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Rupert Hargreaves
Rupert Hargreaves
Articles (512)  | Author's Website |

Avoid Disruption With These Top Brands

Disruption is only going to get stronger

Even though most investors do not consider it in valuation methods yet, disruption is the biggest threat facing investment theses today.

The possibility of industry disruption has always been present for companies. In recent years, the pace of change, particularly technical change, has caught many companies off guard.

From oil drillers to high-tech giants like IBM (NYSE:IBM), technology has uprooted business models and caught companies unaware. This sudden assault has led to a loss of market share and collapse in revenue for many.

Unfortunately, it would appear the pace of tech disruption is only going to become more aggressive as companies devote billions to their tech efforts. All sectors, no matter how manual or bespoke, are being uprooted by technological changes and the development of technologies is snowballing.

In a recent letter to clients, tech-focused hedge fund Whale Rock Capital highlighted the world’s largest tech companies have a combined $650 billion of cash to spend on acquisitions and research and development. Also, there is more than $100 billion of private equity capital earmarked for tech sitting on the sidelines. The letter speculates that if this capital were levered up three times, as is common in private equity deals, the total cash pile the tech sector has available to it is near $1 trillion.

With so much cash sloshing around, it is clear few sectors will escape the market of tech disruption, but there are a few stand-out companies that might fare better than others.

Disruption immune?

Consumer goods companies such as Coca-Cola (NYSE:KO) and Kraft Heinz (NASDAQ:KHC) are unlikely to see a severe impact from tech disruption, but they have other problems. Both are seeing sales come under pressure as consumers move away from high-sugar and high-salt products for healthier alternatives. There is also a move among policymakers to crack down on the level of sugar in drinks.

Interestingly, the one sector that is currently flying under the radar of regulators, and is unlikely to be impacted by tech disruption, is alcohol.

Alcoholic beverage stocks such as Brown-Forman (NYSE:BF.A), Anheuser-Busch Inbev (NYSE:BUD) and Diageo (NYSE:DEO) are possibly the most defensive stocks to protect against the unstoppable march of tech disruption. Even though the business models may come under pressure from upstarts, these companies are those of the most recognizable alcoholic beverage brands in the world, which have a huge amount of heritage.

This legacy just cannot be replicated, no matter how much money you want to plow into a new website or marketing program.

Take Diageo for example. The company owns the Smirnoff vodka brand and Johnnie Walker, both of which have over 200 years of history and are recognized by consumers all over the world. There have been plenty of start-up companies trying to take market share away from these two products in recent years but they have struggled, and this is unlikely to change. Both brands have heritage, memories and an unrivaled distribution network. With enough money you could recreate the distribution network, but it would be impossible to replace the history and the memories consumers have of the products. Few other companies have such established brands.

Brand reputation

Ferrari (NYSE:RACE) is another example of a company that is unlikely to be disrupted by tech. Even though the automotive industry is currently progressing through a structural shift away from hydrocarbon powered vehicles toward electric models, the Ferrari brand will remain desirable. You buy a Ferrari for the name, not for the car’s specifications. Furthermore, management has limited production over the past few years to increase the desirability, and the business has stayed at the forefront of technological development. The company has said it will not make an all electric car because that would remove one of the most popular points about owning a Ferrari—its engine. Nonetheless, the company has designed and is producing a hybrid vehicle.


The bottom line

Overall, tech disruption is one of the biggest threats facing investors today. There are, however, companies out there that own brands that may be immune from tech’s advances. If you are worried about disruption and want to buy and hold an investment for the long term, companies such as Diageo and Ferrari may be your best bet.

Disclosure: The author owns no stock mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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