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Stock Market Business Basics


The Different types of Earnings

Stock Market Business Basics - The Different types of Earnings; picture of an earnings chart shown on a large wall computer screen with investors studying the charts

Stock investors are often confused with the different types of earnings figures they come across. The various types of company earnings include Reported earnings, Diluted earnings, Restated earnings, Retained earnings, Forecast earnings and Consensus earnings.

There also tends to be some confusion with the difference between Earnings per share, Earnings, Profit and Income.

Basically, Income is a standard term used in accounting, Profit is a term the financial press likes to use and Earnings is a term used within the stock market industry. They are all the same thing and it's the profit made by a company as reported on the income statement.

Earnings per share is simply the company's profit divided by the number of shares outstanding and is often simply referred to as Earnings, thus the confusion since the stock market frequently uses the term Earnings and Earnings per share interchangeably.

When dealing with the stock market, assume that Earnings means Earnings per share.

Reported Earnings

The reported earnings per share is the figure reported in the company's income statement and is first released to the public in the 8-K report. This is the most common profit figure cited by the financial press and is also known as the basic earnings.

Diluted earnings

The reported earnings per share can be distorted when a company has stock options on their books which have not been exercised. These stock options are company issued options which are offered to key employees as part of their remuneration package and are not the same as the stock options which are traded on the options exchanges.

If these company issued options are exercised, then the company issues additional shares to cover the options exercise. The issue this creates for stockholders is that there are now more shares outstanding and the Earnings are now divided by a larger share quantity which lowers the Earnings per share figure (for the same company profit).

Stock Market Business Basics - The Different types of Earnings; picture of earnings data shown on spreadsheet printed out on paper with a blue pen laying on top

Obviously stock investors are not keen on having the company's Earnings per share drop (or dilute). To allow for the possible exercise of company issued options, the Earnings are divided by the shares outstanding which include all the shares that could be made available if all the company issued options were exercised. This is referred to as Diluted earnings per share.

The Diluted earnings per share is a conservative figure since usually not all company issued options are exercised simultaneously but are exercised over a number of years. Also some company issued options are never exercised and expire worthless, which happens if the company's stock price remains below the options strike price.

Dilution also occurs when a company has issued convertible bonds. These bonds can be exchanged for company shares and creates the same issue as with company issued options.

The shares outstanding used to calculate the Diluted Earnings also includes the shares that could be converted from convertible bonds.

Restated earnings

Sometimes the Reported earnings per share are incorrect due to some accounting error or even some deliberant attempt to mislead investors which was discovered by the independent accounting audit. For whatever reason, if the earnings that were reported are incorrect they are released again in an 8-K report and the new released earnings are known as Restated earnings.

Quarterly earnings

Most companies listed on the NYSE or NASDAQ exchanges report their earnings for each quarter in the year. The annual earnings is determined by adding up the four quarterly earnings which the company releases at the end of the fiscal year.

Retained earnings

Whenever a company does not pay out all of its after tax net profit as a dividend, the profit kept by the company is referred to as Retained earnings.

Thus net profit after tax equals dividends paid plus Retained earnings.

The Retained earnings is reported on the stockholders equity section of the balance sheet statement.

Forecast earnings

Forecast earnings per share are future earnings which are estimated by analysts of brokerage firms and other research oriented firms. They usually estimate the earnings for the next fiscal year or two and may provide quarterly earnings estimates.

Not all stocks are covered by analysts and they tend to favor the larger stocks such as those in the S&P 500 index. Smaller stocks are generally only covered if they are attracting significant interest from the financial press, especially the stocks that are significantly increasing in price which are referred to as the market darlings. A lot of analysts are employed by brokerage firms and their role is to drum up interest from the public and thus earn the broker commissions for stock transactions.

Consensus earnings

The Consensus earnings per share are sometimes referred to as Consensus Forecast earnings. The Consensus earnings is simply an average of the Forecast earnings per share obtained from the analysts.

Caution needs to be exercised with Consensus earnings as not all analysts cover all stocks (even for stocks in the S&P 500). Some stocks will have over 20 analysts forecast estimates while others may only have a couple of forecast estimates or even only one.

The forecast estimates from analysts can vary quite considerably. A higher number of analysts provides a broader opinion of a stock's future earnings and is generally considered to be a more reliable figure for the stock's future earnings.

Earnings Season

This is when companies report their quarterly or annual financial results

Stock Market Business Basics - Earnings Season; picture of an earnings graph sitting on top of an investors hand while he checks the trend direction

Companies generally report their earnings every quarter, with most companies reporting on a calendar basis. The reporting period for the first three quarters of most companies ends on 31st March, 30th June and 30th September. The final report is an annual report and covers the entire fiscal year ending 31 December. For some companies, the fiscal year does not line up with the calendar year and may end on 30th June or some other month.

The upcoming earnings reporting date that is made public refers to the form 8-K that companies lodge with the U.S. Securities and Exchange Commission (SEC). Companies generally release their financial results in the 8-K filing which typically includes all of the financial statements. The financial statements are not officially lodged with the SEC when the form 8-K is lodged and the results are generally considered preliminary.

The complete financial report (10-K quarterly or 10-Q annual) which contains detailed relevant information regarding the company's financial performance and future direction, are filed with the SEC around two days to two weeks after the 8-K is filed. The financial statements in the 10-K or 10-Q fillings are officially lodged with the SEC and are considered final results.

Companies will generally file their form 8-K with the SEC from about two weeks up to two months after the end of their reporting period. The form 8-K is typically filed with the SEC before the market opens or after the markets close. The reasoning behind making the 8-K report available while the regular market trading is closed is to allow investors time to read the 8-K report (which is typically quite short and quick to read) without being under pressure.

The majority of companies generally file their form 8-K from around the third week up to about the seventh week after the end of each quarter. This busy reporting time is referred to as the earnings season and occurs four times a year.

The form 8-K lodged can be viewed at the SECs EDGAR website or via a financial website such as Yahoo finance.

Stock Market Business Basics - Earnings Season; picture of an earnings season chart over many years plotted on a light blue background glass pnael

The companies that are of particular interest to the market are the stocks in the S&P 500 index. These are the U.S. economies largest 500 companies and they are generally actively followed by analysts. The profitability of the 30 companies in the DOW industrials is of special interest.

The main interest in these large companies is that their profitability is a gauge of the current strength or weakness in the economy. Should these companies average an increase in earnings over the pervious corresponding period, the stock market will probably rally. Conversely, if these S&P 500 stocks averaged a decline in earnings, there's a good change the stock market will undergo a correction (at least for the short-term).

The largest companies in an industry group are referred to as the leaders and are stocks in the S&P 500 index. Should these leaders report earnings that are lower than the previous corresponding period, most of the stocks in that industry group will probably drop, even if the broad market overall reported an increase in earnings. The logic here is that the profitability of the market leaders in a particular industry group will ultimately be reflected in the profitability of the smaller companies within that industry group.

Analysts make forecast estimates for the larger companies, especially those in the S&P 500 index. The earnings estimate from analysts is averaged and is referred to as the consensus earnings estimate. The investing market can also react to an earnings result even though the results meet the consensus earnings estimate.

Investors can be sensitive to forecast estimates and react swiftly

when the reported figures differ from the estimates

Stock investors tend to rely more heavily on a consensus earnings estimate when there is a larger number of analysts and all the analysts have a similar earnings estimate. Investors may well sell down a stock even if the company reports earnings greater than the last corresponding period, but reported earnings less than what investors were expecting. This tends to occur when the stock rallies prior to the earnings release, as investors have already priced in the consensus earnings estimate and were hoping for an even better result.

Sometimes a stock may rally prior to the earnings release on a whisper number which is higher than the consensus earnings estimate. Investors here are really expecting a good earnings result and if the company reports anything less than the whisper number, then there is a good chance that the stock is going to be sold down.

The earnings season can be quite volatile as the companies (especially the DOW stocks) report their earnings from day to day. Some days may see companies reporting good results, while on other days the results may be disappointing. The stock market tends to react accordingly, but will generally trend in the direction of the average reported earnings. If the average reported earnings are up, then the stock market tends to rally.

Upcoming earnings reports (8-K filings) are listed in what is known as an earnings calendar which brokers and other financial websites put together. They are a convenient way of knowing when a company is next due to report its financial results and some calendars will also provide the consensus earnings estimate.

Whisper Numbers

The unofficial earnings estimate

Stock Market Business Basics - whisper numbers; picture of two investors checking their stock portfolio data on printed out charts for earnings surprises

The whisper number is an earnings estimate that is not officially published, unlike the consensus earnings estimates obtained from analysts which are published throughout the financial press and are readily available from financial websites such as yahoo finance.

In the past, whisper numbers largely tended to come from analysts of brokerage firms. The analysts would generally only make any revisions to their consensus forecast earnings available to their own wealthy clients and institutional investors. This gave these wealthy clients and institutions an advantage over the ordinary stock investor. The information analysts used to revise their estimates often came directly from the listed companies; however this information was often not disclosed to the investing public.

Nowadays the U.S. Securities and Exchange Commission (SEC) have a Fair Disclosure Rule which has made the practice of companies selectively issuing information to brokers illegal. While the Fair Disclosure Rule does not specifically address the issue of brokers selectively issuing earnings estimates, brokers are probably more likely to make any earnings revisions public information rather than running into potential issues with the SEC who regulates them.

The SEC is proactive and continually reviewing its regulations with their goal of making the investing environment a fair and level playing field for the all investors whether small or large. This is coming about from the increasing participation of the small every day investor, whose numbers continue to increase as more investors are becoming self-directed and choosing to make their own investment decisions.

The source of the whisper number nowadays has changed. While they used to be largely obtained from analysts, they now tend to come from investment advisors and individual stock investors and can include investors with large holdings.

The whisper number nowadays seems to be based

largely on speculation rather than analysis

This leads to a few issues with the modern day whisper number. The first is creditability as the source of the earnings estimate is not from an analyst, but rather the opinion of another investor or an investment advisor, neither of which are qualified to conduct an accounting review on a company's financial accounts. The second issue is that there is no way of knowing whether there is any vested interest in promoting an earnings estimate.

While every stock investor would love to have a crystal ball for their earnings estimates, the usefulness of the estimate needs to be questioned. This is especially true for smaller stocks outside of the S&P 500 that typically do not have any analyst earnings estimates.

A common scam that investors need to be aware of is the pump and dump scam. This is where an investor with a vested interest in a particular stock promotes the stock thought internet chat rooms and spam E-mailing to drive up its stock price (usually an exceptional earnings number is promoted). This unscrupulous investor then sells these unwitting investors their stock before the earnings release. When the earnings are released (which typically disappointed), the stock price then drops back down.

Some whisper numbers may actually be genuine earnings estimates (which may even have been obtained from company inside sources) and can be useful information. The trick with whisper numbers is to carefully examine the source (if at all possible) and where the figure is actually reported. If it is merely gossip over the internet, then it's probably not a valid earnings estimate but rather a figure designed to prop up stock prices prior to its earnings release.

Stock Market Business Basics - whisper numbers; picture of five investors holding up a symbolic line chart pointing upwards for increased earnings trend

Time and time again a stock rallies prior to its earnings release, only to sell off hard after the earnings are released even though the result was good (and may even have exceeded analysts' consensus estimates). Quite often there is a whisper number that was released which was higher than the analysts' consensus estimates and the market was rallying based on this higher earnings estimate figure. Even though the earnings released were higher than the consensus, it was lower than the whisper number. For the stock to continue to rally, the reported earnings will need to exceed the whisper number (which is a lot to expect).

Stock traders such as speculators use whisper numbers in a different manner and do not care if the figure is legate. They look for stocks with whisper numbers that exceed the consensus and a stock price that is responding to that overly ambitious whisper number. These stock speculators then take short-term trades in a stock that is rallying and sell before the earnings are released to make a short-term profit.

An earnings season tactic used by stock speculators is to short sell the stock or buy a put option just before the earnings release date on expectations that the company's earnings will not exceed the whisper number. If reported earnings don't exceed the whisper number for a stock that has rallied prior to its earnings release, then it's a good bet that stock prices will come down and will probably decline significantly.

Whisper numbers can also be below the consensus estimates and can be especially useful to short-term players if the consensus estimates are below the stock's earnings for the previous corresponding period. Should investors sell down the stock prior to its earnings release and the earnings released are better than the whisper number (even if less than the consensus), then the stock will likely rally.

Stock speculators are not concerned with the validity of the whisper number and their sole interest is whether stock investors are sufficiently confident to drive up the stocks price or sufficiently pessimistic to drive the down stock price prior to its earnings release.

Business Types

Stock Market Business Basics - Business Types; picture of lots of business men standing in an office area discussing the company profits over the last year

Businesses can be broadly grouped into "commodity type" and "consumer type" which are the general classifications that Warren Buffett uses.

The Commodity Type Business

The commodity type business typically operates in a highly competitive industry such as airlines, manufacturing or gas and oil production. The consumer has a choice between competing business and price tends to be the consumers primary decision to buy. That is the consumer will most likely buy from the business that offers the lowest price. For example, people tend to buy gasoline based on price rather than on brand loyalty.

The commodity type of business usually experiences fairly low profit margins and their profits tend to vary considerably over the years. These businesses may experience booming times over a short period of time but then have to provide discounts to keep their customers thus lowering their profits. In fact it is not uncommon for the commodity type business to post a decent profit one year and a big loss the next year.

From a growth investing point of view this varying profit is not desirable and it also makes it difficult to value the business other than using its net assets value.

Another issue with the commodity type business is that capital is usually required for upgrading plant and equipment to keep the business competitive. This capital expenditure can come from profits if the company actually made a profit, but if it made a loss then this only further increases the long-term debt as the money will need to be borrowed.

The return on stockholders' equity tends to be low with the commodity type business which is typically under 10% and the profit margins are usually even lower at under 5%. Basically these commodity type businesses require a high inventory turnover to make a profit and unfortunately competition can make this difficult to maintain - hence why they make a big loss the following year.

One of the biggest problems these commodity type businesses face is lack of brand loyalty. Again using the gasoline example and comparing this to say Microsoft - which has a monopoly on the computer operating system software market or to say MacDonald's where legions of loyal customers happily pay for their chosen brand.

The commodity type of business is usually faced with a mired of competing brands. An oil company producing motor oil may promote through its marketing campaign that its product is superior, but the reality is that this motor oil brand faces stiff competition from half a dozen other motor oil brands - each of which have their own marketing campaign attempting to convince consumers that their brand is superior. Any wonder why profit margins and return on equity are low.

Thus it is becoming clear that the commodity type of business with its generic product can make it difficult to receive a good return on your investment. Warren Buffett actually avoids these commodity type businesses and this now leads us to the second type of business.

Stock Market Business Basics - Business Types; picture of a group of business men walking in the city with office buildings in the background

The Consumer Type Business

The consumer type of business is characterized by brand loyalty and may well have a monopoly with little in the way of direct competition. This type of business can (to a certain extend) charge what it likes - within reason. Typically their customers are loyal to their products and will still purchase their products even if a new competitor entered the market with a comparable but cheaper product.

With brand loyalty and a possible monopoly the consumer type business will generally enjoy higher profit margins coupled with a stronger return on stockholders' equity. Also they both tend to be far more consistent year to year rather varying widely as with the commodity type business.

The annual earnings for consumer type business tend to show much more of an upward trend and negative earnings years tend to be rare. In fact the consumer type business is about the only business type where for most years the earnings will show an increase over the previous year's earnings. This is a big plus for investors as it allows the business to be valued based on its earnings growth rate. This is why Warren Buffett is interested in the consumer type of business.

The consumer type business may still need capital for upgrading plant and equipment in order to retain their customers loyalty, but since the business makes a decent profit each year it is in a good position to finance any required capital expenditure. This is in contrast to the commodity type business which typically needs to borrow for its capital expenditure thus increasing its long-debt even further.

The consumer type of business may have monopoly either directly or indirectly.

A direct monopoly is where the business has no real competitors for that specific product. An example is a Toll bridge - if the customer wants to cross the bridge then they have to pay the fee - or else they will need to detour and find another way across.

With an indirect monopoly the business does have some competition but there is a strong brand loyalty.

The difference between a direct and an indirect monopoly:

  • With a direct monopoly the consumer has no real alternatives for that desired product or service. If the consumer wants it they can only get it from one place.
  • With an indirect monopoly the consumer is loyal to that brand even though there are other competing brands that the consumer could purchase.

Commodity Type vs. Consumer Type

An example of a commodity type business is United Continental (an airlines company) and an example of a consumer type business is MacDonald's (a fast food company with indirect monopoly).

The earnings per share, profit margins and return on stockholders' equity (ROE) are shown below in table 1. which provides a side by side comparison for these two business types.

Graph 1. Commodity type vs. Consumer type

Business Types - Graph of Commodity vs. Consumer showing earnings, ROE and profit margin for two different companies

It's not hard to see which business is the more profitable. United Continental's earnings are all over the place - showing a small profit for some years while displaying losses for the remaining years with some huge losses. Compare this to MacDonald's which has a general trend of increasing its earnings with most years recording a higher earnings figure over the previous year.

As investor's it is profits that we are interested in and so is Warren Buffett.

When looking at the profit margins for United Continental it's the same story as with its earnings - when they are positive they are generally low but when they are negative there are some really big negative numbers. It's a similar story with United Continental's ROE.

Now contrast this with MacDonald's profit margins and ROE which are all positive and reasonably consistent when compared to United Continental's.

The problem that United Continental faces is that most of its customers will fly with whatever airline provides the cheapest airfares. Contrast this with MacDonald's where its customers are loyal to its burgers - its customers will continue buying MacDonald burgers even when a competitor offers cheaper burgers - now that's brand loyalty and it shows with its strong profit margins and ROE.

It's the consumer type companies like MacDonald's with its brand loyalty that attracts the attention of Warren Buffett.

The Consumer Monopoly

Stock Market Business Basics - The Consumer Monopoly; picture of a consumer visa credit card for investors with the word monopoly written on the front in large scale capital letters

Consumer monopoly businesses are financially in good shape over the long-term. These consumer monopolies characteristically have strong balance sheets with earnings growth that consistently trends upwards. They have solid profit margins coupled with strong returns on stockholder equity.

Even though consumer monopolies are financially strong business they are still subject to business cycles and adverse economic conditions. These conditions will typically cause stock prices to decline - sometimes significantly. But because of their strong profit generating ability these consumer monopolies tend to bounce back when the economy recovers. This provides a buying opportunity for the astute investor to accumulate stock at depressed prices and Warren Buffett makes good use of this strategy.

A consumer monopoly business can have a direct monopoly where they have no real competitors for its product or they can have an indirect monopoly where their customers are loyal to their brand but they do have competitors.

Direct monopolies are much rarer since in the business world as it is only a matter of time before a competitor provides a competing product. A direct monopoly business might start off with a new and unique product and as such has no competition, but over time it will have competitors and so will at best become an indirect monopoly if its customers remain loyal to the original product.

Most direct monopoly businesses tend to revolve around some regulated industry such as a road toll operator or a water supply company which is the only one that services a district. These regulated businesses are generally not free to set their own pricing since they are regulated.

The indirect monopolies are far more common and a simple walk through a grocery store or a shopping mall will reveal a mired of products that have brand loyalty.

Stock Market Business Basics - The Consumer Monopoly; picture of a consumers hand approving the coca-cola bottle with thumbs up

A good example is Coca-Cola which has its legion of loyal drinkers who insist that coke tastes better than say Pepsi or Dr Pepper. While Coca-Cola has competition from Pepsi and Dr Pepper, those consumers loyal to Coca-Cola will remain faithful to coke and continue to consume their product - this gives Coca-Cola an indirect monopoly. It should be noted that both Pepsi and Dr Pepper have themselves an indirect monopoly with their own loyal consumers who will not drink Coca-Cola.

The monopoly product can also be a service rather than a physical product. An example is H&R Block which provides tax preparation services to the general public - this is an indirect monopoly for a service. H&R Block does have competition but it also has its legion of brand loyal customers who use H&R Block every year for their tax affairs.

A business with an indirect monopoly or a direct monopoly that is not in a regulated industry - do not have the competitive pressures and thus are more able to charge a premium for its product/service - or at least do not need to provide discounts. Warren Buffett specifically looks for consumer monopoly businesses to invest in.

The characteristics of a consumer monopoly business:

  • The historical annual earnings tend to show a distinctive upward trend over a 10-year period and negative annual earnings are extremely rare.
  • Profit margins are high and are often above 20%.
  • The return on stockholders' equity (ROE) tends to be high and is often above 30%.
  • They tend to carry lower long-term debt and have low debt-assets ratios - often well below 50%.
  • The product or service is generally well known.
  • The business can usually raise prices in line with inflation without losing customers.

An example of a consumer type business with an indirect monopoly is Apple, Inc. and its earnings, profit margins and return on stockholders' equity are shown below in table 1. for the last ten years.

Graph 1. Consumer monopoly business

The Consumer Monopoly - Table of Consumer monopoly business with earnings, profit margin and ROE

Looking at the figures in table 1. above for Apple, Inc. reveals how strong Apple's earnings growth is - there is a noticeable upward trend with no negative values. Also the profit margin has been generally increasing up to around 20% and the ROE has also generally been increasing to around 30%. This is a very profitable business thanks to its legion of loyal customers who eagerly await Apple's next I-phone or I-pad release. Even though these customers can easily purchase a competitor's comparable product, these loyal customers will still purchase an Apple branded product.

A consumer monopoly will at some stage report annual earnings that are noticeably less than the upwards trend.

For example Apple, Inc, could report the 2015 fiscal years earnings at say $4.00 per share. The reason for the earnings decline should be investigated which may reveal that the decline was due to a general weaker market for its products (which is expected to be short lived). In this case the earnings decline may provide a good buying opportunity as the stock price will most likely have declined and the earnings will likely pick up again.

Another more worrying earnings report would a negative 2015 fiscal earnings figure of say -$1.00 per share. It would be prudent to investigate the reason for such an out of characteristic earnings result.

The reason might be that a large capital expenditure was required and earnings will likely pick up next fiscal year - in which case the stock will likely provide a good buying opportunity.

However the reason could also be that a competitor has released a new product which has enticed Apple's loyal customers to abandon Apple and pledge their loyalty to the new product. This is the less likely scenario but it is possible. Negative earnings that are out of character should always be invested.

Businesses that are conservatively financed without a lot of debt are far more able to recover from a negative earnings year. They have the cash to rectify whatever caused the negative earnings. The company may need to release a new model or work on its marketing image and this requires money.

Businesses with low debt levels could repay their long-term debt in just a year or two rather than a decade or two. This means they can weather any adverse business conditions as they have plenty of cash.

Consumer monopoly businesses are very profitable businesses that do not require large expenditures research and development or plant and equipment.

It's much easier to see how a consumer monopoly can increase its business value other the long-term compared to other business types. If the business value increases over the long-term then the stock price will broadly raise accordingly.

This is why Warren Buffett does not concern himself with the future stock price - he knows that the consumer monopoly business will likely continue to grow into the future along with its stock price.

Warren Buffett particularly likes to buy when the stock price of a consumer monopoly business declines as these businesses have the financial strength to propel them forward into the future.

Finding Consumer Monopolies

Stock Market Business Basics - Finding Consumer Monopolies; picture of an investors hand pointing to a monopoly sign in white writing on a glass wall panel

A consumer monopoly is a business that either has no real competitors for its product (a direct monopoly) or their customers are loyal to their product but they do have competitors (an indirect monopoly).

Direct monopolies are much rarer since in the business world as it is only a matter of time before a competitor provides a competing product. A direct monopoly business might start off with a new and unique product and as such has no competition, but over time it will have competitors and so will at best become an indirect monopoly if its customers remain loyal to the original product.

An example of a direct monopoly company is Dolby Laboratories with its Dolby Digital sound systems which are used in cinemas and home theater systems. The manufactures of sound systems must use Dolby licensed technology - this gives Dolby Laboratories a direct monopoly.

However, most direct monopoly businesses tend to revolve around some regulated industry such as a road toll operator or a water supply company which is the only one that services a district. These regulated businesses are generally not free to set their own pricing since they are regulated.

The indirect monopolies are far more common and a simple walk through a grocery store or a shopping mall will reveal a mired of products that have brand loyalty. The indirect monopoly with its brand loyalty is the focus of this article.

To find a consumer monopoly business the investor needs to find a product or service with brand loyalty. These brands are usually quite obvious to anyone who is in the market for a particular product or service. For example Pepsi cola or Doritos tortilla chips - both are popular brands with their loyal consumers - indeed both of these products actually come from the same company - PepsiCo, Inc. A company can have more than one indirect monopoly product.

A good place to start looking for a company with an indirect monopoly product is to look for products that are consumed quickly or wear out quickly. This provides turnover for the company as the consumer constantly needs to repurchase that product. These products will often fall into the consumer staples and consumer discretionary sectors.

These indirect monopoly products are usually small ticket items and are relatively inexpensive. The investor can easily find these with a quick stroll through a grocery store or a shopping mall and noting the items on the selves. These brand items are products that the grocery stores and the shopping mall merchants must stock in order for them to remain in business.

These brand items are manufactured or produced products and the company that makes or provides those brand items generally rely on advertising to maintain their brand loyalty. The businesses that benefit from this advertising demand are advertising agencies and media companies. While the media industries can have a large number of competitors the industry is also a profitable industry. Think of the Wall Street Journal which is owned by News Corp.

Brand loyalty can also be found in the financial sector. The credit card industry is a good example with consumers loyal to a specified company such as Visa or American Express. Once a consumer takes up a card from one of these credit card companies they will tend to always use that same credit card company - now that's brand loyalty.

Another place to find brand loyalty is in the food industry. When thinking of fast food what comes to mind - how about MacDonald's - now here's a product with its own army of loyal soldiers! The brand loyalty here is with the hamburger as a whole (Bun, meat & toppings) rather than with the company that actually made the meat for the hamburger. MacDonald's have taken a simple thing like a hamburger and turned it into a brand name product.

Brand loyalty can be found in the technology sector. Intel enjoys an indirect monopoly with its computer chip that a lot of people insist must be present in their new computers. In fact computer manufactures place use Intel chips in a large range of their models. While Intel does have competitors, its brand loyalty ensures that Intel remains a market leader.

An indirect monopoly does not mean that there are no competitors - it means that the consumers are loyal to its product and are unlikely to switch to a competitor brand even if the price was cheaper. The brand loyal consumer has convinced themselves that their chosen brand is superior. It's this brand loyalty that effectively provides the company with a monopoly over those brand loyal consumers.

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