They will certainly fall if their competitive advantage is eroded. Not the time to buy them though.
Hi Chops,
These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.
Cheers
You have made a boring day very funny.
Maintain your own competitive advantage.
Cheers
Hi Chops,
These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.
Cheers
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
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.
i suppose TLS should be on the list. They have the money to bash their way through the market.
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.
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.
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.
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.
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.
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.
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)
Hi Chops,
These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.
Cheers
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
Has no one mentioned Innovation as a prerequisite to a competitive advantage?
CanOz
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.”
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