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- general topics
- pricing and products
- changing environment
- mergers and acquisitions
General QuestionsWhat sustainable competitive advantages do you have vs. your competitors? As with most of my questions, I usually have a reasonable idea of what the answer is likely to be. Part of my question is to test the competence and veracity of management. If it trots out some answer that is nonsense, that is a big red flag to me. Given that most of the time I invest in mature industries, I want to hear answers that tell me the company has an expense advantage over competitors. That can be easily verified. Other possible answers include exclusive distribution agreements, patents, technological advantages and company culture. Once I hear the answer, I try to analyze how much it makes sense. Has the company really created a "moat" that protects its profits from competition, or is it trying to fool me? I don't always get a sharp answer, but the exercise is always valuable. Uncertainty leads to doing nothing or to a smaller position, which is always appropriate when you don't have a big edge. For instance, longtime readers know that I am a
- insufficient demand at current prices
- insufficient talent for some critical labor resource at current prices
- insufficient supply from some critical resource supplier at current prices (the "commodity" in question could be iron ore, unionized labor contracts, etc.)
- insufficient fixed capital (e.g., "We would refine more oil if we could, but our refineries are already running at 102% of rated capacity. We would build another refinery if we could, but we're just not sure we could get the permits. Even if we could get the permits, we wonder if long-term pricing would make it profitable.")
- insufficient financial capital (e.g., "We're opening new stores as fast as we can, but we don't feel that it is prudent to borrow more at present, and raising equity would dilute current shareholders.")
- Analyze the quality of a management team and you'll have an edge.
- Sell-side analysts tend to lob 'softball' questions.
- Test your team on competitive advantage, constraints and (tricky) top-line growth.