Panelists:
Nina Portier Reinhart (NPR), Reinhart Capital Co.; Primary investment focus: High-tech start-ups
Jeremy Deal (JD), JDP Leadership; Primary investment focus: Publicly traded stocks
Moderator:
Dr. Peter Lorange
Additional questions:
Per Lorange
The two panelists cover different investment instruments:
NPR: Primarily start-ups, with particular focus on technology-driven ones, especially when within the so-called climate area, as well as B2B companies and those who can help traditional industries to accelerate efficiency and digitization. She works closely with SICTIC, the Swiss start-up group.
JD: Primary focus on stocks, and tested stocks are preferred, since they are relatively easier to research, and on companies with a five year plus, longer-term time horizon.
Question 1: How do you go about finding good business projects to invest in today, given the reality of the Coronavirus threat? What is the value that COVID has unlocked and what are the permanent shifts that may have been brought forward?
When it comes to investing in stocks, JD emphasizes that it is key to find companies that are relevant in tomorrow’s economy and doing sufficiently well to be able to invest enough in itself so as to fuel organic growth; the “survivors and thrivers”. There should, of course, be some dividends too, but the bulk of a firm’s discretionary results should be reinvested. These types of companies often have unique technologies. These types of stocks tend to grow in value over time, i.e. to be considered “cheaper and cheaper”, when it comes to what one had to pay for the stock when it was purchased, i.e. as times goes on. Such shares should thus basically be held for quite some time.
When it comes to investing in new ventures NPR emphasizes that it is key to assess the quality/capabilities of the entrepreneur(s) leading the firm to be prospectively invested in. Are these people sufficiently talented and bright? Also, she is looking for specific tools and know-how that a firm should have to be attractive, such as whether digitalization can take place, as well as whether a particular firm might be able to combine with others, in such a way that the structure of the firm’s industry might become transformed.
Both NPR as well as JD are indeed doing a lot of analysis. In order to be able to find reasonably relevant and reliable data, JD prefers to work with publicly listed companies. NPR prefers to focus primarily on European/Swiss prospects. Both thus acknowledge that “strategy means choice”. Both recognize that detailed spread-sheet analysis may only be marginally beneficial, at best.
The advent of the COVID-19 pandemic has opened up for a lot of new opportunities, above all when it comes to these businesses that might be able to “do business, taking advantage of the distant dimension”. Both feel that the pandemic has fast-forwarded us to an opportunity rich environment.
Question 2: Are there some geographic areas, as well as some types of business segments that have become particularly attractive now? Why has the market recently rewarded technology companies?
NPR gives two examples, both from industries that one might consider as rather unattractive according to the traditional way they might practice their business activities, but where new thinking, new values and certain urgencies have led them to take advantage of the digital dimension whereby non-linear thinking is key:
Travel tech. Much travel booking was traditionally done via travel agents and/or airlines directly. Now customized booking is offered on the internet, and the firm that has pioneered this has more than tripled its number of customers over the last year. This new offer is giving the customer remote access, and is offering the best itinerary, which is normally not identical to what might be best for a given airline or travel agent.
Education. There are now so-called micro-schools emerging, such as those in Silicon Valley who focus on creativity in education, say with small numbers of students for each professor (i.e. ten), to better adhere to social distancing and also to implement distance learning, in other words blending “distance” and “physical”.
JD recommends Patrick O’Shaughnessy’s podcasts “Invest like the Best”, and Eric Vishria’s (from Benchmark Capital) segment “The Past, Present and Future of SAAS Software” , giving an example from the advertising business (based on Michael Lewis’ book “Moneyball”). While classical classic ad-agencies typically now might be seen as “Madmen”, the new generation of advertising and ad tech, the so-called “Moneyball” would be digitalized firms, such as Google. There is a clear transition such as this in many industries. The “new way” is more than five times more profitable. Generally, we are seeing a number of companies with new measurability.
Question 3: Please share with us how the balance may have changed, given today’s Coronavirus threat, between Growth focus (typically longer-term), versus Liquidity/cash flow focus (typically shorter-term).
JD stresses that the balance seems to have shifted more in the direction of more mature, established businesses, where one would be able to apply capital budgeting in a reasonably comprehensive way. Such businesses must however still be attractive, as follows:
Would such a company have the ability to continue to raise its prices?
Is this company able to both pay dividends and to reinvest sufficiently in its own growth projects?
He stresses that analysis based on data from 10k reports may allow for an assessment of how profitable the firm’s new projects might be, i.e. to safeguard against “value destruction” by a firm investing in itself and where its own internal projects are no longer sufficiently attractive. (In such instances: sell!). Invest based on the future, not the past!
NPR stresses again that to apply competent judgements is key, much more than “mechanical” quantitative analysis. A key aspect of this would be to assess the nature of the potential alignment between management and owners in terms of knowledge and conviction. This should be strong, but often it is missing (if so, sell, or abstain from investing!). She is witnessing a shift towards better valuations. NPR also stresses that we are now leaning more from hardware, software and cloud companies, to those that can build mega-trends, such as blockchain, AI. In other words, what are the company’s building blocks that may make mega-trends possible? Can that tech company really support the economy of tomorrow?
Question 4: How do you judge the (increased or decreased) attractiveness of the following areas (real estate, shipping, precious metals, bonds), or areas in which you have direct experience, and certain markets such as China, the US, Europe, in light of the Coronavirus threat?
Both panelists stress the importance of exploiting local strengths. Particularly, it is key to be sufficiently focused so as to be able to do one’s own judgement or assessment and analysis, as well as to support the entrepreneurs/management in question. The trend is to be more focused, more local. Also, not outsourcing due diligence will allow for greater core competence and market understanding.
Question 5: What do you see as factors contributing to rising uncertainty in today’s Coronavirus threat context?
Both panelists stress that there is more competition today and mood is uncertain. New players are coming up in many industries, threatening the firms that might traditionally have been the winners. The need for all firms to reinvent themselves is rising, but some firms may not be able to actually do this. And, then their human talents are being attracted to the new winners. So, there is increased uncertainty – more competition as well as often hard to reinvent oneself! Old strengths may now become a liability. JD comments that one has to be more close to what is disruption and for the bigger companies he looks at, they especially need to find this. NPR adds fear is an important factor, and reducing it will be ever important.
One industry where this comes to mind is the newspaper industry, which traditionally was based on paper, but which is now mostly digitalized.
This added level of uncertainty seems to have led to more nervousness in business. But it is probably more important than ever to remain confident, to learn fast and to be proactive.
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