... then maybe you start to rationalize it. Maybe they have a brand that's so powerful customers want to pay for something they don't need. And that brand creates a moat. Maybe its the greatest company in the world! Or not? "Climate change will kill them! Climate change will create more demand!?" You can follow any line of reasoning your mind takes.
Maybe this is a sign of brain damage but this idea has been on my mind a lot lately.
Companies whose products we don't need and are only differentiated by some perception-of-differentiation or services sold well in the man-hour impression are selling snow to eskimos. EVen outside the consumer space there are more of these than one cares to think and some may be considered excellent investments b/c they are so darn good at selling.
This is not a ground breaking observation nor a suggestion to buy a small company ahead of an eventual product or brand development or new service hire, just to recognize the power of the sales function. It's something we miss at times. Maybe an unwillingness to acknowledge that differences are matters of perception and perceptions are pliant and easily manipulated.
Which is where a good salesperson or a good sales experience comes in. I know it sounds antiquated but in less modern terms anything that eases a transaction forward - or enables a bias or emotion - is a good salesman. It is invaluable at differentiating. A "like" on the great confirmation bias machine. These are hard to generate but scale well across a network.
I'm not stupid enough to compare Jobs' Apple with a waste brokerage business or any other small services companies LCA owns, but a handful are growing their costs / expenses / expenditures towards selling / marketing / product improvement with the expectation that revenues will follow.
If the market considered a return on investment likely or probable, these stocks would trade at higher multiples in anticipation of the eventual rebound in earnings. Neither me nor the market knows the future but we are anticipating different outcomes.
Long Cast Advisers recently published it's 3Q17 letter:
"3Q17 was our eight quarter in business. Cumulative returns on accounts managed by Long Cast Advisers increased 8% in 3Q17, net of applicable fees. This was better than the various indices against which we benchmark ourselves. YTD returns through the end of 3Q17 are 21% net of fees. Since inception, we have returned a cumulative 57% net of fees, materially ahead of our benchmarks."
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ALL RIGHTS RESERVED. PAST HISTORY IS NO GUARANTEE OF PRIOR RETURNS. THIS IS NOT A SOLICITATION FOR BUSINESS NOR A RECOMMENDATION TO BUY OR SELL SECURITIES. I HAVE NO ASSURANCES THAT INFORMATION IS CORRECT NOR DO I HAVE ANY OBLIGATION TO UPDATE READERS ON ANY CHANGES TO AN INVESTMENT THESIS IN THE COMPANIES MENTIONED HERE. I MAY OWN POSITIONS IN T
Good post. I like the theme of patient investors looking at improvements that don't screen well but indicate future profits.
ReplyDeleteI tried to capture some examples of this theme below:
1. As you suggested above- Companies increasing spend towards sales & marketing but that hasn't shown up in revenue and profits yet
2. REITs that have cancelled dividend while they clean up their portofolio.
An example in this area is DS. Others that are in play but haven't shown improvements in dividend or AFFO (things that screen well) are RSO and STAR.
3. Commodity companies that are lowest cost producer and are cutting costs, but these improvements haven't shown up yet in profits due to low commodity price. The returns are amazing once the tide turns and commodity prices pick up
The one exception I see for #1 above is RMGN which was a small position (<2%) for me but has lost ~67% on paper. They've shown promises of improved sales but the revenue hasn't gone up for 2+ years. Things might still work out, but trying to see if there are some takeaways from this example.
Adding one more example:
Delete4. Rollup strategies where company uses 10X+ EBITDA to acquire 5X+ EBITDA company. If they are successful in executing, they can keep doing it for long time.
Example: EVI
Thanks for your comments.
DeleteIt's not apparent to me what problem RMG solves for its customers. Without understanding this I can't possibly can involved in becoming a part owner of the business.
I'll add that becoming a part owner of a business solves the problem of capital deployment and I like to do this as few times as possible so that I can generate a return on that investment over as long a time as possible.
Thanks for your comment. It makes sense to become part owner of a business as few times as possible.
Delete