investing

Why polarizing brands won't make you rich

Michael Wiles, Ph. D., Arizona State UniversityWe all have favorite brands. One person loves the Yankees, while another person lives and dies with the Red Sox. Some people prefer Fox News Channel, while others tune into MSNBC. Do you prefer Target or Wal-Mart? Everyone has an opinion.

Some brands -- including Fox News Channel, Wal-Mart and Target -- elicit particularly strong feelings from consumers. Those emotions can be extremely positive or sharply negative.

Michael Wiles, assistant professor of marketing at Arizona State University's W.P. Carey School of Business in Tempe, Ariz., has a label for such brands: "Love-it or hate-it brands."

In the following interview, Wiles talks about a recent school of business study that finds that "love-it or hate-it" brands are unlikely to perform exceptionally well in the stock market -- but that they also offer less risk for individuals looking to invest.

Your findings indicate that "love-it or hate-it brands" are unlikely to perform exceptionally well in the stock market. For starters, can you define "love-it or hate-it brands"?

"Love-it or hate-it brands" are brands that have a lot of loyal fans and a lot of real haters. This includes polarizing names like Wal-Mart, McDonald's, Fox News Channel and Starbucks.

Specifically, we looked at the differences in brand ratings from more than 3 million consumers to measure the spread. The brands with more people on the far ends of the spectrum -- what we call "high dispersion" -- are the "love-it or hate-it brands."

The brands that had opinions more down the middle, such as Amazon and Intel, are called "low dispersion."

Why are "love-it or hate-it brands" unlikely to generate large returns for investors?

As brands become more "love it or hate it," the upside for investors becomes more limited. That's because people generally know what to expect from the brand.

Some people will buy the products no matter what; those are the fans. Some people will never buy the products; those are the haters. That means there's less opportunity for extraordinarily strong returns.

On the other hand, you also found that "love-it or hate-it brands" also lower an investor's level of risk. Can you explain this finding?

Yes, as I mentioned above, investors generally know what to expect from these "love-it or hate-it brands." Investors already know there are haters, so the customer behaviors of the companies are more predictable overall. The downside is somewhat built into expectations.

At the same time, the fans will keep buying, producing a more secure and predictable cash flow. For example, Apple devotees love the brand and can reliably be counted upon to purchase the latest products.

What are some of the other interesting findings that came out of this study?

Rather than just focusing on brand lovers, firms should also engage with brand haters to influence the company's future.

For investors, considering whether a company is a "love-it or hate-it" brand can be just as important as considering the brand's average overall rating with customers. Dispersion -- whether the brand is a "love it or hate it" -- may explain as much variability in future returns as the average overall brand rating.

Increasing dispersion in a brand can dampen the market's reaction to overall brand-rating improvements, which would ordinarily bring up a stock's price.

How can average investors use this information to build smarter portfolios?

Investors can build portfolios of firms with "love-it or hate-it brands" to enjoy less risk and lower volatility.

They can also watch for a company's marketing actions to make sure they stay consistent. Sudden shifts in strategy can have the potential to move the firm's middle-of-the-road consumers to the extremes. This can lead to a less-risky stock, but with lower returns.

Further, investors with earlier or more accurate information that a brand is becoming "love it or hate it" might profit from this because increasing brand-rating dispersion diminishes stock values, and they can sell.

Signs -- typically marketing actions -- that a firm might be becoming more "love it or hate it" (include):

  • Poking or agitating the haters through commercials, social media or other mechanisms.
  • Amplifying a polarizing quality that already exists.
  • Driving a wedge in the market.
  • Using provocative ads or imagery.

On the other hand, some firms placating the haters (or addressing their needs) will reduce their "love-it or hate-it" quality and have the opposite effects -- increased returns, but with more risk.

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