How to Handle the Downturn
December 04, 2008
– Comments (3)
Everyone likely already knows all about the trouble our economy seems to be in as of late – and when stocks get hammered as they have been it’s often quite tempting to try to do some bargain hunting among the mass heaps of wreckage. The question many would-be bargain hunters are likely asking is: how to separate the ‘good but beaten-down’ from the ‘deserve an even bigger beat-down’?
In answering this question I’m reminded of a lesson I learned from one of my community college professors in a class on advertising. He once commented that many companies reduce advertising (and the corresponding expenses) when times were difficult, but that this was a mistake and that the best course of action was to actually increase advertising instead. Whether or not this makes sense for every company in every situation is questionable, but the underlying point I took away was that the time to *really* press the attack, from a business perspective, was exactly when everyone else was battening down the proverbial hatches.
To me, my professor’s comment points to the idea that tough economic times may present a golden opportunity for well-run and well-positioned companies to increase their market share. Not only might a resulting increase in market share help a company to better weather the current economic storm, but when the clouds clear and the entire economy rebounds, the company will be in the position to capture a bigger portion of said rebound.
This begs the question: what are some characteristics that these kinds of companies might have in common that I could try to look for in making investment decisions? A couple immediately come to mind – and while they are characteristics that I think are important to look for regardless of current overall economic conditions, they perhaps become doubly important now.
#1: A strong, preferably cash-rich and debt-scarce balance sheet.
If a company is going to ‘press the attack’ during troubling economic times, it is going to have a difficult time doing so if it’s worried about having enough cash on hand to continue ordinary operations. A decent example of this in action today can perhaps be found looking at automakers. While the troubles of GM, Ford, and Chrysler go beyond the balance sheet, management at these companies is probably spending more time figuring out how to simply survive than it is figuring out how to try to steal market share away from Toyota, Honda, and others.
#2: A compelling value proposition offered to customers that has the potential to change their habits.
It’s one thing to steal market share during troubling times, and another to keep that share when the economy rebounds. Though I haven’t independently confirmed this, I remember hearing a news story that the current economic trouble was actually helping out McDonald’s – as customers began looking for lower-priced alternatives to their usual dining establishments. The question here is: will McDonald’s be able to keep this increased market share when good economic times return, or will these customers return to their previous dining habits once the storm has subsided? While I don’t pretend to know the answer to this question as it specifically relates to McDonald’s, this question is an important one to ask when one is trying to identify those companies that are most well-positioned to exit the current economic turmoil in a stronger position than they were in when the turmoil began.
Of course the couple characteristics I listed above are far from being all-inclusive. What I would encourage all investors to do, however, during these uncertain economic times is ask themselves some of these same questions. What characteristics might those companies who are best-equipped to both weather the current economic storm and steal market share away from weaker competitors have in common? How do I use this list to my greatest advantage, as an investor, when making investing decisions today?
For each of us, the specific answers may be a bit different – but I think we might all become better investors for having asked them.
Regards,
Russell (a.k.a. TMFEldrehad)
P.S. I own no shares in any company mentioned in this blog posting.
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