Surprising Growth

By James J. Cramer

Investing in brand-name consumer products, once the buy-and-hold, sleep-at-night formula for riches, has lost much of its appeal. Just compare the performance of Berkshire Hathaway, the repository of great American brands assembled by legendary investor Warren Buffett, with that of Bill Gates' Microsoft--or Dell or Intel. Is Coke no longer "it"? Have brands like American Express and Disney lost their luster? What has caused Buffett-style consumer brands to lag behind the big tech stocks?

Ironically, it's the notion of surprise. The market now values accelerating growth over consistent growth. Starting in the mid-1980s, investors became wary of U.S. industrial and cyclical companies like U.S. Steel and Phelps Dodge, which faced withering competition from abroad. At the same time though, U.S. household brands like Gillette and Nike held sway at home and won new markets abroad. No matter how tough the Japanese competed, you never wore Mitsubishi sneakers or shaved with Sumitomo blades. The top U.S. consumer brands showed consistent growth year after year.

But in the past few years, the stock market, led by institutional investors, has put a premium on growth that "surprises to the upside" or beats expectations, even though the companies carefully manage those expectations. In the past few years, only companies involved in computing--driven by ever cheaper, more powerful processors, better software and, of course, the Internet--could regularly deliver surprises that pleased investors. Microsoft's ability to "blow away the numbers" when it reported fourth-quarter earnings recently added billions to its capitalization and swelled its lead over steady, reliable General Electric as the world's largest company.

Simultaneously, Microsoft and Intel and to a lesser extent Dell and Cisco, the two other great NASDAQ performers, have become the new global brand names. "Intel Inside" is almost as recognizable in China and Eastern Europe these days as are Coke or McDonald's.

In the meantime, the fortunes of the old-line brands have taken a turn for the worse. Overseas markets have turned sour, with, first, Southeast Asia, then Russia and now Latin America producing surprises to the downside. Amazingly, these weakened economies have shown more appetite for computer hardware and software than for fancy razors and soda. A stronger dollar took away some of the pizazz. And some of the great brands have run out of room to show double-digit growth without bumping into one another. This week saw another tough quarter from Pepsi, which can seem to win only if it spends massively to take market share from Coke. Microsoft and Intel face far fewer constraints on their growth.

Has brand-name investing lost all its allure? I don't think so. After shying away from Coke for many years, I have dipped my toe in, as the dollar's recent weakness, coupled with some fresh positive trends in Europe and Asia, could bring a return of more consistent growth. My fears have diminished only because Coke has surprised to the downside so often lately that I think the worst may be over. Much of the bad news may be, at last, priced into the stock. Nevertheless, with Coke selling at 40 times this year's expected earnings, it's no low-risk bargain. These days I lose more sleep over an investment in Coke than over one in tech.

Cramer runs a hedge fund and writes for thestreet.com He holds investments in Cisco, Coke, Dell, Intel and Microsoft. This column should not be construed as advice to buy or sell stocks.