Do Firms That Create Cool Things Make for Hot Stocks?

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Clemson v Maryland
G Fiume/Maryland Terrapins/Getty ImagesThe Maryland Terrapins wear Under Armour shoes against the Clemson Tigers during the annual Play 4 Kay pink game in February.
Daymond John and Jim Cramer have compiled their second annual list of hot stocks for their Lifestyle Brand Index. Over the last year, the index has outperformed the Standard & Poor's 500 index (^GPSC), 34 percent to 18 percent.

John is founder of FUBU and now more famous as a shark on the ABC's "Shark Tank." Cramer told smartCEO magazine, "He's made more money for 'Mad Money' viewers than just about any guest I have had in more than 2,000 shows." Since John's first iteration of the Lifestyle Index in 2010, those stocks are up 92 percent, compared to the S&P 500 up 54 percent.

This Year's Hottest of the 'Cool'

The 2014 list is Under Armour (UA), Facebook (FB), Tesla Motors (TSLA), Walgreen (WAG), Netflix (NFLX), Wells Fargo (WFC), AOL (AOL) and Samsung (SSNLF).

There is a notable absence of names including Urban Outfitters (URBN), Visa (V), Yahoo (YHOO) and Nike (NKE). The biggest surprise delisting was Apple (AAPL), replaced by Samsung (SSNLF). John deems Apple phones not as cool anymore, but the new Samsung smartphones red hot.

AOL, publisher of Daily Finance, was added because, according to John, "They've generated a new delivery of content that we love." Aww shucks, John.

Under Armour is "smoking, absolutely smoking," says John, thanks to a new fashion focus from the athletic wear company. The company is going toe to toe with Nike on footwear and to the mat with Lululemon Athletica (LULU) for yoga fans.

Facebook made the list again, despite continuing reports of younger users leaving. "Even Grandma is on Facebook and it's still cool," John argues.

John and Cramer like Tesla because both believe the company will sooner, rather than later, come out with an affordable mass market electric car.

Walgreen redefines what a drugstore can be into a health and wellness center that also offers a destination experience with on-site manicures and pedicures, juice bars and a spa-like vibe at some larger locations. The company has been expanding in Europe with a stake in Alliance Boots, and it is anticipating trends, offering battery charging stations for electric cars, for example.

Netflix -- formerly hot, then not, then hot again -- is creating its own media empire with "House of Cards," and "Orange is the Black." It is attracting A-list talent and is redefining the way Americans watch TV even as it did with movies.

Wells Fargo (WFC) is another cool lifestyle brand, which at first might seem a head-shaker for a company founded in 1852. But John notes it is revitalizing inner cities all over America with its commercial and residential loans. He also admires its support of entrepreneurship, especially as he says, "Fifty percent of millennials say they will never work for anybody in their entire life."

Sum it up in Two to Five Words

John's recommendations are all based on his definition of a brand with strength you should be able to "sum it up in two to five words." It should also have a wow factor. But what's the true strength of these brands?

Wells Fargo is Warren Buffett's largest holding, pays a dividend of 2.5 percent and is one of the largest commercial and community banks in the U.S.

Under Armour was founded in a University of Maryland dorm as performance wear for athletes that last and are truly comfortable. It has been a winner since 2010, up tenfold.

Facebook, the social media brand with a billion unique users globally, continues to evolve and monetize itself. John says,"At the end of the day [they'll] be able to sell to everybody." Other reasons: Facebook will soon launch a mobile ad network, and acquisitions such as Instagram and What's App seem to be working out well.

%VIRTUAL-article-sponsoredlinks%AOL, not to toot our own horn, owns Huffington Post and TechCrunch and is moving into original online video content. AOL is No. 1 in video ads in the U.S.

Netflix has benefited from the burgeoning cut the cord cable movement and binge viewing.

Since 1901, Walgreen has been a trusted pharmacy chain, growing faster than peers CVS (CVS) and Rite Aid (RAD). John loves the new, "beautifully lit" stores and goes into Walgreen every day.

Tesla has made the electric car into a performance vehicle winning automotive media awards. CEO Elon Musk just announced that Tesla will manufacture in China within a few years to better penetrate that huge market.

Samsung's new Galaxy phones are incredibly popular and gaining on Apple. However, Apple will debut another phone in the fall.

The Bottom Line

All of these -- save Wells Fargo and Walgreen -- don't pay dividends and are fairly expensive on a price to earnings ratio basis. Tesla in fact has negative earnings per share. Netflix as of the April 21 close before earnings has an 184.93 P/E, the highest of the bunch. John may not be a stock-picker, but when it comes to brands, he is the man.

More from Annalisa Kraft-Linder

Do Firms That Create Cool Things Make for Hot Stocks?

A big, bold "SALE" sign helps get people in the store, where they are likely to buy non-sale items.

Once you enter, there's the shopping cart. This invention was designed in the late 1930s to help customers make larger purchases more easily.

 

In supermarkets, high margin departments like floral and fresh baked goods are placed near the front door, so you encounter them when your cart is empty and your spirits are high.    
Flowers and baked goods also sit near the front of stores because their appealing smell activates your salivary glands, making you more likely to purchase on impulse.

Supermarkets like to hide dairy products and other essentials on the back wall, forcing you to go through the whole store to reach them.

 

    

Once customers start walking through a store's maze of aisles, they are conditioned to walk up and down each one without deviating.

Most stores move customers from right to left. This, combined with the fact that America drives on the right, makes people more likely to purchase items on the right-hand side of the aisle.

Anything a store really wants customers to buy is placed at eye level. Particularly favored items are highlighted at the ends of aisles.
 

There's also kid eye level. This is where stores place toys, games, sugary cereal, candy, and other items a kid will see and beg his parents to buy.
Sample stations and other displays slow you down while exposing you to new products.
Stores also want items to be in easy reach. Research shows that touching items increases the chance of a purchase.

Color affects shoppers, too. People are drawn into stores by warm hues like reds, oranges, and yellows, but once inside cool colors like blues and greens encourage them to spend more.

Hear that music? Studies show that slow music makes people shop leisurely and spend more. Loud music hurries them through the store and doesn't affect sales. Classical music encourages more expensive purchases.
Store size matters, too. In crowded places, people spend less time shopping, make fewer purchases (planned and impulsive), and feel less comfortable
.
Stores not only entice you with sales, they also use limited-time offers to increase your sense of urgency in making a purchase.
The most profitable area of the store is the checkout line. Stores bank on customers succumbing to the candy and magazine racks while they wait.
Finally, there is the ubiquitous "valued shopper" card. This card gives you an occasional deal in exchange for your customer loyalty and valuable personal data.
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