STREET DOGS

From Steven Wood at GreenWood Investors:

While it was both a frustration and a great opportunity, fundamentals didn’t matter during the C-19 selloff. That meant the “rocks uphill” companies sold off with equal vigour to companies that are managed by Builders with better narratives. The funny thing about the selloff is that while Mr Market did a great job differentiating between industry and market sectors, it did a very poor job distinguishing between good managers and administrators, or companies with a debt or a cash position. Frankly, in a world where the MBA “optimisation” processes are no longer relevant, I trust managers who actually embody their business more than I trust the MBAs. I trust cash over debt. I trust organic growth over financial engineering. Mr Market still hasn’t differentiated between these dichotomies, and owner-operators and family-controlled businesses have still managed to underperform the [US.] market so far this year. These are the people who have generated the most significant long-term outperformance. They don’t give quarterly guidance. They use less cash for acquisitions, buybacks and dividends. They have lower profit margins, but significantly faster revenue, employee and fixed asset growth despite carrying lower debt levels.

Our analysis of companies that have significant insider ownership suggest that founders and familycontrolled businesses do not optimise for profit margins, but for business growth. At the same time, we acknowledge the timeless aphorism that “revenue is vanity, profit is sanity and cashflow is reality.” Still, this customercentric approach contrasts starkly with the over half of major US businesses that are optimised to “beat” the quarterly guidance [which is] quite a bit harder to become passionate about.