What type of company is ideal for value investing?


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Today, we will discuss how to identify whether a company is providing branded products or services or commodity-based products and services. In general, you should invest in companies that provide some sort of branded products or services, e.g., Apple. It’s not that hard to identify whether a business is branded or commodity-based. The following example will help you to understand.
Suppose, you are driving the car and suddenly your attention goes to the bright yellow, low fuel-level symbol on the dashboard of your car. Your car is running low on fuel. Luckily, in the next major intersection you see the gas station, not just one but four. Each resides on a corner of the intersection. If you are like me and not a big fan of some sort of special fuel to fill your 2025 Honda Pilot, you should look for and go to the gas station that advertises the lowest cost of gas per gallon. You don’t care whether the gas station you have selected is a well-known name like Exxon-Mobil or Shell. You only care about the lowest possible price per gallon. This kind of business where price elasticity exists is classified as commodity business. In this type of business, the price is dictated by the consumer or by the market and not by the company.
Take the example of the Walt Disney Parks and its entertainment business. The most parents in the USA want to take their children to the Magic Kingdom at least one time to feel its magic. If the company raises the entrance price of the park from $100 to $110 per person, you will still want to take your child to the park because there is no other Magic Kingdom in the United States. This type of business where the price is dictated by the company and not by the consumer or market is known as a branded business. The ability of a company to raise the price without fearing the loss of consumer interest makes the company a very good business and, subsequently, a highly-profitable business. Another well-known example would be Apple.

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Businesses that provide some sort of branded products or services are usually very good businesses. However, in one industry this usually proves to be illusionary. It is the IT industry. Many, once well-known brands disappear quickly if they are unable to keep the pace with the changing landscape of the industry.
I went to college back in India, and whenever we need to copy a few pages from a reference book, we went to the store and asked the person to XEROX the page. Just think about the power of the Xerox brand. However, then came Canon, and Xerox – once dominant the printing and copying machine market – soon started to lose the market share of the printing industry. Similarly, the mid-1990 famous cell phone makers were Nokia and Motorola, but they could not keep up with the changing industry waves created by the invention of smart phones. And how can one forget about the enterprise leader BlackBerry, who used to dominate the market but had faded away in no time. This is mostly true for the IT industry or any other industry where the changes are rapidly occurring.
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