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Deciding on blue chips? Buy big brands

June 12th, 2016

The most important question any new investor has is: What should I invest in? We watch CNBC and Bloomberg because they have an entire television schedule of stocks to watch, but you've never heard of any of them. While there's no sure-fire advice on what you should buy as a new investor, it may be a smart play to go with what you know.

For instance, you've watched Disney movies, you've shopped at Costco and you've used an Apple product – in fact, you're probably reading this article on one right now. The point is, start there. These companies are among the biggest brands in the world because they have competitive strength and brand differentiation in their markets. So if you want to find a good place for profits, you can do a lot worse than to consider these three stocks.

If you haven't heard of Disney, I hope the rock you're living under has central air conditioning. Disney is the most recognizable name in entertainment around the world. It also owns ESPN, Marvel and Pixar, the three biggest names in their markets. Furthermore, they own the intellectual rights to all of their most valuable fictional characters, which just happen to be the most valuable characters in the world.

Disney's a company that has spanned generations and will continue to reach future ones. It is one of the few global brands that is close to untouchable by competitors in its market. According to Investor Place, this is why it has produced $13 billion in revenues in the first quarter this year. That represents a 4 percent jump over the same time last year. In fact, free cash flow has increased by 12 percent and adjusted earnings per share spiked by 11 percent. All told, Disney reached double-digit growth for adjusted earnings per share for the 11th quarter in a row. This doesn't even include the revenues from its television shows, online streaming video, movie studios and amusement parks.

This is a surprise to no one. According to an Interbrand report cited by Motley Fool, with an estimated 2015 worth of $107.3 billion, Apple is one of the most valuable brands in the world – if not the most. Presumably, you already know about their products and may even have brand loyalty due to having owned Apple products for a number of years. This is common among Apple customers because of the halo effect: People buy once and stay for a long time. The way this works is that customers will buy iPhones, iPads, smartwatches and various other products that all fall under the Apple umbrella. A prime example of this came in a recent survey conducted with smartphone buyers in the U.S., 95 percent of them were loyal to the iPhone. That is not only an impressively high rate, it is the highest ever for any smartphone.

Who can blame these customers? Apple's product ratings are second to none. Due to these ratings, it can charge premium rates, which customers will gladly pay. That means its profit margins are great. To put that into context, according to a Morningstar report, Apple has an operating margin around 29.4 percent of its revenue – the industry average is only 21.7 percent.

If you've ever bought a 12 lb container of peanuts, you're more than familiar with Costco. The big bulk retailer is still the king of the its market, with its remarkable ability to maintain low cost margins. Competition has begun to stiffen in the warehouse retail business market with similar stores and online retailers, but Costco has resisted the mounting pressure.

One advantage it has over other retailers is that its profits do not come from margins on its products' prices, they come from membership fees. This is distinctive from its competitors because it can sell its products at significantly lower profit margins. Another advantage it has over competitors is that these cost savings allow it to allocate more spend into marketing and advertising. In turn, it can pay its staff more than the competition, which has pushed its personnel into offering customer experiences that are best in class.

All told, Costco has ranked as the industry leader in the American Customer Satisfaction Survey for 16 consecutive years. According to Forbes contributor Robin Lewis, its membership retention rates are 90 percent in the U.S. and Canada and 88 percent worldwide. So what does this mean for investors? Costco has shown a great ability to not only generate sales, but to grow them – which means more revenues, and that ultimately leads to more profits for investors.