Hi Reader,

Welcome to the 6th edition of the Stockstartr newsletter. In today's edition, you'll learn why great companies in lousy industries are interesting for investors.

Fundamental

Investment Opportunities in Lousy Industries

Fast-growing industries have always attracted speculators and investors. And that is no different from the current hot topic, AI. It is exciting and sensational. Each company related in one way or another to AI gets high valuations. Nvidia currently has a whopping price-earnings-ratio of 54. Meta, Microsoft, and ASML have P/E's ranging from 30 to 40.

Then there are also many smaller non-public companies or start-ups that integrate AI into a product or service. With so many competitors, they compete to get or retain market share. And for now, it isn't clear who will be a winner or a loser.

Sensible investors don't partake in such unknowns. And they certainly don't want to pay high valuations for hyped-up companies. So where should these investors look then?

Lousy industries aren't interesting for the general stock market participant or entrepreneur. Thus, the great companies in these industries attract less competition. They are likely to keep their market share for a long time. The industry may grow at 1 to 2 % or not at all. But the strong companies slowly expand their imperium as the weak ones go bankrupt or drop out.

A company that can capture an ever-increasing market share of a small or non-growing market will do a lot better than a company losing market share in an exciting market.

As the companies in lousy industries go unnoticed by most investors, the valuation multiples (price/earnings ratio) are lower. It gives you a window of opportunity to invest in a company without overpaying.

Hot trends on Wall Street get a lot of news coverage, and even your neighbors or colleagues talk about it. Everyone has talked for years about Tesla and how it is disrupting the EV market. However, no one talked excitingly about couch sellers or photo frame manufacturers. To invest in such companies, you need to shift your mindset. In lousy industries, time feels slower. There is no daily news or acquaintances to talk about with. Which is good because it allows you to get in at a decent price.

Where to find such lousy industries with great companies? Sit yourself down and think about boring companies or companies doing something the general public doesn't want to hear about. Other places to look for these industries are in waste management or doing something depressing. You, for sure, can think of more.

Most market participants avoid companies who deal with uncomfortable situations. An example is the funeral home business. It is a slow-growth industry. Some companies purchase similar mom-and-pop funeral homes. This is how those companies grow in a slow industry. And who is going to stop them? Only a few entrepreneurs are queuing up to get into the industry.

With a bit of creativity or investigating a supply chain, you will find something in a lousy industry. When you do, follow with a competitor research and go with the best company. Good luck!

Glossary

Seasonality

Seasonality is a regular and predictable pattern observed that recurs every year. A wintersport gear store has more business every year in the autumn and winter than the spring and summer. Dating apps see more registrations in January after the holiday season. Or TJX companies buying up out-of-season goods and reselling them, has during the last quarter more sales because of the back-to-school and holiday purchases.

Practical

Business Overview

The figures in an annual report have little meaning without knowing the story behind it. To understand the story behind it, you have to understand the business operations of the company. The best place to start is at item 1 in the annual report. As an example, we take Floor & Decor's (FND) annual report from 2023.

Item 1 informs us a lot about surrounding the business. Typically, under the section "our company," the report states what it does, which products it sells, and which customers it targets. Further, it describes Floor & Decor's warehouse-format stores and website.

Then Floor & Decor communicates their competitive strengths in lengthy detail. When you compare the report with other companies, you'll find that competitive strengths are less extensive. It doesn't mean they have none. It could be to keep competitors in the dark longer.

FND's growth strategy includes more store openings, an increase in store sales, and investments in service improvements. When you look through their growth strategy from the previous 5 years, you see an accelerating increase in store openings and key points to focus on. Together with the improvement of the growth strategy, it indicates a growing company.

The report continues with product segments, customers, marketing, manufacturers, distribution, competition, and more. It is one of the more detailed business overviews compared to many other public companies.

FND's business description is an excellent example of what public companies are willing to share. However, not all companies are eager to do this. Mature companies often neglect to share their strategies. It is possible to obtain the same or more information, but that means talking with employees, managers, customers, and other players in the supply chain.

Principle

Don't waste Valuable Time

Imagine you have a big monitor on your desk that displays various price charts of stocks you invested in. The prices change red or green with every update. You only decided to follow the prices for a couple of minutes. Before you know it, an hour has passed. Probably you didn't need your imagination, as it happens frequently to you.

Don't worry, it happens to many other stock market participants too. Regardless of how addictive it is to glue your eyes to the screen, investors focus on the companies instead of the stock. How a company generates cash flow and how financially healthy the company is are 2 questions that keep investors awake at night.

Ideally, an investor has someone executing the orders for them. So, you have no reason to look at the stock market. Because everyone has experienced how addictive it is watching stock prices go up and down. And no matter how much time you spend looking at the screen, the outcome won't change. It is a waste of time.

If analyzing companies is anything like turning stones to look for treasure under them, you would be turning stones non-stop. Especially, when you know that every tenth stone has treasure. You try to turn as many as you can.

Investing has a high resemblance. When you analyze 1 company, chances are, you don't find it a good company. You look for certain characteristics. When you analyze 10 companies, your chances increase finding a better one. Maybe it isn't the one you are looking for, but you now have a better idea of what you aren't looking for. You gain valuable information either way. So, what do you do? Focus your precious time on turning stones.

What you can do to prevent watching pricing: the phone provides easy access to real-time pricing. At your desk, you pick up the phone easily. Would you pick it up when you leave the phone in another room? It is already less likely as you must get up and walk to the next room.

When you use a computer instead of a phone, simply block the websites with a browser extension. You can block them during weekdays or specific hours. It is all about making it (slightly) more challenging to access the pricing. Then, you will watch the stock market for fewer moments of the day. It leaves you time to turn more stones.

Thanks for reading Stockstartr. For questions, suggestions, or feedback, please reply to this email. We will gladly take the time to listen to you. Please ask your friends and colleagues to sign up.

No investing advice is given at any moment. The newsletter is purely for informative purposes only.​
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