Warren Buffett's No. 1 Metric for Picking Winning Stocks
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Warren Buffett understands a thing or two about successful investing, and he says pricing power is the most important factor to consider when making investment decisions. Let's look at why this is such a crucial aspect to keep in mind, analyzing examples from Apple and Chipotle Mexican Grill , two companies delivering extraordinary performance for investors while flexing their pricing muscle.
The importance of pricing powerPricing power is a company's ability to raise prices without losing too much sales volume because of this increase. This factor has some clear advantages from a financial point of view, as higher prices usually mean bigger profit margins for the company and higher returns for investors in the long term.
Also, pricing power says a lot about a company's competitive strengths. Competition tends to keep prices at bay. If a company raises prices too much, consumers will typically go for a competitor's cheaper product. Businesses with superior pricing power are those with competitive differentiation, meaning that consumers find something unique or superior about that company and its products.
To have pricing power, you need competitive strength. This can come from a higher-quality product, a differentiated brand, or technological superiority, among other possibilities. In addition to generating higher profitability, competitive strengths protect the business from the competition, and this substantially reduces the risks for investors.
AppleMost electronics manufacturers need to aggressively compete on price to sustain market share. Apple, on the other hand, benefits from tremendous brand power. Both Interband and the Forbes Brand Ranking consider Apple the most valuable brand in the world, and this is a huge advantage for the company and its shareholders.
CFO John Hartung said in the last conference call:
The article Warren Buffett's No. 1 Metric for Picking Winning Stocks originally appeared on Fool.com.
Andrs Cardenal owns shares of Apple and Berkshire Hathaway. The Motley Fool recommends and owns shares of Apple, Berkshire Hathaway, and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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