The market has come a long way since its last major crash — an event that transferred much wealth from the ignorant to the informed. It almost feels like deja vu when you see VCs lining up again to fund startups, or companies commanding unreasonable stock price multiples based on little more than hope for the future. Don’t you wonder what we’re not knowing this time around? I don’t wish to convince everyone to be value investors, but what if there’s a way to play a popular trend, but also err on the safer side of risk to avoid the extreme volatilities?
There were a few survivors from the market crash. Some companies were made household names during the tech bubble, withstanding the first onslaught. Names like Amazon and eBay attracted investors like moths to a flame back in 1999, and those names haven’t lost their shine yet. There now exists more choices and competition, but most people still think of these companies first. But for every Amazon in 1999, there were many failed examples. Playing with these new emerging companies can yield huge rewards but can also become huge busts. Feeling lucky yet? If you do, you might tendencies towards a gambler rather than an investor.
Being the admitted value investor on the InvestorGeeks roster, technical charts all look greek to me. I also don’t often feel the lure of stocks boasting a huge following behind them. Contrarily, I prefer coming across an undervalued boring stock rather than an undervalued attractive stock. I’m not crazy, I’m only looking for predictability in those companies. It’s true that attractive stocks can also be predictable companies, but the analysts and investors who follow these popular stocks are seldom predictable or rational. Those irrational behaviour will carry along a degree of risk when buying the stock.
So by my own admission, I would not be interested in popular Amazon and eBay right? Even if you build a case that these 2 names are currently facing some hard times, it would not be enough to move me into a contrarian interest. Call me old fashioned, but where growth managers turned fad-value may find opportunities, I see competition risk, difficulties in evaluating the companies’ intrinsic values, and a mad dash to diversify business lines while they haven’t fully established a competitive moat in their core business. But behind every successful business, there are suppliers, service providers and business partners that have benefited from its growth. If we starting putting on the CEO hats ourselves and dig deeper into how a business operates, we may be able to discover more investment prospects.
Where To Look
“Plus ça change, plus c’est la même chose”. That’s French for “the more things change, the more they stay the same” (thanks to my high school education!). Just because the latest piping hot company comes along, doesn’t mean it won’t interact with old established businesses. For example, web commerce has been said to transform the way goods and services are transacted. But whether you order from an old fashioned Sears catalog or buying from an online website, you still need those things shipped to your doorstep, right?
More and more products are delivered from warehouses to homes, and from homes to other homes. This has placed an increased delivery demand on the changing commerce economy. In my Amazon and eBay example, the top names that are benefiting from increased web consumer spending are United Parcel Service (UPS), and Fedex (FDX). The courier industry is also more stable when compared to eCommerce. Whether Amazon’s business is operating smoothly or if it’s losing its shirt while offering free shipment, courier companies are still getting paid. The courier business has proven to be a safer (from a risk perspective), and more fundamental “old world” alternative to trendy eCommerce stocks.
Distribution Is King
Let’s take a look at distribution costs. In the product peddling game, this cost remains relatively constant throughout a product’s lifecycle. The products themselves usually experience a depreciation of their prices over time due to innovation and competition. Buying an HDTV now versus buying an HDTV 2 years from now will yield drastically different prices, but the shipping costs for such a purchase will not decrease. That’s why businesses place so much emphasis on managing distribution channel costs. If companies can master this aspect of their operations (example: Walmart), they will have a significant edge over their competitors.
There are concerns that rising fuel costs may eat into the margins of the shipping industry. But what choices will a consumer who just bought that HDTV have, if he/she wishes to enjoy that purchase as soon as possible? Shipping companies have been able to easily pass on the increased costs to the consumer who are essentially at their mercy.
It Doesn’t Stop There!
Finding a play on shipping companies through eCommerce stocks is merely illustrating an example of finding fundamentally sound but perhaps boring companies lurking behind a successful attractive prospect. Does this mean I recommend UPS or Fedex? This is where I wish to caution that even if a company is good, it doesn’t mean it’s good at any price. But next time, rather than listening to your neighbour, that janitor, or that cab driver about the latest “hot” stock, you might just do more research about the business operations itself. Who knows! By thinking more like the business owner, you might find some solid proven business partners that though boring are also benefiting from the trend.
There Are Still Bumps Along The Way!
Of course, just because these business partners are benefitting doesn’t mean that they are bullet-proof candidates. There are many caveats to look for when evaluating these coat-tail riding stocks. For example, is company A deriving the majority of their revenue from only one customer? I’m sure there are more caveats that you can think of. If you do, please share with us in the comments below!