Talking to Management, Part 3: The Competition
Note: The opposite question, "Which companies are not run properly?" will not get answered, except perhaps in one-on-one meetings. Few managements will publicly trash-talk the competition. The few that will do so deserve a red flag for hubris.
As an example, I had an interesting experience while at a financial conference. I was at a breakout meeting where J. Hyatt Brown, of Brown & Brown, was taking questions. Of the insurance brokers, Brown & Brown is no doubt the best managed, and Hyatt Brown has strong opinions and is almost never at a loss for an answer. When my turn to ask a question came up, I said, "OK, you're the best-run company in your space. Who is No. 2?"
Hyatt Brown looked reflective, paused for 20 seconds and answered that it is was tough to say, but he thought that Hub International (HBG) was No. 2. And now Hub has gone private in a much better deal than Goldman Sachs' (GS) buy of USI Holdings (USIH), from a quality standpoint. To my chagrin, I didn't buy Hub off of Hyatt Brown's comments. I missed a cool 59% in 10 months, but you can't kiss them all.
What would your competitors have to do in order to reverse-engineer your competitive position? Or, why do you suppose other companies don't adopt your methods?This question gets at what management views as its critical differences for business success. The answer had better be a good one; it should be something important, and hard to duplicate. As Warren Buffett might put it, we are trying to determine the size and depth of the "moat" that exists around the business franchise. If the answer doesn't deliver an idea that is weighty and makes sense from a competitive standpoint, you can assume that the business doesn't have a lot of franchise value and doesn't deserve a premium multiple. Valero Energy (VLO) is the leading oil refiner in the U.S. It also has the leading position in refining both heavy (high-density) and sour (high-sulfur) crudes, which cost less, leading to higher profit margins. It would cost a lot of money for a competitor to create or purchase the same capacity, assuming it could get all of the regulatory permits to do so.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV