Introduction
In this note we shall discuss how the relative importance of various investment criteria seems to have shifted, in light of the current Corona virus situation. Specifically, we shall highlight criteria that seem to have become relatively more important, as well as others that apparently are now relatively less prominent.
I shall be drawing heavily on my own experiences from my investment firm, S. Ugelstad Invest AS (SUI), as well as on discussions with several members of the Lorange Network. A short note before we begin: while the various factors to be discussed in the following are being presented in a dichotomized manner, the reality is that they are typically overlapping, and, further, that one particular investor shall tend to put different weightings on each of these factors, i.e. rather than what other investors, such as myself, might do. And, in the end, what shall things be like in a post-Corona world? Are we going back to the pre-Corona era criteria, or are we experiencing permanent shifts?
It should further be noted that all investment criteria to be discussed, except for Factor 1, in essence represent “control checks” – are these factors sufficiently relevant now or not? As such, criteria represent qualitative hurdles to satisfy a project’s goodness (or lack of so), complimenting the more conditional discounted cash-flow analysis, undertaken under item one below. Thus, all the criteria to be discussed during sections two though might fall into this category, representing additional “go” or “no-go” checks to compliment the fundamental discounted cash flow analysis, as discussed in section one.
One more preliminary clarification should be made, before we go into the specific arguments of this note. Warren Buffet; the famous US-based value investor, states that when he buys shares in various companies, he assesses the attractiveness of such investments as if he might have intended to acquire this entire firm. I.e. his investment criteria are becoming the same as those criteria the leaders of this given firm follow in their corporation’s strategy. I agree with Buffett here – investment criteria for buying shares or corporations (or stakes in such firms) are essentially the same.
Keeping these caveats in mind, let us now move on to discuss the two sets of investment criteria – those which seem to be becoming relatively more important, as well as those with seemingly relatively less importance:
Set 1: Six investment criteria that see to become relatively more important, in light of the new Corona virus reality
Go to relatively predictable cash flows, in the given investment projects being considered. “Cash is king”! This often implies a reasonable shift towards being relatively more short-term, in the sense that shorter term cash flow criteria typically are the ones that tend to be more predictable when things are “normal”. And, cyclical, as well as more long-term growth projects should be avoided now (see more about this in paragraph five below). Perhaps quite particularly troublesome, this may also tend to put credence on who is the individual expected to deliver this cash flow, i.e. more of a “me, me, me” team emphasis, in contrast to the “we, we, we” team thinking that until now has become so fashionable. My sense is that this potential change is positive.
Disruptive technology. We can expect that certain types of technologies will become relatively more important, particularly those that shall have to do with IT-based digitalization, i.e. those that enhance virtuality. More specifically, how can new technology help ordinary people today? Technological advances increasingly allow for a wide array of value-creation above all when it comes to “distance”, such as virtual shopping, but also for so-called distance learning, remote conferencing and networking, working from home, and so on. This new wave of technology-driven advances, to make the new world of operating virtually today more of a reality, is however quite broad, including the emergence of new cloud-based approaches to “virtual routes-to-market”, allowing for new business approaches to assist other firms to become more virtual, etc. There shall also be significant technological advances in other areas however, such as the development of more cost-efficient batteries (power storage, cars with little to no emissions, etc.), filter technologies, more efficient combustion, etc., supporting ongoing advances in EGS (environment, government, society) also to be discussed in more detail under paragraph six below. In general, new technology will come to use to a much higher degree than before, and also much faster. To have this ability to better understand how new technology might open up for new business, and to take the time to analyze this, shall be key. Finally, not to be forgotten is how technologies may work together in new ways with traditional methods or systems, how hybrid systems may be created, and how unique combinations of the ultra-tech solution may be merged, added to or streamlined with the older or more standard system. In other words, it may not always be about the new only, but how new technologies can be combined with what worked well beforehand to make things better and/or faster.
Virtual business focus. Businesses that can be performed virtually are now to be preferred. We have already touched upon aspects of this, under section two, but shall now here highlight other aspects. To respect social distancing is of course a part of this, i.e. to avoid close face-to-face interaction. In retailing, a focus on more basic products that indeed may be categorized as generic (potatoes, apples, …) and/or being associated with a trusted, well-established brand (Nestlé, …) would be central here. Trust and simplicity are key! Luxury goods, on the other hand, might be more difficult to promote this way – physical “inspection” in stores might be needed, none-the-least to trigger more impulse buying generally associated with non-essential goods. In this case the typical customer shall not be able to rely on established brands, at least not to the same extent, nor to draw on what he/she might understand to be generic goods. In general, we may safely conclude that traditional shopping, where products were researched, seen, touched and acquired in-store, has and will continue to decline. The new generation is so used to do shopping on the internet - from beginning to end, with post-purchase servicing, further acquisitions, CRM, communications, etc. all internet based whether via smartphone or PC.
The value chains. Can one rely on this? Are sub-contractors able to deliver? (Many smaller sub-contractors may simply not be able to sustain the drawn-out Corona virus!). To have a degree of direct control over the key elements of one’s value chain seems critical. Reliability is in the center. This implies that one’s value chain may evolve into becoming more local. Reliability might be emphasized more than cost efficiency. It follows that we may see a threat to the growth of world trade. Specifically, for the US, to rely on pharmaceutical compounds produced in China, for instance, rather than in the US itself, might now become less of an option. It costs to go more local, but the reliability and control increases! There is less of a risk of political blackmailing.
Our core values are changing! People are becoming more concerned, worried and/or scared, and will be prepared to invest more in health, medicine and protective measures. And, people now increasingly prefer to stay at home, and invest in business areas that might contribute to upgrading of their houses (paint, home improvements, …). Real estate in rural, remote areas will become even more attractive. People are prepared to invest in ways to both protect and isolate themselves!
Our ways of living, traveling and working are changing. This trend opens up for many new business opportunities. To invest in areas that might enhance our abilities to effectively work from home, to invest in new modes of conferencing remotely, (Zoom, Skype, …) represent key opportunities. Areas that match these new ways of living, socializing and working can be of high interest.
Let us now turn to a set of investment criteria that might have become relatively less important, in light of the new reality of the Corona virus threat. As we shall see, there seem to be at least four key areas when it comes to this too.
**Set 2: Four investment criteria that seem to become relatively less important, in light of the Corona virus reality. **
Growth focus. This needs to represent a key criterion during the pre-Corona period. The “problem” with this, however, is that it might be difficult to impossible to come up with good cash flow estimates. Some such growth companies may indeed be in a non-profitable stage for long periods of time! (Tesla, Uber, …). These types of investment tend to have become relatively less attractive! Paradoxically, the “we, we, we” culture typically associated with long-term growth may no longer be in vogue. Instead, as discussed in section one, the individual executive, preferring to “drive” short-term results, and be accountable for them, shall now be key! One final note when it comes to perhaps pursuing some growth, after all. There are always opportunities to make acquisitions or mergers, i.e. various forms of consolidations among corporations. This is perhaps a way to achieve growth in today’s Corona virus reality context. Members of the organizations involved are also likely to be more flexible and open-minded, less driven by conventional prestige or culture-based conservatism. To look for such potential candidate firms for corporate restructuring may be advantageous. Of course, in categorizing growth focus as possibly less important during Corona times is based on the consideration of how we wish to define “growth” in the focus. What was meant by growth before may be different today or tomorrow. And thus, perhaps the word “focus” here is also important. The question remains about how significant growth can be now, but having a focus is usually timelessly crucial.
The environment. We are, of course, continuing to see a strong focus on the environment in public debates and in government circles. It is interesting to observe, for instance, that air pollution in general became less sever during the height of the Corona virus crisis due to increased restrictions on travel. The “problem”, however, is whether companies might be able to afford the expensive EGS (environmental/governmental/societal) regulations imposed on them form the past. After all, the more effort to survive may now be the priority for many firms. So-called “green-tech” thinking, as well as focus on the so-called “circular economy” shall of course continue to be positive. Platforms to support the circular economy shall be attractive – simplicity, enabling, sharing based systems and economies (e.g. purchase of used clothes). And to utilize our natural resources better shall always be good. The question is whether these aims can now be pursued with the same vigor as before. My sense is that such changes tends to be expensive, and that to invest in these types of activities might not be all that attractive, at least for now. It remains an open question whether we shall afford to return to the old ESG standards or not. These clearly continue to be important, but now, should they be financed? Will there be more direct governmental subsidiaries, including tax breaks, when it comes to pursuing heavily EGS-driven investment projects?
Cyclicality. As already noted, here too we tend to face rather uncertain cash flows. And, it is typically hard to put value on such flows. There seems to be a clear trend to swing away from such. It might be that an actor might have entered into a long-term contract with a given counterparty, where the latter is facing cyclical pressures, and thereby might be tempted to go back on his contractual commitment. In shipping, for instance, a charteree might become tempted to break a time agreement for this reason (higher freight income elsewhere!), leaving the charterer to cope with now a significantly more expensive project. And/or it may be that the charteree is simply becoming too economically weak to honor his/her commitment. The underlying issue is of course that the underlying cash flow streams might be more uncertain than expected – i.e. a situation to be avoided!
Lack of social distancing. Some businesses require relatively large “concentrated” gatherings of people. Social distancing regulations might easily be jeopardized. The so-called “re-opening” of economies typically is faced with this as dilemma: safeguard people’s health by keeping things closed or stimulate economic activities by re-opening. There are of course not only beaches and street traffic that are affected by this dilemma, but several key business areas, which now have become relatively less attractive (retail stores, travel, hotels/restaurants/bars, concerts/sporting events/religious gatherings, …). Such businesses might now have become relatively less attractive. The world-famous value investor, Warren Buffett, for instance, sold all of his airline-based holdings, involving four major US carriers! His reasoning was that it will take a long time, at least, before the social distancing negatives might be overcome for this type of business.
Conclusions
This brings us to the end of our discussion regarding how project investment criteria may be re-prioritized. But a critical issue remains: what about opportunism by going “against the stream”? Would there be opportunities by being counter-intuitive? After all, most attractive investment projects call for such uniqueness. Perhaps a more in-depth analysis of the various factors just discussed might be called for?
This is possibly the most important conclusion that might be drawn from the above, namely, to treat the set of identified investment criteria opportunistically, rather than mechanically. Good projects are coming about this way! But, a careful analysis of the various criteria is indeed key, to achieve this.
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