Competitive Advantage

[craft]

Hi Chops,

These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.

Cheers

They will certainly fall if their competitive advantage is eroded. Not the time to buy them though.

 

[McLovin]

APN

Owns radio licenses, which have held up the best of all traditional media. Owns the best network of outdoor advertising in Australia, again not easy to replicate. It's hard to tell what's happening in their regional newspaper business but on the surface it does appear to not be as affected by the structural change as metros.

 

[ROE]

You have made a boring day very funny .

Maintain your own competitive advantage.

Cheers

You sum up nicely
Company competitive advantage + your own advantage = good return

Have you ever seen Warren Buffett tell people what he's buying ... He even got a sec exemptions not to lodge substantial holding until he fully loaded

 

[chops_a_must]

Hi Chops,

These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.

Cheers

You could put the whole market on a watchlist for shorts then.

They wont necessarily fall from where you buy them.

But I'd say you need to be aware of where they are in the growth cycle.

For instance, COH once had market dominance and competitive advantage. Now that it is trading at a lower P/E, does it have the same factors it once did, or has the risk for other competitors taken the fluff out of the price?

None of these companies with a distinct advantage will ever hold that position eternally. High margins, and barriers to entry will eventually reduce.

Just my ramblings..

 

[sinner]

Have you ever seen Warren Buffett tell people what he's buying ... He even got a sec exemptions not to lodge substantial holding until he fully loaded

and yet, Berkshires 13Fs still provide plenty of alpha on the table if you want to follow along
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=806246

 

[sinner]

Point is, trading the factor is more important than timing the factor.

 

[robusta]

APN

Owns radio licenses, which have held up the best of all traditional media. Owns the best network of outdoor advertising in Australia, again not easy to replicate. It's hard to tell what's happening in their regional newspaper business but on the surface it does appear to not be as affected by the structural change as metros.

This is interesting, not a company I have ever looked at thank you.

i suppose TLS should be on the list. They have the money to bash their way through the market.

Many Australians will stick with Telstra no matter what for their telecommunication needs, that is a nice moat.

I'd add RFG and DMP. They're both on the pricey side but have show a long term ability to grow EPS and have good scale. DMP has taken to the internet quite well - from memory up to 50% of sales is now done online.

DMP I agree with totally, RFG however I have never been able to get my head around, the group of businesses are not any I would personally go out of my way to frequent and they also do not have a significant point of difference to their opposition in my opinion.

Prob add CPU in there. Not a great performer lately, but they do have global scale and reach and once the global economy starts growing strongly again they will be very leveraged to it.

Scale and ease to deal with probably the main advantages with CPU

CDA would be another company. They have the tech that puts them in the front globally. Read an article from a year or 2 ago where they out competed some Chinese company that was selling fake product, but CDA was so good at their manufacturing that eventually the Chinese company signed a distribution deal with them.

Another one I will have to look inti.

SEK prob needs to be on the list too. They have a stranglehold on the online job market in Australia and are moving internationally now too.

You are probably right with Seek but I have allways worried how sustainable their network effect is up against Linkedin.

On a Global basis you can try the IOO ETF that invests in the top 100 global companies or the IXI ETF that invests in the top global consumer staples companies. Pretty much every company in those ETFs has small to large CA. In some ways I'd say you nearly have to go global to get into the best companies.

You are right there are not too many ASX listed companies like Coke, EBAY, AMEX...

 

[CanOz]

APN

Owns radio licenses, which have held up the best of all traditional media. Owns the best network of outdoor advertising in Australia, again not easy to replicate. It's hard to tell what's happening in their regional newspaper business but on the surface it does appear to not be as affected by the structural change as metros.

The price has sure taken a beating McLovin, near all time lows...Looks like bottom might be in for the time being though....

Would love to hear a VSA guru comment on that volume, takeover candidate?

Perhaps i'll post the chart in the stock thread...

CanOz

 

[robusta]

When I think about competitive advantages I usually have a few groups.

The first group contains the obvious ones (most of which have been mentioned).

Another group is companies that I feel are in the midst of building their competitive advantage. How do I identitfy these companies? Looking at their history of margins and returns - is there a story building? Is their a consistentcy/upward trend in excess earnings? Are they pulling further away from the competition?

Another group is companies which may have had a substantial CA in the past, but are slowly having this eaten away as competition figures out how to take a bigger bite of the pie...

Another source of competitive advantage can be in the pipeline for a long time, and then once a certain agreement is in force - the moat is in place. (think JUMBO acquiring an exclusive lottery license or a biotech acquiring a patent for a successful drug/product)

Then there is companies that can have CA built into their business model. I think McMillian Shakespeare is one of these. They have one half of the business that acts like a cash cow - which allows the other half of the business to load up on debt and leverage excess returns.

I think the best CA's are when their is multiple sources of the advantage. JBH is a bit like this. It had the low cost advantage, but as it lost this advantage due to online retailers being able to easily match and even beat prices by substantial amounts ---the business still survived, and is thus far still somewhat thriving. I think that this is because JBH had more than just a "lowest cost" CA. They marketed themselves well, ensuring that the brand effect was well integrated and has now become another source of competitive advantage.

Some other candidates (other than what I've mentioned) are FLT (scale, brand), CCV (scale, brand, networking), ARP (quality).

I try to ensure that my main watchlist has a large % of companies with competitive advantages to ensure that these are the types of companies I am constantly researching and keeping up to date with. However as has been said, they are often expensive and as such, i find it useful to keep track of other companies in order to try and identify some of those stocks which might just be building new moats

Competitive Advantages enablers

Intangible Assets
o Brands (if they allow pricing power)
o Regulations (lots of small regulations less susceptible to change)
o Patents etc.

Customer Captivity
o Switching costs
o Network effect
o Habits
o Search Costs

Cost Advantage
o Unique resource, location (Economic rent)
o Size (relative to niche)

Two very good posts, perhaps I should break this makeshift list up into those different categories. The best results would probably come from identifying those companies that have the potential to develop a sustainable advantage early in their development.

 

[robusta]

Hi Chops,

These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.

Cheers

How long are you talking about odds-on?

SOL seems to be a business that has some sort of advantage (probably shareholder friendly and competent management) they have been around since around 1902, I think BHP may have been around for a while as well.

 

[CanOz]

Has no one mentioned Innovation as a prerequisite to a competitive advantage?

CanOz

 

[odds-on]

Hi Chops,

Not suggesting put the whole market on a watch list, instead look for companies which are widely followed and considered to have a “moat” with a lot of “fluff” in the price – reverse DCF can be a useful tool to assess the “fluff”. The higher expectations the investors place on a company (and the price) the more likely the “fluff” will disappear when the company fails to meet expectations.

Hi Robusta,

How long? I would start looking at companies that have been widely followed by the investment community for the last 5 to 10 years.

The Big Four banks are currently trading at 2 x book value yet long term CAGR is approx. 12% - does this not concern you? IMO, the drop in interest rates created the chase for safe yield but the Big Four Banks are starting to have some “fluff” in their price.

Cheers

 

[odds-on]

Hi Chops,

Not suggesting put the whole market on a watch list, instead look for companies which are widely followed and considered to have a “moat” with a lot of “fluff” in the price – reverse DCF can be a useful tool to assess the “fluff”. The higher expectations the investors place on a company (and the price) the more likely the “fluff” will disappear when the company fails to meet expectations.

Hi Robusta,

How long? I would start looking at companies that have been widely followed by the investment community for the last 5 to 10 years.

The Big Four banks are currently trading at 2 x book value yet long term CAGR is approx. 12% - does this not concern you? IMO, the drop in interest rates created the chase for safe yield but the Big Four Banks are starting to have some “fluff” in their price.

Cheers

Might be of interest...

http://www.smh.com.au/business/banking-share-price-bubble-still-has-way-to-go-20130428-2imp5.html

 

[McLovin]

Has no one mentioned Innovation as a prerequisite to a competitive advantage?

CanOz

Innovation isn't necessarily a competitive advantage unless it can't be copied. Otherwise you're just paying for research your competition otherwise would have to. On the flipside, someone like TEN or SWM doesn't need to innovate to maintain their competitive advantage, the government gives them a license which gives them their advantage.

There was an interesting article in the AFR yesterday about how Samsung and LG basically worked out it was cheaper to steal patents and pay the legal costs and that's how they ruined Japanese manufacturers.

A more interesting aspect of the Koreans’ success was their early strategy of forging ahead to make products in competitive markets even if they were impeded by patented technology.

The areas of technology where Samsung focused its early efforts – DRAM chips, semiconductors and hard disks – were all densely patented, highly commoditised areas of the market.

Samsung’s approach in these product lines, according to Myers, was to “ignore the patents, let owners sue them and then pay the legal fees”.

That attitude to using patented technology was summed up as follows: “The view is not that they are stealing but rather that they borrow without permission, with the expectation they will pay later.”

http://www.afr.com/p/business/companies/samsung_borrows_without_permission_UZ7o5knqe2TSZuTvw7QYzN

 

[robusta]

Here is a ASX investor talk from one of the Team Invest guys on Competitive Advantages. Gives Cochlear as a good example.

http://www.brrmedia.com/event/frame/112200