One of my favorite modern quotes comes from General Eric Shinseki, the retired U.S. Army Chief of Staff, who said, "If you don't like change, you're going to like irrelevance even less." Memorable and enduring thoughts, nailed down with succinct quotes, can take on a meaning much larger than the specific context in which they were originally expressed, and that is certainly true here. Whatever the General meant originally, his idea can lead us to see failure as a particular consequence of irrelevance, and to examine change as an antidote for--or, better yet, an inoculation against--such irrelevance.
For our purposes here, we'll note that an enterprise can be a bad investment long before it becomes an outright failure. I have been picking on Radio Shack in this space for the last several years, although the true object of my scorn and derision has been the group of analysts who insisted that the stock was "cheap" and a "value" as the share price declined from $15 to $12 to $8, and so on down. The point is that we don't need to pass the Chartered Financial Analyst (CFA) exam to see what's going on in the world around us. I am tempted to think that such financial expertise could actually be a hindrance if it comes at the expense of our God-given common sense. Relevance is big picture stuff, and by the time evidence of it is manifest on an income statement, it's probably late in the game. And it is not a matter of a company's goods or services being relevant or irrelevant (that would be binary thinking), but rather a question of whether those goods and services are declining or increasing in relevance.
Investors are prone to suffer from a form of denial that usually begins with the statement that People will always buy.... Fill in the blank: Kodak film, because they will always take pictures? McDonald's hamburgers, because they will always want fast food? Sears, because they sell everything? The problem with such rationalization is that it fails to appreciate the brutality of change at the margin. No, everyone does not have to quit eating Quarter Pounders to send McDonald's (MCD, $95) into declining relevance territory. The company just has to lose customers at the margin. I have heard more than one investment analyst suggest that what McDonald's really needs to do is streamline its menu, that the offerings are overloaded and complicated. But don't you actually have to go to McDonald's to know what's on their menu? The parents who are feeding their kids at Whole Foods Market (WFM, $56) are not going to go to McDonald's even if the company started giving away granola with the fries. Even if the health--conscious do indulge in the occasional Happy Meal for the kids, they are not going to do that on a regular basis. And that's really all it takes to cause trouble.
If the relevance of McDonald's is threatened by the trends in healthier eating habits, the company's other raison d'etre, quickness and convenience, is under siege from the likes of Panera Bread (PNRA, $154) and other fast casual chains (the Panera in Midtown Memphis has a drive-thru!). Sometimes you just want a good old burger, I know, but that could soon be a smartphone tap away once food delivery apps from GrubHub and Yelp's Eat24 roll out across the country. If I have that option, my burger is going to come from Huey's (the best burger in Memphis). As for the changes that could have salvaged the company's relevance, I'll just point out that MCD was once a major investor in a start-up known as Chipotle Mexican Grill (CMG, $672) before divesting itself of that enterprise in 2006. The shares of CMG are up more than 500% over the past five years alone. I'm not Lovin' It, McDonalds.
For an example of where imaginations were not calcified in the corporate executive suite, we have Netflix (NFLX, $467) and its chairman, Reed Hastings, who saw early on the declining relevance of the mail-order dvd rental business. The company reinvented itself as a provider of streaming video and, later, as a producer of original content (my wife and I will binge watch House of Cards when the new season is released later this month). CVS (CVS, $102) saw an opportunity some years ago when it bought Caremark for its own Pharmacy Benefits Management (PBM) division, then more recently ditched cigarettes and renamed itself CVS Health. Coca Cola (KO, $41) bought a 16.7% stake in Monster Beverage (MNST, $119), the energy drink company, and also a stake in Keurig Green Mountain (GMCR, $118), both in 2014. Coke acquired the Odwalla brand of fruit juices in 2001. All of these changes can be viewed as attempts by these companies to get on the upside of relevance.
And then there are those companies that don't have to change themselves--yet--because they are in the sweet spot of relevance already. Palo Alto Networks (PANW, $137) is benefiting from the rising tide of concerns about cyber security. Cerner (CERN, $70) provides health care information technology solutions and has seen its business thrive with the shift to Electronic Health Records (EHR) systems. Hain Celestial (HAIN, $59) and White Wave Foods (WWAV, $39) are in the organic foods space and are riding the wave of healthier eating habits. Zoe's Kitchen (ZOES, $31) is a relatively new (as a public company) and unknown entrant in the healthier fast casual restaurant space.
Let's not make this any more complicated than it has to be. If we ask ourselves the question, What problem is this company solving? and we find that either the answer is evading us or that someone else is solving the problem, we might be on the trail of declining relevance. We could also just follow Amazon (AMZN, $373) the way we might track a kettle of vultures to find their latest prey. As soon as we realized that AMZN was going to be selling a lot more than books, we should have started sniffing for the walking dead retailers--and there we would have found Radio Shack and its handy but increasingly irrelevant storefronts. At the same time, let's not oversimplify the investment dimension here. Just because a company's goods and services are gaining relevance traction does not automatically make their shares a good investment. There's always much more due diligence to perform.
When I was a kid in the 1960s, my friends and I eagerly awaited the arrival of the Sears Christmas Wish Book in the fall. It was chock full of the latest toys that we could write to Santa about. I especially remember one of my favorites, the robot from the television series Lost in Space. It was under the tree on Christmas morning, and my father would have his Kodak Brownie camera ready with plenty of extra rolls of Kodak film to snap lots of pictures. He always did that. And he always would, wouldn't he?
Life is short. Get busy.
Jim
Disclosure/Disclaimer: My family members and/or I own shares of AMZN, PANW, HAIN, CERN, CVS, ZOES, MNST, KO, CMG, NFLX, WWAV, and WFM. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.
No comments:
Post a Comment