Stock Investment Strategy: Investing in Good Advertising

By November 4, 2014 No Comments

When deciding whether to invest in a company or not, there are certainly important metrics to be found in the financial report. Balance sheets, cash flows, asset-to-debt ratio, EBITDA, and fundamental and technical analysis all play a role in determining a company’s profitability. But there’s another asset that is often overlooked — the creative brainpower behind the company’s advertising agency.

So why is a company’s advertising important to its bottom line? I would argue that there are several reasons. First, and most obviously, a company’s advertising is crucial to its sales and marketing engine. Companies with better advertising sell more products, in general. Companies with better media departments spend less money on advertising. And companies with a better understanding of their target market can build products that their target market is more likely to purchase.

The second reason goes a little bit deeper. It speaks more to the advertising agency’s ability to influence the company rather than to communicate the company as it exists. A good advertising agency is collaborative, they think outside the box about the products and services the company offers an endeavor to create a relationship where they influence product development as much as communicate it.

When a company partners with an old school advertising agency like Ogilvy & Mather, this can indicate that the company will spend your money conservatively. When a company partners with a newer or more digitally focused advertising agency, like Wieden+Kennedy or Droga5, this can indicate the company is willing to take risks for higher-quality service.

At the end of the day, advertising is primarily involved with generating goodwill, which is evidenced on the company’s balance sheet. The goodwill of the company directly influences the price that purchasers, investors, and traders will pay for the company. A company with an overabundance of goodwill, like Apple, will see higher valuations that accompany with little or no goodwill, like a regional bank.

Should you decide to invest in a company on the basis of their advertising? Probably not. Advertising is a piece of the puzzle, albeit a relatively small piece, and it would be silly to buy a company without considering the price the company costs in the market, their debt, or the ability of the corporate team to lead the company to success. On the other hand, a company with great advertising is clearly doing something right, even if it’s only a small win.

How can you identify, as someone who is not involved in the advertising industry, which advertising is good? Well, good advertising works. There are a number of award shows out there that we look at to determine what advertising is working and what is not. Probably the most effective award should consider is the EFFIE awards, which is directly related to the effectiveness of a marketing campaign. Other important award shows to consider are CLIO and Cannes.

For most advertising, we use the tried and true SIMPLY method of analysis. The SIMPLY method states that advertising should be strategic, intrusive, memorable, persuasive, lasting, and yours.

It’s widely accepted that a few companies out there better marketing in general than others. Companies like Nike and Apple lead that list, as companies like Burger King find themselves too often ridiculed, lambasted, and humiliated for their marketing blunders (in BK’s case, for hopping between CMOs, ad agencies, and campaigns on a whim).

So before buying your next stock, consider the advertising that your proposed company puts out there. After all, it’s intended for you as well. How is the company communicating its value to shareholders in addition to customers and employees? Thorough analysis of the company’s advertising can give you an insight into what the company views as important, how they position the company among their competitors, and management’s overall perspective on risk, safety, technology, creativity, and above all else, sales.