The value proposition of a publicly-traded company is the level of attraction of the enterprise's products or services to its customers. Put another way, what value does the product or service offer to current and potential consumers?
I think the value proposition of a business is often overlooked, or taken for granted by self-directed investors. Arguably, professional investors and analysts perhaps over-analyze the value proposition of a targeted company's products or services.
Here's my take on defining the value proposition of a publicly-traded enterprise and then confidently explaining it via an elevator pitch.
Can You Illustrate a Company's Value Proposition?
Perhaps my favorite quote on the importance of understanding what we are investing in without experiencing analysis paralysis, comes courtesy of the legendary stock-picker, Peter Lynch.
Never invest in any idea you can't illustrate with a crayon. -Peter Lynch
The thought came to Lynch after he observed a class of middle school students who formed an investment club under the direction of their teacher. Lynch noted that the student investment club's stock picks were collectively outperforming the S&P 500 Index (NYSEARCA:SPY) by a wide margin.
Lynch and his student investors remind us that value propositions can and should be narrowed down to an elevator pitch that an investor can understand and communicate with ease.
I think the worse investment a stock picker can make is buying the shares of an enterprise that he or she has little or no idea of what and how it produces for the benefit of its target market.
Defining a Company's Value Proposition
Beyond what he or she may already know about an enterprise's products or services, a self-directed investor has a myriad of public information available to vet the company's value proposition. I argue that the most reliable information available lies in the company's SEC filings.
For example, The 10K Annual Report filed with the U.S. Securities and Exchange Commission, specifically the section titled Item 1 Business, is where management discusses the company's background, business strategy, specific products and services, markets and distribution, competition, supply chain, research and development, intellectual property, foreign and domestic operations, plus other related items specific to its industry.
The information is often detailed to the point of sleep-inducing but is perhaps the most efficient way to get an idea of the potential for the products or services to propel the stock price upward over a long-term holding period.
Peter Lynch keenly expresses an understanding of the distinction between an enduring company's products or services – as reflected in its earnings – and its stock price.
Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is 100% correlation between the success of a company and the success of its stock. This disparity is the key to making money; it pays to be patient and to own successful companies. -Peter Lynch
Thoughtful, disciplined, and patient self-directed investors know that the stock of a company that produces valuable, in-demand products and services will likely endure through all market cycles; despite a few erratic price movements in-between thanks to the nearsightedness of most investors, individual and professional.
Explaining the Value Proposition on an Elevator
The Self-Directed Investor Model Portfolio holds the common shares of 33 quality large, mid-, and small-cap enterprises based on a proprietary research model of five fundamentals-driven measurements: the value proposition, shareholder yields, return on management, valuation multiples, and downside risk.
I start by attempting to define the value proposition of the business in one sentence or phrase, i.e., an elevator pitch.
Here are my elevator pitches, ranging from simple phrases to full sentences, of the stocks of five companies represented in The Self-Directed Investor Model Portfolio Note: current overall view reflects all five primary measures of my proprietary research model as of January 31, 2019.
The Walt Disney Company (DIS): The undisputed king of media content.
That in-demand, original content has driven a four-bagger stock since 2009, doubling the two-bagger return of the S&P 500 during the same period. Disney is an outstanding example of the magic of compounding, no pun intended. Current overall view: bullish.
Johnson & Johnson (JNJ): Like owning a mutual fund of healthcare products.
Talc lawsuit threats against J&J are real, but the pharmaceutical giant has a history of overcoming adversity. Current overall view: neutral.
Nike, Inc. (NKE): The swoosh is the moat.
Phil Knight, the billionaire co-founder of the global apparel powerhouse, Nike, famously paid a graphic design student – attending a college where he taught accounting courses – $35 for creating the now famous logo for his then athletic footwear start-up. Current overall view: neutral.
Penske Automotive Group, Inc. (PAG): A fabulously-run transportation services company, currently out of favor on Wall Street, is a value investor's dream come true.
Roger Penske's enduring enterprise remains a favorite among customers and employees. Current overall view: bullish.
Target Corporation (TGT): Millennial's favorite place to shop when offline.
Of course, Target shoppers are buying online as well; but the Bullseye appears a comfort zone for the allegedly rare, millennial on-ground shopping spree. Current overall view: bullish.
The Crowd Buys What Sounds or Feels Good
Understanding a publicly-traded company's value proposition – as reflected in its products or services – is crucial to the fundamental analysis of a potential stock for the self-directed investor to buy-and-hold to take advantage of the magic of compounding.
Start with the 10-K Annual Report to get a beat on the products or services and the employees, suppliers, markets, governments, and customers that produce, trade, regulate, and consume the goods or services.
Then attempt to define the value proposition of the enterprise's offerings in one short phrase or elevator pitch. If you are comfortable with a basic understanding of the business, by all means, continue your due diligence toward possible ownership of a slice of that company via its common shares.
To the contrary, if I am not confident in defining and explaining the value proposition in the form of an elevator pitch – or borrowing the metaphor of Peter Lynch's market-beating investment club of seventh graders: with a crayon – then it may be advisable to move on to the next idea.
Too many crowd-sourced investors buy and sell shares based on market sentiment, trends, and fads without first understanding the value proposition of the company represented by the stock.
Successful do-it-yourself investors don't buy what sounds or feels good but allocate their hard-earned dollars to the stocks of businesses they confidently understand and appreciate.
Disclosure: I am/we are long DIS, JNJ, NKE, PAG, TGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Copyright 2019 by David J. Waldron. All rights reserved worldwide. The Self-Directed Investor Model Portfolio and tree logo are service marks of David J. Waldron. David's articles, blogs, and podcasts are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs or intended for portfolio construction beyond the author's model portfolio which is presented solely for educational purposes. David is an individual investor, writer, and editor, not an investment adviser. Readers should always engage in his or her own research and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.