A Billionaire's Brand Strategy

To that end, one brand company that Coats, a value investor, has been buying in recent months is Tiffany, whose shares had been beaten down on concern that consumers squeezed by the economic downturn would curtail spending on luxury goods. In Tiffany, Coats has found a company that consistently produces gross margins of 55 to 57 percent, above the 50 percent of typical jewelry retailers.

"Jewelry is a business where the consumer doesn't really know the cost of goods sold are," he said. "They know that they want to buy a high-quality product from a retailer that they can have confidence in. In the consumer's mind, it's always delivered in the blue box. And the blue box is the symbol of that trusted relationship."

One of the key qualities Gary Bradshaw of Hodges Capital Management looks for in brand companies is the ability to expand products overseas. The thinking is that though mature brands may have little room to grow domestically, especially during an economic slowdown, they could use their overseas plants and vast marketing power to tailor their products in a way that would help them gain market share in emerging economies.

"The world is industrializing right now," said Bradshaw, who owns shares of Starbucks, McDonald's and Wal-Mart. "There are 2 billion people who are going to become middle-class citizens around the world. I believe those folks will live like we do in America."

While he is also betting on Coca-Cola, which derives more than 70 percent of its revenue from overseas, Bradshaw said he passed on Dr Pepper Snapple Group when it spun off from Cadbury to debut on the New York Stock Exchange last month, in part because 90 percent of its business is in the United States. "If it was 50 percent oversees, I'd probably be buying it left and right," he said.

Brand investing, perhaps more than any other investing style, is easy to understand and can be followed by patient individual investors who are in it for the long haul and are willing to their homework. But it's not without pitfalls.

Coats quickly realized his mistake when he bought a small stake of Eastman Kodak in 2000, back when it was the leader in the film and developing business. He and his team thought the brand was strong enough to extend its dominant position into the digital age. But ultimately, they concluded that the challenges posed from the proliferation of digital cameras, home printers and electronic imaging was too daunting.

His fund, which had bought the Kodak shares for an average of about $50, sold them off three months later at $39. On Friday, the stock closed at $15.32.

A product with top market share, however, can suddenly be challenged as a result of competitors' mergers and acquisitions.

In the mid-1990s, Matt Kaufler, a portfolio manager of the Touchstone Value Opportunities Fund, took a position in Pet, a food company with several key brands including the Old El Paso line of Mexican products. But then, competitor Pace Foods was acquired by Campbell Soup. And Pepsi began rolling out salsa sauces under the Frito Lay and Doritos labels.

"Picture a vise, and picture Old El Paso in the middle of the vise and on either side is Pepsi and Campbell's squeezing," Kaufler said. "Overnight . . . their competitive posture changed substantially. Their margins began to show the stress of that. They started to miss their earnings numbers because they had to spend more to promote their products."

It was an unsustainable situation that led to the buyout of Pet by a larger British company, which in turn ended up in the hands of General Mills.