As the cliche goes, the only constant is change. I had a great former colleague, we’ll call him Blake B., who asked me a very serious question on investing. Is this the time to put money in, or is this the time to pull money out? I spent some time thinking about this, and the more I delved into the thought, and the more I analyzed my positions on what had been working and what had not, the more I realized the reality. Everything has been pulled forward, and the new eventuality is here today.
Secular change is the greatest force in investing success. For example, one could look at all the financial statements you like on the best-run market-dominating Buggy Whip factories, but the reality is (as it was in 1900), secular change (in this case to the automobile) trumped any and all value or investment rational. “But look at their earnings multiple!” you might say – or “look at that dividend while we wait!” – or even the proverbial “Doesn’t matter what the next big thing is, they’ll be ready for it!” (Insert CSCO, IBM, INTC here) – or will they?
With the unfortunate and terrible onslaught of COVID-19 thrust onto the world, we have all made changes in our lives. At one time, Visa (V) and Mastercard (MA) fraud detection AIs were suddenly thrust off their rails as consumer buying patterns changed en masse. Why is SuzyQ suddenly buying 15 cases of toilet paper online when she hasn’t made 2 purchases in 24 months? What is going on with this potential mass fraud on hand sanitizer, bleach and soap – asks the AI? But these are not the secular changes I am referring to. The true changes for the investment world are how we work, live, and play into the future – post the COVID-19 pandemic.
The fact is, the world has changed. If you are the CEO of a mid-level company selling into Costco (COST) and Walmart (WMT) and thinking how to raise your sales 10% next year, you are already nearly doomed to failure. Online sales have exploded, and consumer buying patterns have completely shifted and accelerated. Costco and Walmart have realized this, and they are not waiting on mid-level manufactures to fill the void. They are filling it themselves. The value proposition you think you may provide is being eroded.
The entire working experience has also changed. Work remote, conference in – the ant farm open source workspace is dead. How will companies work and thrive in the new secular changing economy?
Well, let’s imagine the future company that you could start today. You can do this because you have no legacy or baggage costs.
All workers are remote
No need for massive office spaces. Maybe at a large level a satellite office where teams could meet very occasionally.
A deeper and broader talent pool
Talent willing and able to work for less. This is not exploitative – but there is probably a great 70-year-old electrical engineer that would be thrilled to make 80k a year and work on his beach property in Fiji. This opens the door to far more talent than has been accessible in the past.
All salary information is well-known and online now
Simply post your payroll for everyone in the company. When Johnny asks why he doesn’t make as much Jill, have that honest conversation on why and what Johnny can do to improve. Employees are no longer in the dark on what their peers are making. Glassdoor and other online sites know exactly what you are paying.
How can you best leverage your talent pool and workforce in a remote economy?
Transparency. Transparency. And, of course, Transparency. Employees will and should have an equity stake in the business and the fully transparent profits of the company. These are the companies that will thrive. This “I own it all and you are lucky to work here, or I’ll find someone else” mentality is dead. Old companies will not be able to compete with a collaborative, socially diverse, and energized workforce. A company with a legion on entrepreneurs will crush the competition. But it just can’t be words – it must be deeds.
These types of companies will excel in the new era. But let’s get back to the investing side of the new world. Where, as investors, can we have great opportunities?
It is not impossible for older companies to change – but it is difficult
There will be some great opportunities in market leaders that embrace the new age and change, as opposed to the “moat builders” that are defending their turf. If your only defense against the onslaught is regulatory, a patent, or abusive business culture that prevents competition, prepare to have your castle stormed.
Look for companies that embrace a collaborative, worldwide explosion in talent potential. My first thought is Fiverr (FVRR). Fiverr connects a talent pool of mercenaries for hire that can help small and big businesses succeed. Need an online commercial produced? – No problem. Need some voiceovers for your ad? – Simple. Need some packaging and design? – Get it done out of Sri Lanka easy. Yes, the stock is crazy expensive, but with 80% margins and an exploding do-it-for-hire workforce, it fits into the new economy mold very nicely. Pick up some on market declines and you could have a 5x-10x bagger in a few years. Full disclosure: My cost basis on FVRR is 40.14. Apologies for not writing about it earlier, but I was busy getting fired from my old-school corporate job.
Retailers – Look for those that have embraced the new model: Tractor Supply (TSCO) and Home Depot (HD) come to mind. They do supply the work-from-homestead crowd and have a nice tailwind for sales expansion. Floor & Décor (FND) has also been a big winner, but up here north of $70, I just can’t recommend a new purchase. It’s good to buy on a decline.
Manufacturing – Just one example, but check out Purple Innovation (PRPL). The company was selling a large amount via wholesale, and it learned some valuable lessons in the new economy. Of all manufacturers, it has been one of the quickest to pivot to a direct-to-consumer model. Purple Innovation was selling direct before, but has greatly expanded these efforts. Along the way the company figured out, in a very short time, a few valuable points. First, its margins are higher. Second, it is in better control of its message and brand. Third – which the company may or may not have figured out yet – is that it is in a better position to control production and demand with better visibility to actual consumer demand. Purple Innovation has recently announced a factory expansion just southeast of Atlanta, which will give it a great footprint in the Eastern US. I’ve been in the stock from $7-10 on multiple buys – so again, sorry to write so late on it, but I’m not selling any shares here.
Insurance Companies – Maybe overlooked, but with less people driving, there will be fewer accidents and fatalities. Funny thing how these companies work; they try to breakeven on claims and invest the principal to obtain good market returns. Many are “generously” giving premiums back to consumers. I see this as corporate brand control from the ginormous profits the companies must be generating. When the gargantuan quarterly profits are reported, they will be able to say, “But we gave back XXX to policyholders – see?” Pick one, buy them all. Shooting fish in a barrel on those guys. More of a one- to two-year trade, but a great opportunity.
Even RGA works well here. Down from 150 into the 80s on excessive death claim fears. Combined with accident claims, overall claims are not up that much in 2020 over 2019. This is a difficult topic to discuss. Putting human lives on an actuary chart seems callous. Our condolences and heartfelt sympathies to all those affected. As this is a financial website, I’ve taken the data specifically from the CDC, and there was a spike, but that seems to have leveled off. Make your own determinations, but I do not think it is worth 80 points of decline for RGA. With a solid dividend, it could easily trade back to 150 in 12-18 months.
Document signing – DocuSign (DOCU). Maybe a bit too obvious, but can it really be wrong in the new age? I’d hope for a pullback, but it seems to be the future. I’m not in this stock yet, and I don’t really have a good excuse.
Then, there are the more obvious: Shopify, Square, etc. These stocks help budding entrepreneurs and small- to large-size companies embrace the new economy. I almost think these are too obvious and have run a bit too far. But they should be bought on any weakness. I don’t have a crystal ball, maybe they can be bought here – but they are just a tad too expensive for my taste. “But hey – you just recommended Fiverr and sixty bazillion times multiple… why not Shopify?” Fair question. I tend to look at the overall market cap of a stock and try to imagine a future – can I see a current Fiverr with a $3 billion market cap going to $10 billion? Yeah. Can I see a Shopify with a $177 billion market cap going to $450 billion? Not as easily.
The point of this article is to promote thought
With the world changing so quickly, there will be secular changes in the way we live, work, and interact. Do the companies in your portfolio have the wind in their face or at their back? Do not get trapped into valuation metrics on companies with business models that are as arcane as the Roman aqueducts (beautiful and inspiring, but better solutions exist). Are the companies in your portfolio just trying to build a moat? They are sure to be overrun.
There has never been a better entrepreneurial time than now. Things that were so difficult in the past are much simpler now than even a few years ago (merchant accounts, web design, shopping carts, overseas sourcing, freight and logistics, graphic design). The best and brightest will be moving into the new age. Companies that can embrace this dynamic and harness it will better succeed than old-style management structures. No longer can quality failures or marketing gimmicks succeed in the culture of online reviews, which are just waiting to trash your brand. Even the Dutch East India Company eventually faded to obscurity (1602-1799). If companies do not embrace their employees and work with them in a new way, the best and brightest will move on – and those that can’t will stay. Companies that support the hyper-modern employment era, which has been accelerated from 2030, will be the winners. To the rest, well, they will still have their dividends – for a time. Old-style management has to change. You can’t just say you care about your people – you really have to believe it and walk the talk. There is nowhere to hide in today’s rapid-fire information zone.
Have some good ideas that fit this mold? Let me know below and we can dig into them one by one.
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Disclosure: I am/we are long PRPL, FVRR, RGA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.