Has the Game Changed?

16 March 2020 | by Todd Wenning, CFA

Game’s the same, just got more fierce. – Slim Charles, The Wire

In Sean’s recent posts, he discussed how we’re thinking about the financial impacts of COVID-19 and what we’re doing about it in our portfolio.

This week we received an email asking if the “game had changed” in terms of looking for companies with economic moats, strong management, and long growth runways, so we wanted to briefly address that topic.

There’s a lot of uncertainty right now and asking if we’re changing our process is a reasonable thing to do.

The short answer is “no.” If anything, this is exactly when great companies can shine, communicate value to customers, win market share, and come out stronger on the other end of the downturn.

That said, a few points of our process have stood out more than others during our most recent company-by-company reviews.

First and foremost, we want to make sure our companies can financially get through this challenge. In order to thrive, a great company must first survive. We wouldn’t own a company we didn’t think would do well during a “normal” recession, but this shock required a fresh evaluation. What happens at a retailer, for example, if same-store sales fall 30% this year because people aren’t going out – at all? There’s no precedent for it, but it could happen. Fortunately, we’ve found none of our current holdings are a major cause for concern on this front.

Second, beyond the near-term coronavirus impact, we’ve been asking how the relevance of our companies’ products and services might be impacted by any permanent changes in customer behavior. Because our fair value estimates are primarily driven by the cash flow a company will generate over the very long term, it’s critical that we determine if our opinions about a company’s moat and product relevance have been impaired. For instance, Sean recently highlighted a number of business service companies that we own which are mission-critical to their customers’ operations. We think it’s unlikely those relationships will change because of COVID-19.

Finally, moments like these serve to reemphasize the importance of outstanding cultures. Specifically, companies with virtuous corporate cultures in industries full of dull or destructive corporate cultures should do exceedingly well in the face of unprecedented challenges. Employees at such businesses are better aligned with the corporate strategy and mission. They are intrinsically motivated to create solutions and adapt to new environments.

Bottom line, this is an exceptional period to be an investor in outstanding, competitively advantaged businesses. As Slim Charles’s opening quote implies, investing is the same it’s ever been – it’s just been “more fierce” lately. And that too, shall pass.

Events like we’ve experienced in recent weeks will test anyone’s process. Or, at least they should. It’s in times like this that having a foundational investment philosophy – which for us is moat, management, and forecastability – is the most valuable.

When times become uncertain, you go back to basics. Through this lens, we’ve confirmed our confidence in our businesses’ ability to navigate some tricky waters in 2020.

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