Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, April 4th):
...Since the 1980s I have read articles by Shad (Rowe) in Forbes, Fortune, Barron’s, etc. and always found them insightful. Moreover, I have often used his sagacious comments in these missives to emphasize those gleanings in an attempt to help investors profit from them. This morning is no exception.
Shad ... opined why he is a steadfast bull on the American stock market. Said bullishness does not stem from his nature, for a couple of decades ago he enjoyed great success as a “short seller.” Nope, Shad’s bullishness is based on the belief that innovation is thriving in America. He used Google (GOOG) as an example. To wit:
“In the United States, two graduate students have managed to develop a product that led to the creation of the most scalable business model in history. Google is 12 years old and is already the 39th most profitable company in the world. Google’s core product is useful to corporations and consumers both, but has also become the lifeblood of thousands of small and medium-sized businesses. Beyond generating close to $30 billion in revenue this year, Google’s success has created an ecosystem that employs thousands of people around the world and Google alumni populate the upper echelon of the next batch of revolutionary technology companies. Facebook is one of many other examples.”
I would add Groupon as such an example, which was a “startup” three years ago and now employs more than 5,000 people. To be sure, the country is going through what the economist Joseph Schumpeter described as “creative destruction” whereby the dying industries, like the building of McMansions or giant SUVs, fade away but are replaced by new, growth industries. As scribed in Wikipedia:
“Schumpeter identified innovation as the critical dimension of economic change. He argued that economic change revolves around innovation, entrepreneurial activities and market power and sought to prove that innovation-originated market power could provide better results than the invisible hand and price competition.”
Granted, this creative destruction process takes time, and does not occur without “hard spots” along the way, but as Shad notes:
The same factors that have served the U.S. well in the past are the same factors I believe will lead us to future prosperity:
1) The United States is the home of the entrepreneur.
2) The U.S. is the most open / flexible society the world has ever seen.
3) The brightest minds from around the world dream of coming to the U.S.
4) English is the universal language.
5) Americanization remains a powerful and growing – though resented – economic and social trend throughout the world. (To quote the advertising / marketing giant WPP Group’s CEO, Sir Martin Sorrell, “Globalization is a misnomer. The better word is Americanization.”)
I revisit Shad’s cogent comments this morning not just because Greenbrier Partners has produced above market investment returns since its inception in 1985, but because during my Texas speaking tour last week I had the pleasure of spending time with him. Following our strategizing, Shad borrowed a phrase from another acquaintance of mine, Adam Smith (aka Gerry Goodman) author of the classic book The Money Game – “What do we do about it on Monday morning?” Shad goes on to counsel:
“Subscribing as I do to the Charlie Munger dictum that a great business at a fair price is superior to a fair business at a great price, we buy shares in what we believe are ‘Great Companies.’ Since the stock market currently makes little distinction in valuation between fair and great companies, the normal dilemma – Do I pay up for quality? – does not exist. My plan is to proceed as follows:”
“First, I define what makes a company ‘Great.’
1) A great company brings value to its customers, its suppliers, its shareholders, and a culture of fulfillment to its employees.
2) As a customer, you can’t beat it and what the company sells is good for its customers.
3) A great business generates a lot of free cash for reinvestment and is able to reinvest at high rates of return.
4) The chief executive does not ‘alternate between smart and dumb.’ He / She is smart all the time and demonstrates respect for shareholders, first because it is right and second because the CEO is a significant owner.
5) The socio / economic wind is at the back of the company.
6) Ideally, there is a ‘moat’ around the business that Buffett and Munger define as a sustainable competitive advantage. ‘Moats’ are problematic in practice because the world changes so fast that most of them are not sustainable. My concept of a ‘moat’ is superior management with superior brains fixated on adjusting to and capitalizing on rapid change.”
While these are not Shad’s selections, some companies from the Raymond James research universe that appear to “foot” with Shad’s metrics, all of which are rated Strong Buy, are: IESI-BFC Ltd. (BIN/$25.81); Pão de Açúcar (CBD/$43.12); IBERIABANK Corporation (IBKC/$60.39); and Kansas City Southern (KSU/$54.47), to name just a few.