6-09 New and Improved Products?

chapter6-9A company with well-respected and reliable products that have been accepted by the consumer market is often a valuable investment. How many rolls of Charmin toilet paper have you purchased in your lifetime? How many tubes of Colgate toothpaste? How many boxes of Tide laundry detergent? How many gallons of BP gas have you pumped into your car? How many McDonald’s fries have you eaten? These are all strong, stable brands.

However, as global business cycles compress and rapid changes occur, particularly in the technology-based industries, the introduction of new products or dramatically upgraded current products are important contributors to both future earnings, cash flow levels, and ultimately—stock price.

Currency speculation and hedging (usually through hedge funds) are similar. You invest in foreign currency believing (sometimes just hoping) that the exchange rate against the dollar becomes more favorable – and profitable over time. As you can imagine, you can make or lose a great deal of money in the arenas of FX (also called FOREX), currency speculation, and hedging.

Consumers also appear to be much less loyal to “tried and true” products than ever before. This behavior is forcing companies, even those with a good existing product mix, to modify some or create new ones to stay competitive. The formerly effective tactic of marketing a product as “new and improved” (Would someone please finally explain how any product could be both at the same time?) seldom works any longer.

Skeptical? Just ask Bill Gates about the Windows Vista operating system. Many customers expressed extreme distaste for the new operating system, often choosing to retain the older Windows XP, which Vista was intended to replace. This hurt Microsoft’s revenues.

Mark's Tip

When you are evaluating a stock, think about the products that the company offers, and ask yourself if they have new products under development that will add to future revenues. Obviously, technology products change so fast that every year products are getting faster, cheaper, and with more memory. Pay attention to who is always the leader and ask the sales reps at Best Buy what company’s products they like best. And remember that things like toilet paper and toothpaste do change. Toilet paper becomes more “green” and earth friendly and toothpaste is now stressing “whitening” more than ever. I travel a lot, and with the “No liquids over 3 ounces allowed” in your carry on bags at airport security, I was amazed at how some companies quickly offered their products in 3 oz travel sizes, while others still haven’t been able to produce a 3 ounce size. Look for signs like these of well managed companies and well managed brands.