You Won’t Believe What These Winning Investments Have in Common
After more than three decades in this business, I sometimes feel as if I’ve seen it all.
I never expected Apple (Nasdaq: AAPL) to drop 43.1% from its high last September. But neither have I forgotten about the equally surprising 65.3% fall from grace five years ago by another tech giant, Google (Nasdaq: GOOG).
The price of gold recently fell 24.2% from its peak last October. Stop the presses: In early 1980, when I was reporting from the trading floor of the Chicago Mercantile Exchange, gold fell nearly twice as much in one-third the time.
As Barry Manilow famously told Billboard Magazine in 2006, “If you live long enough, anything is possible.”
That’s true enough.
Still, I did a double-take the first time I laid eyes on this chart:
The red line represents the performance of the S&P 500 over the past 10 years.
The blue line represents the share prices of a basket of 10 stocks from industries as diverse as food service, energy transportation and business services.
The common denominator? Simply this: These companies share an established history of retaining customers over the long haul.
That’s right. None of these businesses started as small caps that lucked onto The Next Big Thing. None of these companies blazed any trails in new media 10 years ago or social media today. These companies made their mark the old-fashioned way: by keeping their customers. And collectively, they trounced the market by a 3-to-1 margin over the past decade.
Customer retention comes in many forms. Brand loyalty is perhaps the most obvious. But sometimes a company’s customers are locked in under long-term contracts. And sometimes customers might face significant costs by switching to another supplier.
Whatever the link, when you think about it, it makes perfect sense to consider customer retention in your investing decisions.
After all, studies have shown that existing customers are several hundred percent more likely than new prospects to be buyers. And businesses that have a loyal following have an easier time raising their prices, which can benefit the bottom line. Moreover, it’s usually less expensive for a company to keep an existing customer than it is to acquire a new one.
The StreetAuthority Customer Retention Index first appeared in the April issue of Top 10 Stocks. It was developed by Chief Strategist Elliott Gue, who set out to illustrate one of the tenets of Top 10 Stocks — namely, that you can increase the odds of beating the market by investing in companies that do a great job of retaining their customers. (I’ll reveal the names of the stocks in the index in a moment.)#-ad_banner-#
Elliott began by looking at companies that have a reputation for strong customer loyalty and high retention rates. He limited his search to stocks that offer a yield and/or have a history of buying back shares to boost shareholder value (another tenet of Top 10 Stocks).
After weighting his selections by market capitalization, Elliott tracked their performance over the past decade and the result is the chart you see above: Over the past 10 years, the index showed a gain of nearly 276%, compared with a gain of just 80% in the S&P 500 over the same period.
Elliott points out that the results are even more dramatic when the cumulative effect of reinvested dividends (yet another Top 10 Stocks tenet) is taken into account. On a dividends-reinvested basis, the average return for the 10 stocks in Elliott’s index is 541% over the past 10 years, more than four times the S&P’s gain of 126%.
(Note: If you’re still not a believer in the Top 10 Stocks investing tenets I just mentioned, consider this: As of midweek, all 15 holdings in the Top 10 Stocks portfolio were in the green. Every single one. The average return was 22.1%%, spread over holding periods ranging from just under two years to just under a month. For the first time ever, StreetAuthority is offering a lifetime subscription — but only to the first 500 takers. Click here to find out how you can receive every issue of Top 10 Stocks — in addition to a number of other great benefits — for life. Even if you’re already a subscriber to Top 10 Stocks — especially if you’re already a subscriber — you’ll want to check this out.)
As promised, below you’ll find a list of the 10 companies that make up the StreetAuthority Customer Retention Index, each of which does a great job when it comes to keeping its customers…and delivering market-beating returns to investors.
American Tower Corp. (NYSE: AMT) — Long-term, fixed-rate contracts
American Tower owns and develops broadcast towers and antennas in the United States, Latin America, India and Africa that it leases to wireless communications companies. These towers are the cellular sites that enable voice and data communications across mobile telecom networks.
Typically, American Tower’s leases are long-term, fixed-rate contracts with major telecommunications firms such as Verizon (NYSE: VZ) and AT&T (NYSE: T). Rates automatically escalate at 3% to 5% annually to help offset inflationary pressures, and each tower can handle equipment owned by multiple providers.
Enterprise Products Partners (NYSE: EPD) — Locks in its customers using long-term contracts
Enterprise has one of the largest networks of oil, natural gas and natural gas liquids pipelines and storage facilities in the United States. Enterprise typically locks in its customers using long-term take-or-pay contracts that guarantee cash flows regardless of commodity prices or the actual volumes of oil and gas transported or stored. The company typically signs its customers to binding agreements before it breaks ground on a new pipeline or storage facility project.
Iron Mountain (NYSE: IRM) — Largest network of warehouses in the United States
Iron Mountain is the world leader in document storage and retrieval services, with a customer base that includes 95% of Fortune 500 companies. The firm concentrates on customers in industries, such as financial services and health care, that are legally required to retain copies of key documents regarding their customers. It has the largest network of warehouses in the United States and its other main markets, making it the most convenient choice for companies that need storage. This helps the firm retain its customers for a long time.
In addition, the business has high switching costs because a company would have to pay a considerable fee to move all of its documents out of storage for transport to another provider.
Starbucks (Nasdaq: SBUX) — Consistent quality and a customer loyalty card program
Starbucks is the world’s largest coffee retailer, with more than 18,000 locations globally. The firm retains its customers through a combination of consistent quality, brand loyalty and convenience.
With a standardized menu and a large footprint of stores in its major markets, most consumers will find Starbucks a convenient and reliable choice.
And through services such as free Wi-Fi and a customer loyalty card program, Starbucks has been successful at keeping its customers coming back on a regular basis. The average Starbucks customer visits one of its locations six times per month.
Automatic Data Processing (NYSE: ADP) — Strong brand reputation and high switching costs
ADP is the nation’s largest provider of outsourced human resource services such as payroll and retirement and health benefits management. Payroll is still the firm’s most important business, and the company’s strong brand reputation and high switching costs are powerful customer-retention tools.
ADP locks in its customers under multi-year service contracts that give it a reliable revenue stream. In addition, the company estimates that it can take as long as six to 12 months for it to set up a large new client for its various outsourced solutions; the time and cost involved with switching payroll providers are high. Moreover, because payroll, tax processing and benefits management are all mission-critical business functions, companies tend to prefer to go with large established providers like ADP.
On average, the company’s employer services and payroll customers stay with ADP for 11 years.
McDonald’s (NYSE: MCD) — Adapts menu to meet changing customer demands and tastes
From its start in California and rapid growth through the 1960s, McDonald’s has been focused on growing its store footprint and providing a consistent experience in all locations. McDonald’s locations are ubiquitous in many of the 119 countries in which it operates, making it an easy and convenient choice.
McDonald’s also retains customers by innovating to meet changing customer demands and tastes. In the 1960s, the firm introduced the Big Mac and Filet-O-Fish Sandwich to appeal to changing customer tastes. Over the past decade, McDonald’s has launched salad and sandwich wrap offerings to appeal to more health-conscious consumers.
Philip Morris International (NYSE: PM) — Loyalty to favorite cigarette brands
With a global market share of nearly 29% and a stable of powerful brands that includes Marlboro and Merit, Philip Morris is a global leader in the cigarette industry. Consumers are intensely loyal to their favorite cigarette brands. Even in Europe, a market that has been hit by weak economic growth and a series of new taxes aimed at curbing smoking, Philip Morris has been able to successfully push through several price increases for its cigarettes without negatively impacting volumes.
(Note: For purposes of index calculation, Elliott used Altria (NYSE: MO) in the index up until Philip Morris International was spun off from its U.S. parent in early 2008.)
Diageo (NYSE: DEO) — Loyalty to favorite drink brands
The world’s largest alcoholic drinks firm owns a portfolio of instantly recognizable brands, including Guinness, Tanqueray, Johnnie Walker, Smirnoff and Jose Cuervo. Consumers are loyal to their favorite drink brands and are willing to pay a premium price over generic brands. That’s particularly true of premium-priced liquor categories that tend to be consumed by less price-conscious consumers, a niche where Diageo is estimated to hold more than one-quarter of the global market.
In addition, given the firm’s broad portfolio of brands, Diageo is able to ensure it commands a large amount of prime shelf space among liquor retailers.
Yum Brands (NYSE: YUM) — Consistency and reliability of the firm’s brands, regardless of location
Yum Brands owns three of the world’s largest and most recognizable fast-food brand names: Taco Bell, KFC and Pizza Hut. The company’s large footprint makes at least one or two of Yum’s restaurant locations and formats a convenient choice for most consumers.
Like McDonald’s, consumers are also attracted to the consistency and reliability of the firm’s brands regardless of location. Strong brand recognition is behind the firm’s estimated 49% market share in the U.S. quick-service Mexican restaurant market, 38% share of the chicken-on-the bone market and 16% of the pizza market.
Brookfield Renewable Partners (OTC: BRPFF) — Locks up customers under long-term power purchase agreements
Brookfield owns 195 hydroelectric power plants located in the United States, Canada and Brazil. Electricity prices are volatile and depend on supply and demand conditions as well as the cost of key commodities used to produce power like natural gas.
But Brookfield reduces the impact of power price volatility on its cash flows by locking up customers under long-term power purchase agreements (PPAs) that guarantee the firm a fixed price for the power it generates regardless of market pricing. Over 85% of Brookfield’s projected power output over the next five years is locked in under PPAs.
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