Weekend Reading

6 May 2016 | by Paul Perrino, CFA®

A summary of this week’s best articles. Follow us on Twitter (@IntrinsicInv) for similar ongoing posts and shares.

Companies which provide indispensable services to their customers… (Value Investing World)

Not all growth companies are equal. As this excerpt explains, preferred growth stocks are companies that have a moat around their business protecting them from competition. This allows them to maintain, or slow the rate of decay of their earnings growth. One moat source is the cost of their product or service relative to the customers total costs. If it’s small, but provides them with an invaluable service, then the switching costs become too high to make it worth it. One such company that exhibits this characteristic is Broadridge (BR). Further information about BR can be found in our March 1, 2016 post.

Company Profile: TransDigm Group (The Random Walk)

TransDigm Group (TDG) is another company that has built a wide moat around their business and have been effective capital allocators. This has helped maintain their 20% CAGR in revenue. Similar to Broadridge (BR), TDG’s products are a small, but vital, part of their customers’ expenses. As noted in the article “Maintenance only accounts for 9 percent of airline operating expenses but obviously the quality of the components used in maintenance activities is extremely important. Other than the fact that TransDigm is the single source provider for most of its product lines, airlines have little incentive to ‘shop around’ for a lower bidder given the low cost of replacement parts relative to overall operating expenses. This provides a great deal of pricing power to TransDigm as well as other aftermarket parts manufacturers.”

Nate Silver (Mike, The Waiter’s Pad)

A summary interview with data journalist and forecasting expert, Nate Silver. He’s a great thinker for investors to be aware of and learn from. He has a very rational and self-aware approach to statistics and forecasting.

How the Bay Area Became America’s Symbol for a Housing Crisis (The Tipping Point)

As the fast paced demand for bay area housing begins to slow, Robert Joseph of Tipper Point interviews Gabriel Metcalf of SPUR to find out how we got here and thoughts on how to fix it. The rise of “NIMBYism (‘Not In My Back Yard’)” in the 1970s impacted the cultural view on zoning and building, and decreasing urban population caused the growth in the supply of urban housing to be lower than needed.  This combined with the population influx from the tech boom resulted in the imbalance of supply and demand to be exaggerated. Cities similar to San Francisco, like Seattle and Portland, have been able to better handle the population influx because they’ve been able to “accept more development, more physical change.”

On a lighter note…

KFC, With New Nail Polish, Redefines Chicken Fingers (Austin Ramzy, NYT)

KFC (Yum! Brands) brought new meaning to their tag line “Finger Lickin’ Good.” In a new marketing campaign in Hong Kong, KFC plans to release a lickable, edible nail polish. You read that right, nail polish. When the marketing agency was asked about the new campaign, marketing and communications director, Anna Mugglestone said “Yes, it is actually a real thing.” It comes in both Original, and Hot and Spicy.

Ensemble Capital’s clients own shares of Broadridge (BR) and TransDigm Group (TDG).

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