable and market leaders in their respective industries.
Innovator brands are those companies that are competing with and trying to disrupt the legacy leaders in their fields. These stocks can be more volatile but offer higher upside.
Turnaround brands, or tactical trading ideas, are investment opportunities more short-term in nature, stemming from the market discounting the company’s stock based on the latest news rather than the company’s long-term potential.
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The conversation soon turned to the state of the economy, especially consumer spending. Clark believes that with higher savings rates, jobs coming back, and extended government aid such as extended unemployment benefits and stimulus checks, that the economy has a chance to appreciably rebound as it re-opens.
Along the way, Clark and Cochrane discuss companies such as Apple (NASDAQ:AAPL), Domino’s Pizza (NYSE:DPZ), Netflix (NASDAQ:NFLX), and Tesla (NASDAQ:TSLA), their mutual love for San Diego, and how they teach their kids about investing.
00:48 – Why Eric Only Invests in Consumer Brands
06:06 – The Economic Moat of Consumer Brands
17:14 – How Long would Erik Hold Domino’s For?
23:46 – What are Innovator Brands?
31:05 – Brands that Can Make a Turnaround
37:41 – How Long will the COVID Hangover Last?
43:55 – Judgeing Companies when there are Multiple Brands within them
50:17 – What will be the most Durable Brand 50 Years From Now?
Matt Cochrane 0:00
Greetings, fellow investors. I’m Matthew Cochrane, a lead advisor at 7investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone. Listeners, today, I am very excited to introduce Eric Clark, a brand strategist and an investor in leading global brands. He can be found on his website, globalbrandsmatter.com, and on Twitter, where I find his takes both entertaining and thoughtful. On today’s show, we’re going to explore Eric’s strategy for investing in consumer brands, how he ranks brands, and why he limits his portfolio to just this one area. I followed Eric for a long time, and I’m very much looking forward to this conversation. So let’s get to it. Eric, welcome to the show.
Eric Clark 0:47
Hey, Matt, how are you?
Matt Cochrane 0:48
I’m doing great, Eric. So let’s just start there. Why consumer brands? Why limit your portfolio and the entire business universe? Why limit your portfolio to just this one area?
Eric Clark 1:02
It’s a couple of reasons really, number one, very few other people do it. You said you follow me on Twitter – I tend to be somewhat contrarian, a lot of the time and my wife would probably corroborate that. I’ve worked in this industry for like 26 years, and I work for some big institutional money managers and I noticed a couple of things. One, every fund, every ETF, always has some exposure to consumer stocks. But very few of them are dedicated to that thematic and it’s kind of ironic. 70% of GDP here is consumer spending. 60% of world GDP is consumer spending. So it’s very odd that there’s very little places to go to get real dedication to the consumer theme, given that it’s like 40 trillion a year.
That seemed to be a bit of a disconnect. We’re the only game in town as far as investing and dedicating to identifying the brands, the best brands, the most relevant brands, and brand z, and all those brand consulting firms that are huge advertising and PR firms,. They’ve been pounding the table on brands matter and these are great businesses. And if you really work on enhancing your brand, you’re probably going to gather more customers, have more loyalty, etc, which they kind of stop there. And then I take it one step further, and try to help people connect the dots between all of those good financial metrics and brand loyalty to actually being a good stock.
And part of that is because the first book I ever read in the industry was Peter Lynch’s, ‘One Up On Wall Street.” And that book, his writing, just instantly resonated with me. And then when you look at the track record of Magellan, when he ran that it was the number one fund. And as a young guy, I was just kind of impressionable, and it just kind of resonated with me. So for my own personal investing, there was a lot of focus on the consumer, and which companies that I really loved and enjoyed spending time. Or whether it was an apparel company like Nike, or if I was waiting in line at Chipotle, etc.
So it was this little time in my career, where I just said I can keep doing what I’m doing. But I have an itch, I really want to create something that doesn’t exist. And so I looked at active management in general, and I tried to identify what’s really good about active, what’s really bad about active and let’s try to enhance it, and let’s dedicate to some theme that’s always present, really predictable, and really stable. And that’s kind of the product of that of that exercise, you know, in 2015.
Matt Cochrane 3:33
Absolutely. Yeah, I’m so glad you brought up Peter Lynch, because I’ll take a backseat to no one when it comes to being like a fan of Peter Lynch in his book. They are some of the first books I read too, when I got into investing, and they’re such a great jumping off place to get started investing. And there is a certain like Peter Lynch-ian appeal for this type of investing, right? Because you’re talking about consumer brands and that’s something that everybody’s at least partly familiar with, we all have our products that we enjoy and use every day.
Eric Clark 4:28
100%. When I’m talking to a financial advisor, about the fund where I always start with “I can guarantee you, this is going to be the easiest conversation you have with a client or prospect because we’re all consumers. We all understand spending money is part of our DNA as Americans and it’s kind of a global phenomenon.”
And we all have this loyalty to certain brands in different spending categories, whether it’s warehouse shopping at Costco or my daughter, literally, at the beginning of this process, she said, “Dad if you don’t have a target in your portfolio, I will not speak to you,” right?
Matt Cochrane 5:07
Eric Clark 5:09
She’s 11. She is so brand aware at her age. And I don’t know that we were as brand aware, when we were kids, it certainly wasn’t as prevalent as I think it is now. But yeah everybody kind of understands the concept of consumption. And we all have favorites. But if you can analyze the universe and kind of see who rises to the top, those are usually pretty good places to at least start from a research perspective.
Matt Cochrane 5:40
Yeah, that’s so true. And we were talking before the show about our kids a little bit and starting early, I mean, like you said your 11 year old daughter – they know what they like, They know what brands they like, as far as clothes go, or shoes, or so many other things, even video games like Xbox versus PlayStation and things like that.
Eric Clark 6:03
Trends start with the youth, right?
Matt Cochrane 6:05
Right, yeah, exactly. So I’ll say when I invest the primary thing I look for is companies with economic moats. And I fully acknowledge that brands can represent a moat. But when I find a company, and I feel like it’s brand is its primary moat, I almost get a little nervous. Is this a soft economic moat? It’s almost a little squishy like other types of moats feel a little more concrete – high switching cost or network effects? Am I wrong? How strong how strong of an economic moat can brands be?
Eric Clark 6:42
Well they can be unbelievably strong with the footnote that consumers can be fickle. I’m sure you follow Jeff Mackey on Twitter, as well. And him and I have commiserated over the years about retail because I consider him a retail expert. His dad grew up in target and it’s just it’s just funny to see certain moats. Sears had a moat at one time, JC Penney had a moat at one time. But what I find is that it’s so easy for some of these legacy brands to just get lazy. And you can’t get lazy anymore.
So assuming a company really does continue to have a visionary management team, and is willing to self disrupt sometimes, and is kind of ahead of the curve. Or Steve Jobs used to say we’re not just here to create what what customers tell us they want, sometimes customers need to be shown what they want. But the moat, in some way, can only be maintained, if the company is committed to innovating and keeping that customer delight and all that kind of stuff.
And that’s hard so not everybody can do it and do it well. And sometimes you fall off for a little while, like Chipotle, they had their issues with the food scare but man the consumer is willing to give you the benefit of the doubt if they believe in your business and your philosophy and your mission and certainly, if you can prove that you’re staying true to that mission. All of those things I think are moats. They’re certainly intangible. And we put the brand in the intangible assets category,
Matt Cochrane 8:32
Sure. Of course, yeah.
Eric Clark 8:33
And maybe that’s why there aren’t a lot of brand dedicated strategies because the brand is so intangible traditional analysts operate on the balance sheet and on the income statement. And brands, for the most part, don’t really fall there. It’s a very subjective thing. It’s a very intangible thing. Jeff Bezos used to say your brand is what people say about you when you’re not in the room. That’s not something that you can put in the balance sheet. And so some people aren’t very good at analyzing the strength of the brand. And sometimes I get into that on Twitter with somebody about a company that they say, “hey, the financials don’t look this way.” And I might say, “You can’t ignore the strength of the brand in the mind of the consumer.” Because that sometimes pushes you through to the other side when financial metrics will follow along, where the brand loyalty started the whole process.
Matt Cochrane 9:32
Sure, sure. So you’ve talked about Sears and JC Penney, and how they used to have moats. This is something I’m curious about, How do you rank brands? If you just asked me, for instance, do you like Macy’s? And when I think of Macy’s, I think of the Macy’s Day Parade, which at heart it harkens images in my mind of Thanksgiving and just good times. So I would say “yeah, I think I like Macy’s.” I have no idea when the last time is that I stepped in a Macy’s or bought something from them. But I would say I like Macy’s.
So how do you rank brands? Because how do you separate consumers memories of these iconic brands, but companies that are dying? How do you sift through all that? And how do you rank them?
Eric Clark 10:27
Yeah, I’ll tell you, it’s a very detailed process. So, in the beginning of this process, we said, okay, if you’re gonna anchor to a theme, you probably need an investment universe to start. And so that’s where we created the the brands index. And my investable universe is 200 companies that we update every December. So it’s almost like that nifty 50 you know, that the NIFTY 50 back in the day. Add one flaw, they never updated it. It was the same companies and they lost relevancy. And they just kept them. And so people made fun of the NIFTY 50. We focus on the relevancy part of that equation.
Matt Cochrane 11:08
Hence dynamic brands I guess?
Eric Clark 11:11
Absolutely, absolutely. We started off with the phrase ‘iconic brand.’ It’s got some sexy marketing. And the reality is the definition of iconic is just recognizable. Like you said, Sears and Macy’s is recognizable, I wouldn’t say that they’re particularly relevant anymore, right? Not like they used to be. So once we once we created the 200 index, and that is a very kind of a detailed process because they’re intangible assets. Essentially what we did is we said, let’s go find brands, where they live in the indexes, at the sub industry level, just to create the 200.
And so what we did is there’s about 150 sub industries, in the S&P 1500 I think it is. And we literally went through each one of those and looked at the holdings, looked at the name of the sub industry, and kind of gave it a thumbs up or a thumbs down. Is that industry either A) directly tied to the consumer,you know, most of the companies that are in that sub industry, or are those businesses kind of consumption supply chain companies, meaning they produce a product that’s vital to to a Consumer Direct, you know, a B to C company.
Matt Cochrane 12:26
Eric Clark 12:27
So from there, and then we just created a ranking system. It’s very quantitative. Total market cap, revenues, revenue growth, a bunch of other financial metrics, all that did was allow us to rank a company from from best or most relevant if you will, down to least relevant. And obviously, market cap tends to be a part of that because if you become really relevant, it means that you’re probably a bigger company, in most industries.
Matt Cochrane 12:56
Eric Clark 12:56
So that’s one part of the process. And there’s a much more detailed explanation of the 200. But to answer your question directly on the brand relevancy. So the first step was to create the universe of 200. The next step from the stock selection perspective, was I built what was called a brand relevancy scoring system.
And I sat down and I said, “Okay, if I’m going to try to laser in on companies that are that are really doing well, and therefore resonating, let’s take it from a quantitative approach and a qualitative approach.” And so I built this screen, that 50% of it is the traditional financial metrics. Like I said, the revenue growth of free cash flow, the ROIC’s, all of those great measures that kind of tell you who’s getting it done on the operating side, And then the other part was, which is, frankly, the more time consuming part, the quantitative stuff in general, gets done through a screener that we created and through use of YCharts, I know you use Y charts to it’s been really,
Matt Cochrane 14:04
Eric Clark 14:05
Those guys are great. But the subjective part of this is detailed. It’s an assessment of a business on factors like can we prove that they have a management team that has a lot of vision that’s shown that they have vision? Can we prove that they’re pretty strong capital allocators in looking at back quarterly earnings and, and all the other quarterly reports? Do we see a culture of innovation in there? Do they seem to be ESG friendly?ESG in general tends to be a little marketing oriented. But at the end of the day, if you have a management team that thinks about their employees, and how they treat people and how they view the world and their carbon footprint and all those kinds of things, those are probably pretty thoughtful people, and you can imply that they’re probably running a business the right way.
So there’s a lot of those subjective factors combined with the quantitative factors that all roll up into a score. You might assume a lot of the biggest brands, you know, the apples and the Googles, and the Microsoft’s, and, you know, Amazon, those obviously, would rise to the top for a variety of reasons. But you always find these great nuggets of opportunity. And those are the ones that I get most excited. So every quarter, when I go through this process, after earnings season, I get so pumped to see who’s going to start to rise to the top. And it’s brought up names like Medifast, which is on the meal replacement side. And Domino’s when it was out of favor.
It’s actually been a pretty good interesting source of stock selection and idea generation, because sometimes you’re not focused on a particular part of consumer spending. And then that shows up, you have a couple of names that show up on the screen, which kind of makes you focus and say, “Okay. This is interesting, what’s happening here, between the subjective and the quantitative that’s saying, ‘hey, this brand is really relevant and their financial metrics are accelerating and doing really well.’ And now I’m going to go look at some technical charts to see if it’s an interesting, kind of potential buying opportunity.”
So, long story short, there’s a lot of detail oriented analysis that goes into this thing. And then part of it is just you and I, we’re all consumers. Like Peter Lynch, when I’m out, in public, looking at stores and seeing where the crowds are developing you see the crowds at the Apple store, you see them at the Lulu store,you don’t see anybody at Urban Outfitters, or wherever. You talk to your wife, who’s, let’s face it, women control 85% of the household checkbook. So between kids and their trends and women and their knowledge of trends, and all the work that we do, you get a lot of great data that gives you some idea for where to do some more stock selection work.
Matt Cochrane 17:14
That’s really interesting. So you mentioned Domino’s. So let me ask you a question. So 10 years ago, and I don’t think you were doing this exact strategy 10 years ago, but if Domino’s comes up on your screen when it was a ridiculous price, I mean, it was like $5, a share at the depths of its turnaround story in the financial crisis, and all these things were going on with it. And it comes up on your screen. So you add it to the portfolio. And now it’s, without looking, I think it’s almost a $400 stock.
So it’s been like an incredible 10 years, or give or take 10 to 12 years for this company. How long would you hold it for? Let’s say it comes up on the screen, and you capture that initial bump that it gets right out of the gates and you go on a terrific run. But how long would your strategy allow you to hold this for? Does valuation come into play or something like that? You update your rankings quarterly, but as it gets more expensive, how long can you hold things for?
Eric Clark 18:25
For us we’re very thematically focused. If you look at the holdings, for instance, of the of the brands fund, most of the holdings in there, we’ve held for three and a half years, and then we’ve also held them for a year earlier in a separate account. So for us, as long as the thematic, is still highly important, and top of mind in front and center, as far as really important parts of the consumer spending theme, then in theory, we can hold things for a long term. I struggle to see a time when I would probably want to sell my entire position of Amazon for instance. You see multi trillion dollar market caps and you think how much more juice is there to squeeze out of the fruit? But as long as a company keeps innovating, and the financial metrics keep moving in the right direction? We don’t care quarter to quarter.
But if we saw that if we were early enough in the Domino’s theme, and we just kept seeing, yes, the pizza market in general is highly fragmented. But these guys just keep expanding stores and revenue keeps growing and they keep using technology to enhance things. There’s absolutely no reason that we would want to sell that unless we thought that something in the thesis had changed. And here’s a fast fact. I was just refreshing my brand’s brochure and one of the slides I show people is the 10 year track record of some key brands in really important spending industries. And I used Domino’s in that kind of fast casual pizza delivery over the last 10 years, the S&P would have turned $10,000 bucks into $36,456. dominoes is up to $176,671 with that same $10,000 bucks
Matt Cochrane 20:24
Eric Clark 20:26
A pizza store right? When I was in high school, I loved it. I worked at Domino’s, it was an awesome job for a high school kid. But I don’t love Domino’s Pizza. I’m a bit of a food snob now. But I get their their special sauce and the technology and their efficiencies.
Matt Cochrane 20:47
I already told you I have four kids. So I will defend Domino’s Pizza to the death. It’s the only place we can go and get food that’s edible for about 20 bucks. As far as I’m concerned. It’s amazing. The convenience factor is just off the charts. I mean, that’s really its brand, right? Its brand is comfy. We all know the pizza, right? I mean, it’s fine. But it’s not —
Eric Clark 21:16
It’s not a good pizza, but it’s 10 bucks, right?
Matt Cochrane 21:19
It’s 10 bucks, and it’s fast. And it’s convenient as anything is that you can order. So it’s as far as I’m concerned. It’s amazing. So how do you categorize brands? I see on your website you have three categories for brands. The first is a mega brand, what is a mega brand?
Eric Clark 21:42
Yeah, so the portfolio is one basket, but it’s got three sub components. The Mega brands, to me are like the chassis of a vehicle, the foundation of the house. A mega brand is an already established company that is highly recognizable, still highly relevant, serves – in most cases, there a few like Home Depot, and a few others that don’t – a global audience. But if you have a brand that’s very relevant, very recognizable, are serving a global opportunity, hopefully you appeal to kids all the way up to adults and older adults. So you have many people in demographic age cohorts to sell to. Super high brand love and loyalty. You’ve got that management in the culture of innovation and that vision, like all of those things colliding, can give you that trillion dollar market cap. If you break down Apple and Microsoft and Google, who else? And Amazon on the trillion dollar above? You know, they all have, they all have those things in common? +
Matt Cochrane 22:54
Eric Clark 22:55
When I look who has the potential business model to reach the mega brand status and the trillion dollar club? I don’t like Facebook at all. I don’t currently own Facebook but I do see that Facebook has all of the right stuff to get it to be a trillion dollar business. So I would consider Facebook a mega brand, even if it’s not a business that I’d love. I don’t love Snap, they reported a decent number. But I don’t love the business model. So yeah, the mega brands are about 70 or 75% of the portfolio. And to us, those are kind of the more stable, predictable, high quality businesses, really strong cash flow, that’s kind of the anchor to the portfolio. And then around that we have some other more sexy things like the innovative brands that we talk about.
Matt Cochrane 23:46
Gotcha, yeah, we’ll get to that. Your mega brands, you mentioned Home Depot, Apple, Alphabet. Those are like some of the core positions in my own portfolio. Those are just classic companies with so many great things to say about them. But like you said, the second category you have for brands is an innovator brand. What is an innovator brand?
Eric Clark 24:10
I’ll get crazy and say those are some of the ARK names, right?
Matt Cochrane 24:14
Eric Clark 24:15
Are super-duper high growth and a lot of your names I think you guys have a lot of high revenue growth,
Matt Cochrane 24:21
Eric Clark 24:22
High valuation names that are just disrupting industries. If you take a look at Roku, for instance, the streaming video category started obviously with Netflix and frankly, Netflix was an innovator brand that’s turned into a mega brand.
Matt Cochrane 24:39
I was actually gonna ask you. Do companies like Netflix? That was the example I was gonna use. Do they graduate? At what point do they graduate – when did Netflix graduate?
Eric Clark 24:50
When they are kind of ignored by Disney and Viacom and they have this, this business model, it’ll never catch on. And if it really catches on, we’re big enough to scale and jump in, right? Listen, I love Disney, I respect it, I don’t currently own Disney, but they let Netflix create a business that should have been Disney’s or somebody else’s. Netflix was early, they took all the risk. Look at the return of Netflix. That same $10,000 bucks, I’m looking at my sheet, is $153,000 bucks, versus the 36. So there are huge potential rewards for the early companies that see either a new business model that they can exploit, or just take an existing model that really needs to be changed and disrupted and then go to market and just really shake things up.
Airbnb is probably a good example in the hotel and lodging space. So those tend to be much more volatile names, they tend to have much more upside, they tend to have a lot more volatility and potential downside. So they tend to be sized accordingly. The mega brands, Visa, MasterCard are my two biggest holdings, it may be 6% and 7%. Whereas my innovative brands are Square and Airbnb and Afterpay and Peloton that are super potential upside if they really get it right. But there’s a lot of risk.
Because once you get on Amazon’s radar and Apple’s radar, then you really got to compete with people that that have a big brand and have a massive moat and lots of free cash flow to throw at a problem if they choose to. But the rewards are great if you get it right. And I would even say, you know, a Square is probably still the innovator brand, even though it may have the market cap of a mega brand. But I would say PayPal has graduated. In my opinion Paypal has graduated from an innovator to a mega brand.
Matt Cochrane 27:02
And with market caps now. It’s almost like you have to adjust to expectations. It still blows my mind, a trillion dollar company like, Well, you know, there’s companies now, I mean, I don’t even without looking but like Apple and Microsoft are right there, if not over. And i think those companies are going higher. Maybe not tomorrow, but a year, two, three, four, or five years from now, those companies in my mind are undoubtedly going to be higher. $100 billion company is not what it used to be, is all I’m saying I guess
Eric Clark 27:39
No, and when I see these 1999 examples. We remember ’99. I was a young guy, I knew just enough to be dangerous back then. And I believed a lot of the hype. But these companies, Apple, Microsoft, the amount of cash on the balance sheet, the amount of cash they generate, the loyalty that they have with real businesses, there is nothing compared to 1999 in those mega brands, mega cap stories.
Matt Cochrane 28:12
Eric Clark 28:13
The 30, 40, 50x sales names that are, you know, part of some other part of tech. I get it, I see the similarities on that side. Even Amazon at 35x sales finally peaked in ’99. Business kept right on growing, and the stock went down 90% or something. So yeah, there is a limit to the valuation expansion that you can have but I just don’t see it in the mega brands category.
Matt Cochrane 28:40
No, I’m with you. There’s pockets of frothiness. And some of which are debatable. Some I’m like, that’s definitely a bubble. Some pockets I’m on the fence about. There’s some names that I’m like, well, that’s an incredible company, and you can see what they’re doing and how fast they’re growing. And I don’t know if it’s overvalued or not, but I know I would pay a lot for it. But yeah, absolutely. There’s pockets of frothiness no doubt, but as far as the overall market. I don’t see how there’s any way I think you can really say it’s just like ’99 and make a blanket statement like that.
Eric Clark 29:16
You look at Snap, and I’ll pick on Snap, because let’s face it, I don’t think the development of Snapchat has been good for our kids. I’ll be the old man parent right now. $3 billion in revenue at an 86 billion market cap? That seems a little excessive to me. I get that they’re growing, they still can’t make any money. We certainly have had some of those kinds of names because of the growth factors. But for us it’s really how relevant, how able are they to really generate really good revenue and really good free cash flow and all of the things that we know make a really solid business to give you a moat.
When you’re generating a massive amount of cash, and you have great opportunity to reinvest that cash and compound that cash, that’s how really good businesses compound over time. So those are a lot of the brands that we that we focus. If you think about brands, sometimes people initially think Nestle, Procter and Gamble, Johnson and Johnson, and those are part of the equation too. We tend to use those kind of defensive brands, more when we’re nervous about the market, and we want to play some defense. When we’re on offense, we love some of these brands that we’ve talked about. When we’re a little cautious, we tend to hold more cash and add more defensives because they tend to hold up. It’s hard to get excited about 30 times earnings and 5% organic revenue growth.
Matt Cochrane 30:59
It really is.
Eric Clark 31:00
Yeah, unless the doo-doo is hitting the fan. And that’s where money’s rotating.
Matt Cochrane 31:05
And so now, the third and final category for your brands is turnaround brands. I’m interested in this brand, because how often can brands turn around? How do you look for brands that can make a turnaround?
Eric Clark 31:20
Well the turnaround is also kind of opportunistic. We trade a little bit inside the fund. And sometimes you could find a brand that’s in the 200, that you don’t necessarily love the thematic right now, you may not love their financial metrics right now. But the stock chart is saying, “Man, this company is breaking a downtrend, I think I can probably get 10 or 15% of this out of this company.” And I’m okay renting it. So there is definitely an opportunistic, tactical trading component to this in this basket. But from the turnaround perspective, here’s a good example.
In December, when we updated the 200, we added a couple of names that we had kicked out three years ago, because they lost relevancy. And we added them back, because they got destroyed, like we kind of thought they were going to, and we started thinking, there’s actually a decent opportunity now to make some money in these companies, because they they’re going from completely dreadful, to being less dreadful. And what comes to mind is like an Under Armour, or L Brands or Gap. My wife loves Lululemon, but I noticed that her and my daughter, were going to Athleta a lot more.
And I started doing some work on Gap before we put it in. And I said, Wow. Athleta and the growth in Athleta and probably Old Navy is probably worth more than the overall company. So you know, the legacy Gap and the Banana Republic and all that stuff. That’s a business that’s just struggling and they’re going to keep closing stores because they haven’t really changed or innovated. But part of the other side of the house is really intriguing, and the stocks are down 60 plus percent.
And there’s an interesting turnaround story. I’d even put Tapestry in that, that the stock just kept going down and down and down and down. And the Coach part of Tapestry was doing great. But the other part, Stuart Weitzman, just was struggling and so there are some of those companies where we start to see an inflection. And COVID has been a great example of that turnaround story this year because, last year, a lot of these apparel businesses were closed and some of them had terrible omnichannel and online presence. So their sales fell off a cliff. But a name like Capri that’s got Michael Kors and Versace. They clearly got it. And they got their house in order and refinanced a ton of debt. They’re really good at social and I actually found that one through Sean Emory over at Avory & Company.
Matt Cochrane 34:12
Same thing. Yep. Yep, same thing.
Eric Clark 34:14
He’s, I just love listening to his stuff. So it’s another great example of how many people we’ve all been able to connect with on Twitter. It’s a dang shame they haven’t been able to figure out how to monetize better. I’ve been in and out of Twitter. Twitter just hasn’t gone mainstream yet. I think it’s pretty mainstream in our industry. But I’m rooting for him because I see the business model and their ability to allow people to connect way better than LinkedIn does.
Matt Cochrane 34:42
Oh, and look, with you, with Sean Emory with so many people I’ve connected with. We’ve almost grown our entire business out of Twitter. And yet when we tried to advertise on Twitter, it didn’t work. It just didn’t work as good as Facebook or Google or all these other avenues that are available now. You’re right. It’s like you see the potential there. And yet, you know, I just, I don’t know, they just can’t do it for some reason.
Eric Clark 35:15
Maybe Jack should focus. He’s doing okay with Square.
Matt Cochrane 35:21
He’s doing more than okay with Square, yes. Absolutely.
Eric Clark 35:24
So the turnaround stuff is opportunistic, it’s tactical trading, it’s kind of everything that might not fit in number one or number two, that if our job is just to make money, and do it in a risk managed way, sometimes you just see an opportunity. I might even see Netflix as a good opportunity as a tactical trade after it got beat up on earnings. At some point over the next couple of days. If I have some cash in the strategy and something like that goes down. I might take that as an opportunistic trade.
Matt Cochrane 36:00
Sure, absolutely. About Capri, I remember Sean Emory’s his bull pitch on it when it was like maybe $30 or so. And maybe a little under $30. And when COVID hit, it dropped down to about $8. I was already looking at it, you know, pre COVID. And I tweeted about it, I said, the valuation I like it. And I bought it at, I don’t know, like nine bucks or something. And it went up 20%, 30%. And I sold it. So basically I bought at 9, sold it at 12. And I thought I did great. Right now it’s about $50.
Eric Clark 36:43
And I would argue it’s still a double from here.
Matt Cochrane 36:46
Yeah, it really could be. But my problem with these brands is if I don’t have that long term confidence to just hold, my conviction gets shaken as soon as it goes down. So I see the opportunity. It’s been hard for me though to, to do well in it, or to do well with these types of brands,
Eric Clark 37:12
Apparel in general, I mean, let’s face it, I’m going to be I’m going to be very kind of stereotypical here, men and fashion. I wear the same pair of jeans, I wear like five different of the same t shirt from Buck Mason, I would not say that I’m fashion forward. So you know, in some ways we all do our little channel checks. And you have to let the data kind of drive you in some way with some fashion trends, because we’re clearly not leading those fashion trends.
Matt Cochrane 37:41
Well, it goes back to Peter Lynch’s book, right? Like where your wife and daughter are shopping, you know? Yeah. Absolutely. Let’s talk a little about the consumer sector right now. Are we getting ready for a big economic rebound? You think the COVID economic hangover is going to last for a little bit yet? How do you think of the consumer sector at this point?
Eric Clark 38:06
I live in California, and our governor has done all he can to keep us from doing what we love to do. Say we’re gonna open June 15, most of the country is already fully opened, I think. It’s a virus so the vaccinations are not a silver bullet, you can still get COVID when you’ve gotten vaccinated, your odds just go down. And if you get it your chances of having a severe case are lessened. That really helps confidence.
We do a lot of macro work. And if you look at savings rates, for instance, they tend to average about seven, seven and a half percent. Because of COVID, and when when we were forced to kind of pull up in our houses, the savings rates jumped up to like almost 30%. Obviously, thats since mean reverted down, but we’re still over two times the normal rate. So there’s a little over $2 trillion. Now, that is just kind of sitting there waiting for people who are pent up, have COVID fatigue at a massive rate, myself included. We’re getting vaccinated, our economy’s opening up, our confidence is getting better, the hiring is going back. So in my opinion we’re out there ready to spend.
And it’s springtime, it’s starting to be spring that means summer vacations and kids out of school. I happen to think that there is a massive amount of pent up spending that’s going to be unleashed over the next couple of years. And I think the lodging and the and some of the categories in the consumer services sector I’ve written about that a few times. To me, that was the laggard out of COVID. The durable goods people first started doing stuff in their homes and, you know, painting the house, that’s why Sherwin Williams has done well. Home Depot and Lowe’s really did well, and Whirlpool is doing well.
And we’re now kind of moving into the services sector where we’re able to go out and we’re going to go bars and restaurants and we’re going to go on vacation. And whether we do staycations locally, and we just drive or we finally get on a plane, I just think what I mean, I don’t know about you, I am a music guy. I can’t wait to go to a concert.
Matt Cochrane 40:29
So many things right now. I think people are just, I mean, yes, myself included. C homping at the bit right now. Right?
Eric Clark 40:37
And listen, it’s going to be slow, because politicians are just so slow, to kind of allow us to get back. So you know, let’s face it. I mean, we’ve even heard from the cruise lines that bookings are just really robust as people get get vaccinated. So the demand is there. Yeah, I think if GDP is 70%, consumer spending, and consumer spending has a lot of tailwinds for the next couple of years, I think we’re in for some better times from the consumer spending perspective.
Now, certainly, we may take from some areas that we have been spending and kind of stop and the or less than that spending and then shift our dollars somewhere else. But I do think on a net basis, the spending is going to be more because we just have more ways to spend and more options to spend. And that’s naturally going to benefit the companies that are most relevant in all of these spending categories.
Matt Cochrane 41:41
Sure. No, absolutely. Let’s hope that happens. I think I’m in the same boat. I think the same thing. People are just ready, they’re ready to be out and about, and they’re ready to do the things they used to do, they’re ready to enjoy vacations again, and just get out and socialize. So I, I think I’m in the same boat, like, I just don’t. This has been a lot harder economically for some people than others. But I think overall, people are going to get out. And I think that’ll be a boon to the service sector. And I just think that it’s really going to, hopefully, ignite the economy. I don’t know exactly when, but I don’t think it’ll be too terribly much longer either.
Eric Clark 42:31
No, and I don’t even know that I buy the corporate travel is going to continue to be much less. All it takes is some second tier companies that want to start making some inroads into their client accounts or their prospect accounts. While you know the bigger companies are still kind of doing Zoom meetings.
Matt Cochrane 42:56
Exactly. There’s going to be hungry sales people who are ready to travel, and they’ll be the first ones there. And as soon as they land that big sale or that big client, that big account, that’s just going to open the floodgates. I agree. Yup.
Eric Clark 43:09
It is. It’s gonna start slow. And we’ve heard we own Southwest Airlines in the fund. And, they had a great earnings report. And they are clearly seeing the signs of that. And the nice thing about our strategy and just the consumer in general, because we’re consumers, we kind of know the playbook, right? We know how people act, we know what people like to do. We are social creatures by nature, even if you’re not a social person, I mean, I have some buddies that I would say are on the left side of the not so social, even those guys are pent up and want to get out and talk and want to go out, right?
Matt Cochrane 43:55
I’m that way, but I want to get back to being anti social because of my choice, right? So like, I’m that way and and I’m ready to be out and about, no doubt, no doubt. Let me ask you. I got a few more miscellaneous questions for you. So I have one that I was thinking about today, as I was getting ready for this interview. How do you categorize companies with multiple brands? You have Costco, which is its own brand, but you also have Kirkland. You have Walmart, which I think they said they had 13 brands beneath them like consumer private label brands that do over a billion dollars in business every year. You have Procter and Gamble, which is just like this whole family: Tide, Gillette, Pampers. How do you judge companies when there’s multiple brands that work within them?
Eric Clark 44:54
Number one, it’s in the screener, it’s in that brand relevancy screener, they actually get double weighted. So if you have a brand that does have what we call ‘a house of brands,’ In theory, if it made its way into the 200 index than it is one of the most relevant brands in its category in the sector already. But yeah, if you’re constellation brands, and you have all of these liquor brands under your umbrella, and you have the ability to have multiple 1 billion or more type of brands those are intriguing.
Now, obviously, most of the time, even if you have 10 brands underneath you, you’re all generally in the same category. So if you’re a consumer staple or if Procter and Gamble is in the household products category, they have multiple brands, but they’re all still under the household products category. So if we were going to own something like that, we would want to have some exposure to that category. And most of the time, that’s going to be (we had some last year and COVID) in part because there was a shortage of that kind of stuff when people were overbuying at Costco in the supermarkets. And so we knew that they were going to have strong earnings. Like a Kimberly Clark and a Procter and Gamble and all that or we just want to introduce more defensiveness into the portfolio. But absolutely that’s very intuitive. I mean, look at Apple, my gosh, the watch. The iPad.
Matt Cochrane 46:29
Right. Exactly. That’s a great point.
Eric Clark 46:31
Now, maybe with this new.. what is this this tracker? I didn’t read the full..
Matt Cochrane 46:35
Yeah it’s a tracker that you can put on different things like your keys or in a backpack or in a laptop case, you know, things like that. I hope I get this, right, because I didn’t read too much beyond the press release. But they use its network of phones, using Bluetooth to like track these things down. So they don’t have to be on a WiFI or cell network or anything like that, to track them.
Eric Clark 47:02
Yeah, well, thank heavens, they’re not Facebook, because they’d be then they would be just tracking you already.
Matt Cochrane 47:08
With like, little microphones everywhere, or something.
Eric Clark 47:13
But yeah, part of the mega brand and the potential to get to the trillion dollar market cap is you may have hooked somebody with the iPhone, but you’re not going to get to a trillion if you’re a one trick pony. Do you have the ability and the brand love to be able to introduce following products that wow us? There’s a reason Apple is the market cap it is look around your house. The amount of products that we have on, I have two Mac screens in front of me, I have, a couple of iPads. I have two iPhones, I have an Apple TV, and it’s on its way out because Roku has replaced that.
Matt Cochrane 47:52
The funny thing is we were talking about our kids, but it’s my kids who got us into Apple, We had one apple laptop in our house. And now there’s Apple products everywhere, because we’re talking about our kids being ingrained early with brands. That might be the strongest brands I’ve seen with my kids to be honest. There’s no doubt, they are Apple kids.
Eric Clark 48:18
I always ask advisors to, when you go home tonight, have some fun with your kids. And I’ve done this in a seminar, where we’re with an advisor, we brought 15 households out, we actually did a Tesla test drive. We did it at a country club we had a Tesla show car, and a drive car, and the gals that came out and talked about the technology. And we all got a test drive in the Tesla. And then we went back and we had cocktails and hors d’oeuvres. And we talked about the brands that people love, and it is so unbelievably fun to watch people’s eyes light up when they’re talking about a brand that they love.
And I went back six months later to the advisors. And I said just out of curiosity, what percentage of those clients wanted to buy the stock and did and then also who bought the the car. And he said, 70% of them said I need to buy the stock. That was their first inclination, which I loved because most people don’t necessarily connect the dots. They like the products so they buy the product, but then they forget, oh my gosh, I missed this massive run in a company that I was so in love with. That’s one of the reasons why I created the fund.
But he said that 30% of the people bought Tesla’s too which he wasn’t real happy because they took money out of their account to buy the Tesla. But in many ways, the gains from the Tesla, the girls from Tesla said a lot of people have literally come to us and said, “Hey, I’m buying a Tesla with the gains from Tesla stock” and they were just like that was the most amazing thing to hear.
Matt Cochrane 50:00
Yeah, and that is amazing. And the gains have been about that good.
Eric Clark 50:05
A little over 1,000%. Sorry, your $10,000, 10 years ago, is a little over a million bucks. It’s $1.2 million. Wow.
Matt Cochrane 50:17
incredible. Incredible. So I have a question for you. 50 years from now, what do you think is the most durable brand that you’re very confident will still be around in 50 years if you had to just pick one?
Eric Clark 50:34
If I had to pick one? It’s hard to see Apple not being there. I can think of others. Apple and Nike are the two that came to my mind quickest. Amazon would be probably the third. If it’s something that is a part of our spending all the time and it’s in products that we can’t live without those are the places that that I think have the most durability. In theory if the phone at some point gets replaced, in theory it should be by Apple. Maybe it will, maybe it won’t. I always used to say that about Exxon and Chevron. Long ago, they should have been at the forefront of the clean energy world.
We’re and we’re dominant, but we know that there’s a lifecycle for that and we’re going to slowly transition to this while we still need this. And at some point, it’s going to be a smooth transition. Maybe that’s a little too naive. But I certainly think an Apple and Nike in particular are two that they come right to the top of mind.
Matt Cochrane 51:56
Great answers. So another one, I’m in South Florida as we talked about, and I’m in Fort Lauderdale, just north of Miami. It’s one of my favorite metro areas in the country. One of the only other metro areas that rivals it in my mind is San Diego, where you’re at, Make the bull pitch for San Diego, why should people be in San Diego because I love that city?
Eric Clark 52:20
Well, you never have to look at the weather ever. I joke like I don’t ever even consider what the weather is going to be. I’m a big outdoors guy. I love the mountain bike. I can mountain bike all year round. I can wear shorts all year round. Yes, it gets cold. You know, it gets down to 40 sometimes, but you know, for a guy that’s from the east coast, who grew up and lived in Colorado and lived in Tahoe where it gets cold and you have winter, San Diego from a lifestyle perspective, from an outdoors perspective, from a raising a family perspective is a pretty, pretty wonderful place to be. You know, it’s California. So we have the sunshine tax, but at least you’re going to get something for the tax. I grew up in Jersey, and it’s a pretty high tax state. And you got winter and the attitude in some cases on the East Coast is a little tough. Right?
Matt Cochrane 53:10
No, no doubt. No doubt the winters Yes. The winters and the people probably a little tougher in New Jersey. And then final question that I like to ask all the people I interviewed that have kids. You’re a father, you brought it up several times in this conversation. We were talking about it before we were recording. One of the things I’ve talked about it before is how I grew up in a very blue collar background. Two great parents, but they did not know much about money and they passed on all that wisdom to me. How I want to teach my kids about investing and financial awareness is something I very intentionally think through. When it comes to you and your daughter, how are you trying to teach her about investing?
Eric Clark 54:05
Yeah it’s a concept that we talk about all the time. I mean, the fact that she’s my little analyst. You go to school and it’s like, ‘hey, what does your dad or what does your mom do? I literally look around the room and and I’ll say okay, I see vans, that’s a company that if you had some some money, and you wanted to invest in companies that you love, in the hopes that the value of that money is going to grow, you would probably want to identify those companies that are very popular. And I use her all the time for that analysis. I always ask you know, “Sky what are the kids wearing? What’s the cool stuff? What’s the cool apparel?” And you know in California it’s vans with Vf Corp. I wish vans was a separate company because I don’t want some of the other stuff that’s part of Vf Corp.
Starbucks and so I literally ask her if you’re going to go out and spend some of your money because she likes to save her money and save up for things that she wants. She’s saving for an iPhone (she’s not going to get it for a few years) During the holidays, she asked for gift cards, because she loves to be able to go shop. And she says, “Dad, I want to contribute to those companies, by purchasing their products, because all of her college fund is in the Brand fund. So she owns Starbucks, and she owns Amazon, and she loves Whole Foods, and she gets that through Amazon and she owns Costco, and she loves Target, her favorite place in the whole wide world is Target.
So we talk about how to make money, and then how to make your money grow. And part of that growth is understanding the companies that you love, and you’re beholden to, and that you would want to spend your time on, and that are very popular, because those tend to be pretty good places to put your money. She loves to go to the RH gallery, because they’re such sexy galleries, and she sees this crazy cloud couch. And she doesn’t think in price. Right?
Matt Cochrane 56:26
Exactly. She just knows she wants a cloud couch. Yeah.
Eric Clark 56:28
That’s a $9,000 couch, of course you like it, right?
Matt Cochrane 56:32
You better like it.
Eric Clark 56:35
My thematic certainly is a wonderful, wonderful way to talk to kids about making money, making it grow, and being loyal to things. So it’s a fun thing that we have in our family. And even when I started this thing, five years ago, I sat my family in a room and we had this debate about what are the, you know, it was one of those put the whiteboard on the wall, and everybody’s starting to fire, I’m gonna say a category of spending, you tell me the brands that come to mind front of mind. And we started doing that. And it was a very enlightening kind of process that looked a lot like the end result of the brand’s 200 index, frankly.
Matt Cochrane 57:20
Right. Yeah, absolutely. Eric, thanks so much for joining us today. I’m totally jazzed about getting this conversation out there. Where can listeners find you if they’re interested in learning more?
Eric Clark 57:34
Yeah, you can go to our website, it’s globalbrandsmatter.com. Under the brands tab is there’s a couple of different sub tabs, but the dynamic brands is the portfolio that we run. And so you can follow it real time. And as we make changes, we kind of change that. So that’s one place. And my team is with an RIA, a registered investment advisor that’s up in the Bay Area in Utah. Accuvests, so accuvest. Accuvest.com is our website. And then we have that global brands matter, which is the dedicated brands website, and my contact information is on there. And you can connect with me on twitter through @dynamicbrands is my handle. And you know if you’re in San Diego always up for having a fried chicken sandwich at Shake Shack and a beer.
Matt Cochrane 58:26
Absolutely, absolutely. And if I’m in San Diego, I’m going to take you up on that one.
Eric Clark 58:31
Matt Cochrane 58:31
Thanks so much for joining us today. I’m Matthew Cochrane. We’re 7investing and we’re here to empower you to invest in your future. Have a great day, everyone.
Eric Clark 58:40
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