Strategy: Greg Hoffman
What matters is how a company is positioned to perform in the future, not how it performed in the past
The stock pickers on social media sites I follow were mysteriously quiet in early August. Late August is reporting season when most ASX-listed stocks publish their numbers and I’m confident a multitude of “after-the-fact” experts will emerge wondering how everyone else could have been so dumb to not have anticipated whatever now seems obvious with perfect hindsight. But for me winning the long-term investment game is far more important than being “right” about a particular short-term number or issue.
Nobel prize-winning physicist Richard Feynman was a maverick who understood the world deeply from first principles. He once said: “I have approximate answers and possible beliefs and different degrees of certainty about different things, but I’m not absolutely sure of anything. And many things I don’t know anything about.”
It’s a stark statement in a world where certainty – or the veneer of it – is prized so highly. And my approach to investing is deeply rooted in this kind of philosophy. I don’t simply accept uncertainty, I welcome it and make a living by dealing with it effectively.
CASE STUDY
Let’s explore this in the real-life case study of Globe International (ASX: GLB), which featured in last month’s column illustrating the benefits of having owner/managers running a business (the Hill brothers, in this case).
In February, chief executive Matt Hill gave a downbeat outlook, saying “profits are expected to be below last year in the order of 15%”. Seven weeks later, as the Covid-19 pandemic spread, Globe said that “operations have been significantly impacted since the middle of March 2020, due to the mass shut-down of retail stores in all of the key markets in which the group operates”. It went on to withdraw the guidance given in February.
In other words, investors should brace themselves for a full-year profit fall of more than the previously announced 15%. So as at early April, we could have a high degree of certainty that the profit outlook for Globe for the 2020 financial year was likely to be down by at least 20% and probably meaningfully more than that.
Retail store closures were crushing sales and profit margins were being hurt by an Australian dollar that had fallen out of bed in the throes of financial market panic in March. Globe sources most of its product from China, where the currency is linked to the US dollar, so a weaker Australian dollar increases the cost of its products and crimps margins. The tariffs introduced by US President Donald Trump were likely also a factor in reducing margins for Globe’s business there.
Things looked grim and the share price was languishing around $1.10. That price indicated that the likely poor
To those who prize precision and certainty, this would seem crazy
results for the 2020 financial year would be a permanent state of affairs. As if Globe would never again match 2019’s result of 20¢ per share of profit (and 13¢ of dividends).
I really have no idea what Globe’s results for the 2020 financial year will look like. On top of the factors mentioned, there will be the impact of government stimulus and support measures on the company directly and on its customers indirectly. It’s hard to know how the various cross-currents will play out on the bottom line.
In other words, I am very uncertain about the 2020 profit result. Yet I am increasingly confident that the pessimists on the company’s longer-term outlook will be proven wrong, so I have been buying the stock.
To those who prize precision and certainty above all else, my position is crazy. How could I have bought a stock without having a firm opinion of the next result it will release to the market?
The key for me is how the company is positioned for the future, not what it recorded in the past. And in that regard, I’m confident that Globe is better placed than it has been for many years. Those 2020 numbers come from conditions that are unlikely to be repeated and there’s every chance that 2021’s profit could top 2019’s figure, at least before tax. (Globe paid no tax in 2019 due to prior losses but may end up paying tax in 2021.) GET YOUR SKATES ON
The company’s namesake brand is synonymous with skateboarding, which has been out of favour for several years. But the pandemic has inspired a
It’s an activity you can do with your friends outdoors and at an appropriate social distance
resurgence in popularity. It’s an activity you can do with your friends that is usually outdoors and at an appropriate social distance.
The company’s newest brand, Impala Skate, has also been a huge beneficiary. Impala is a female-led skate brand that was already making a splash with its flagship funky rollerskates. Then rollerskating became one of the hottest global trends in the pandemic.
Impala is in the right place at the right time. Visit the company’s website, social media pages or retailer websites and you’ll see first-hand. Its marquee products are sold out and customers are upset because the re-stocks sell out within minutes. Impala simply can’t make rollerskates fast enough.
In a logical product extension, Impala has moved into inline skates (rollerblades), many of which are also sold out and, more recently, into skateboards. This has been another hit, with certain models sold out (including my wife’s favourites, the Blue and Purple Cosmos boards).
Globe doesn’t reveal its sales by brand, but it’s likely that Impala has vaulted from doing annual sales in the low seven figures to being an eight-figure brand over the past six months. But it’s not just increasing sales that I’m pleased about. Profit margins are likely far higher than Globe’s other brands.
That’s because Impala boasts both a global network of stockists and strong direct online sales. With these direct online sales, it captures the retail margin, rather than its lower traditional wholesale margin.
I think a similar dynamic may also be under way at a brand the group acquired just over three years ago. Salty Crew is a fishing- and surfing-centred brand “for those who find refuge in the sea”. It had been growing well in a shrinking market in recent years, but anecdotal evidence suggests that recreational fishing has seen a resurgence during the pandemic.
One media report said “entry-level rods and reels are on the verge of joining the rarefied air of toilet paper and flour as items in a Covid-induced shortage”. And a friend from South Australia reports his local store has hit new sales records recently. All good news for Salty Crew (though it sells apparel and accessories, not rods and reels).
It all seems to point to better times ahead for Globe. Perhaps more importantly, it underscores management’s ability to spot opportunities in the market and then nurture and develop them.
In a world dominated by hot takes and constantly scrolling news crawls, there is opportunity in tuning out the short-term noise in the social and financial media, and focusing on the truly important questions in investing. And heeding Feynman’s approach to uncertainty might put you even further ahead of the crowd.
Disclosure: Private portfolios managed by Greg Hoffman own shares in Globe International.
Greg is an independent financial educator, commentator and investor. He is also a non-executive director of Forager Funds Management (not involved in Forager’s investment process).