Seeking Long-Term Winners Not Yet Understood by Markets
Emerging industries typically boast many exciting and fast-growing companies. Few will become meaningfully profitable. This is important because revenue is not value – only the prospect of future profit can yield present intrinsic value. Our research suggests that public equity markets are initially unable to discern distant future profitability until it begins to reveal itself in trailing financials.
Our investment thesis is that, under certain conditions, our proprietary toolset for assessing competitive advantage may estimate a company’s distant future earning power more accurately than the market can. When our framework identifies a company with a high likelihood of durable future profitability, there is the prospect of a “strategic arbitrage” between our estimate and the market’s estimate of intrinsic value. When we are right, this resolves as alpha over time, as markets recognize a company’s increasingly observable earning power and its implications for intrinsic value.
Because companies with unrecognized durable competitive advantage are so rare, our portfolios are concentrated and, therefore, volatile. Strategy Capital is only appropriate for those willing and able to tolerate high short-term volatility.
Disciplined Competitive Analysis
Our approach is based on the 7 Powers model of fundamental value, which allows us to empirically navigate the complexities underlying emerging industries. By using this approach, we filter out the market ‘noise’ clouding true competitive outlooks and gain a clearer picture of the long-term earning potential ahead. When we are right, this can translate to alpha.
A newcomer develops an alternate model that would cause serious near-term damage if adopted by an incumbent
A player has preferred access (by fiat – either statutory or choice) to a coveted asset
An economic structure whereby per-unit costs decline as unit production volume increases
An economic structure whereby an individual network joiner enjoys enhanced value due to the presence of others on the network
The durable attribution of higher value to an objectively identical product or service
An existing customer will incur unrecoverable damage by changing to another vendor
Over time, a company evolves a differentiated company process, which conveys significant benefits (usually cost)
7 Powers: The Foundations of Business Strategy
The book 7 Powers is just the public face of a much larger private repository of institutional know-how for competitive analysis, borne of our years of focus on this one subject.