VIDEO: Why We Like Companies With These Characteristics
Here's the skinny on arms merchant business models and rising dollar content strategies.
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In today’s Daily Rundown video Chris Versace discusses why the portfolio utilizes a “buy the bullets, not the guns” approach to selecting companies.
He also explains why the portfolio prefers companies that are increasing their customer dollar content.
Transcript
CHRIS VERSACE: Hey, folks. Chris Versace here, Thursday, June 20. Hope you had an enjoyable Juneteenth that saw the stock market close. You know, mid-week closes for the stock market are a little rare to say the least, especially in the month of June. But it means we have two days left to go in the current week.
And I really just wanted to take a couple of minutes today to talk about one aspect of the strategies that we use to manage the portfolio. As you know, we are very heavily reliant upon fundamental analysis, but also technical analysis. We also have a dash of thematics, which of course, you see each and every week when we share our notebook signals with you. But there is another strategy that I like to employ when managing the portfolio.
Some call it an arms merchant mentality. Others, like myself in the past, have referred to it as buy the bullets, not the guns. And what we mean by that is we like to really favor extremely well-positioned suppliers in a particular sector or a particular industry. They touch a number of different end market players. And the idea is that as the end market grows, expands, if you will, these particularly well-positioned suppliers will benefit.
This is kind of where the rising tide lifts all boats kind of comes in. But here's the deal, it means that these suppliers are not reliant on any one particular customer. So, for example, we could see that with Qualcomm, which serves all the major smartphone manufacturers. And increasingly, as we're learning with AI, many, and a growing list, of PC manufacturers, because of what they're doing with Snapdragon and enabling AI on device for that particular market.
But that's a new growth opportunity for them. Another one is a more recently added position of the portfolio, Builders FirstSource. Now as we've talked about in our notes, when we had Builders FirstSource in the bullpen, and even in the conversation that we shared with you via our podcast with Builders FirstSource CFO, they count a preponderance of the largest publicly home builder companies among their customer base. That means that we're not necessarily betting on whether Toll Brothers or DR Horton wins, but rather the rising tide in the housing market should benefit Builders FirstSource.
There's one other aspect to this that I like to also see when we're looking for these arms merchant type companies. It's the ability to grow their dollar content, whether it's a smartphone, whether it's a home or any other product. And the reason being for that is as a company can increase its dollar content per product. It means that as the market grows, the company should grow significantly faster. That's when the market is growing.
But it also means that when we see a slowdown in a particular market, that rising dollar content should offset the impact on that company's revenue stream and earnings. So those are some of the qualities and characteristics of companies that we not only have in the portfolio, but also for those that we're going to look to be adding to the portfolio. So again, when we put potential prospects, contenders through the ringer, either for the bullpen or even the portfolio, we'll be looking for that. But we're also going to continue to stick to looking for companies poised to grow their earnings significantly faster than the S&P 500.
Thanks for watching today's video, members. Please remember check your emails, check your Alerts. We want to make sure you're getting all our latest thinking, as well as any moves that we make with the portfolio because we want you right there with us. Thanks for watching.
