Pat Connolly's avatar

$110.7M follower assets

Pat Connolly's avatar
$110.7m follower assets
Researching Restaurants
When looking at restaurants what are the KPI's everyone looks at?

What are some good case studies to examine as to why some chains can reach escape velocity constantly opening new locations while others stall and begin to close locations?

Should investors favor companies that rely on franchise growth or those that manage their own locations?

Should investors favor food categories that are relevantly uncompetitive like $KRUS (CC: @investmenttalk) or try to find strong companies among a competitive category? Think burgers, pizza, and subs -- there are so many players within these categories with brands constantly going in and out of favor.

What are some industry growth drivers to consider?
  • Health trends
  • Ghost kitchens
  • Mobile ordering
  • Reward points
  • Dine-in vs takeout only locations

This is a sector I have never really looked at despite being an avid consumer of fast casual dining. My interest in the sector has piqued after learning that there are publicly traded $DPZ franchise groups & after considering that $SHAK growth strategy may actually suffer from dis-economies of scale.
Cash flow dynamics are more favorable at QSRs with franchise models rather than company-owned ones. Franchised concepts can raise capital at a lower cost vis-à-vis company-owned (via a debt product called a securitization).
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Pulling the lever on price hikes
Aside from items like housing, cars, and food I'm curious where other's are noticing higher prices. Sometimes it's hidden in the form of shrinkflation but other times companies can flex their pricing power on products & services that consumer love.

I don't believe $PLNT is too effected by inflation but I do think they can leverage the inflation narrative to opportunistically raise prices on members. This is where it get's interesting: If inflation really is transitory then right now is the opportune window of time to improve the future economics of your business by raising prices when it's least likely to receive backlash.
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$110.7m follower assets
Investing according to personal anecdotes
How To Use What You Already Know To Make Money In The Market

That is the subtitle to Peter Lynch's One Up On Wall Street, an all time classic. What's funny about this subtitle is how little the modern investor is following this advice.

Take a look at your portfolio -- what % of companies have you ever had a personal interaction with? ...is it okay if it's not 100%?

I pose this question because it has become clear that people are extremely willing to invest according to a story. Don't get me wrong, I believe the best story wins thereby lowering the cost of capital for companies with great stories but not every story has a happy ending.

This willingness to invest according to a story is perhaps best seen with investors looking to invest in emerging markets. $BABA gets plenty of publicity and even though we may have never seen an Alibaba distribution center in real life we're pretty sure they exist. On the other hand, if you invested in $JMIA how can you have any certainty of what's happening on the ground?

This also applies to software companies. Unless you're hands on with the product or a similar product how can you be really sure that this particular software company is the next 10 bagger?

Perhaps the one exception is Biotech... if it's not on the commercial market it's just a story. I think everyone has excepted that realty, as 90% of drugs fail to make it from phase 1 trials to market.

I just think it's amazing that 100's of billions of dollars can be allocated to projects & companies because the story creates believers (if no one believed then there would be no funding to make it a reality). Electric car companies are a recent example of this as they cashed in on their story by allowing believers to give them interest free loans to fund their venture -- they just call these loans 'pre-orders'.
Love the perspective. I think about the companies I own and how frequently I interact with their products often. I have also found asking others about companies used in their industries as prospective investments as well. Can't discount the anecdotal evidence!
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$110.7m follower assets
Quick Thoughts on $TWTR
"Why is twitter +27% today? Nothing materially changed, this market is silly"

I actually think something did materially change today. This tweet encapsulates it perfectly, there is a new reality for short sellers.

Even before this news I was getting more bullish on Twitter. They have been shipping new products at an accelerated pace and just at high level we have encouraging growth from the two most critical KPI's : DAU & advertising revenue were up YOY.

Not really looking to overcomplicate things here. I think it's time to consider that the clown car might be starting to turn things around. I will be looking to reread From Good to Great to see if we can draw any parallels from the past as we look at what the future holds for Twitter.
Today was a good day to sell $TWTR, one trading rule I remember from back in the day is when you receive a 'gift' you are suppose to accept it.
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Searching for clues from management commentary
Investors tune into earnings calls in order to better understand the company, the numbers they reported, and the little details you can't get from just reading a 10-K. Investors also enjoy listening to management opine about the broader economy because they have access to proprietary data that can serve as a indicator of something larger.

Maybe investors look to $RH to gauge consumer strength & when the CEO makes bearish comments they begin to get nervous. On the other hand maybe the CEO of a luxury retailer can't speak for 'average' consumer...

@paulcerro is the resident bull on Restoration Hardware and while it's a company I never looked at until this Twitter spaces, I do find it really interesting. Warren Buffet also finds it interesting as he took a stake in the company in 2019. I think this video is a great overview of just how impressive their showrooms are, good luck to any competitors looking to emulate their physical presence.

@mos_capital + @youngmoneycapital joined me in the camp of questioning why these comments carried so much weight across FinTwit.
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Earnings call are a great source also to see the accountability of management. If they don't execute well and put all the blame on external macro issues than that is a red flag for me. We all make mistakes. It's important to acknowledge them and learn from them.
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Are Discount Retailers a Robust Business?
When I initially read about supply chain disruptions I assumed this would hurt discount retailer's ability to source inventory. This Wall Street Journal Article seems to disprove my assumption. GroceryOutlet echoed the reporting from the WSJ article where they said the supply chain issues provided opportunity.

I understand how shifts in fashion can render existing inventory obsolete creating opportunities to source discounted clothing but for other categories I am beginning to question why so much discounted inventory exists.

Are discount retailers levered to the notion that traditional retailers will always be error prone in their demand forecasts? There are a host of multi-billion dollar businesses reliant upon sourcing inventory from traditional retailers that couldn't sell the items on their shelves.

Do improved data insights & more effective inventory management techniques shrink the overall pool of discounted inventory?

Overall the stock performance of these businesses hasn't been great the last year. To dig deeper one could track inventory trends for each company to see if they have in fact struggled to source inventory. It all seems very counterintuitive to me.

A high level view of how some of the businesses source inventory;

$OLLI - "Brand name and closeout merchandise represented approximately 65% and non-closeout goods and private label products collectively"

$TJX - "We take advantage of opportunities to acquire merchandise at substantial discounts that regularly arise from the production and flow of inventory in the apparel and home fashions marketplace"

$GO - "Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers"

$BIG - "we purchased approximately 24% of our merchandise, at cost, directly from overseas vendors, including approximately 15% from vendors located in China"
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$110.7m follower assets
A topic that can't get enough attention from investors: Inflation
Here's the recap from this week's Twitter spaces as the crew (@mos_capital @paulcerro @youngmoneycapital) opined on how inflation will impact various businesses.

Paul & I see eye to eye when it comes to grocery stores. They are attractive in an inflationary environment because they are distributors who are able to pass on the costs to the end customers & actually benefit when consumers seek discounts. A bargain shopper is much more likely to purchase the store branded food items (higher margin for grocery store).

Simon & Young Money make really good points when they mention their desire to seek capital light businesses. I particularly enjoy the notion that some businesses are agnostic to whether there is or isn't an inflationary environment since they are taking a fixed fee % of each transaction.
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An ongoing case study: TransMedics $TMDX
The elevator pitch:
A medical device company that is actively disrupting the status quo whereby their technology can become the new industry standard. As adoption increases they are poised to operate a razor & blade business in a concentrated end market with limited competition. According to their latest 10-K "we are aware of only two other companies providing warm perfusion systems, OrganOx Limited and XVIVO Perfusion AB"

Problem being solved:
Transporting organs set for transplantation is a difficult, error prone process that results in wasted organs and suboptimal patient outcomes post transplant. The current system is basically just placing an organ into a yeti cooler with ice and sending it on it's way. This places a countdown timer on the organ which in turn limits the total distance the organ can travel. With this current system it's may not be possible to transport an organ from New York to California.

Create a novel technology that circulates blood through the organ to keep it alive and functioning outside the human body.

Partner with top tier hospitals to legitimize the technology in order to have the strongest sales pitch when approach tier 2 and tier 3 hospitals. In 2020 Mass General Hospital was ~14% of their revenue which is a really great sign. Mass General is regarded as a 'teaching hospital' that is associated with Harvard and consistently ranked among the top 5 hospitals in the United States. Having the best and brightest involved with the product is what will bring this product from the nascent stages of commercialization to a new industry standard.

The company relies on FDA approval before hospitals can begin to use the product, without FDA approval the product may have a scrappage value of zero. Hospitals also need to see a favorable ROI in order to adopt Transmedics products, if there is no material difference in patient outcomes then there is little reason to train staff and adopt a more expensive solution.

An investors outlook:
This is an early stage company that seems like something out of science fiction but it's a solution to a very real problem. It's a high beta way to get exposure to the health care sector but IF the product lives up to it's promise then we have a clear path to a great business. In my opinion the monetary cost of the devices is the lowest hurdle any investor should be concerned about: there is a large enough pool of money between insurance companies, hospitals, Medicare, Medicaid, etc.

Investors should be excited about the market dynamics. In the US 55 of the organ centers have an estimated 70% market share & Transmedics faces little competition. This is a razor & blade business where they sell the devices to hospitals (the razor) & a consumable solution that flows through the organ itself (the blade). This is a market with extremely high switching costs & barriers to entry.

In sum, you have 'a new operating system' for organ transportation, a well capitalized buyer for the product, and favorable industry dynamics. Fund flows can come from biotech, ESG funds, healthcare funds, and technology funds. It's certainly one of the best stories in the market today. Investors need to watch press releases as the KPI's we need to see are new hospital sign ups & increased usage among existing hospitals. It would be a major red flag if a hospital did a trial with the product but decided not to continue usage.
Probably one of the most interesting things I have read so far this year. What a product! Thanks for sharing this information.
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Hindsight is 20/20 -- When is it time to sell a position?
Investors only need to do 2 things: open a position & close the position. It sounds simple enough, but really, how do you know when to sell?

@paulcerro @youngmoneycapital @mos_capital and myself tried to decode this age old riddle but as you can see it's another example of how a multitude of opinions and processes are what makes a market.
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Great to see different ways of tackling the same question. My own approach aligns with @pat_connolly and @youngmoneycapital. Thanks for sharing this insightful memo.

Lots of factors to take into account - A Stock Hits the Price Target, Change in Fundamentals, Opportunity Cost, a Change in Ownership, Portfolio Management and Tax treatment.

Feel like selling an investment is like buying one—you have to make sure it is in line with your personal investing and financial goals.
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The S & The G
The Russian invasion of Ukraine is bringing the other two thirds of ESG investing into the spotlight. Everyone bullish on the concept of ESG investing has been laser focused on the environmental aspect but now we are witnessing how the Social & Governance can impact our portfolios.

Investors are now bracing and positioning themselves for the second & third order effects of the sanctions imposed on Russia. The ban from the SWIFT banking system makes it more difficult for Russia to transact their oil, but this will likely also lead to a rise in the overall price of oil, which negatively effects the US consumer.

Corporations and funds are divesting their Russian assets but since they are essentially a forced/distressed seller it is basically a certainty this will negatively impact them from a financial perspective. They're not selling due to financial liquidity needs but are seeking a different type of liquidity: Social & Governance liquidity. It is part of their fiduciary responsibility to adhere to mandates or objectives related to Social & Governance issues and the latest developments have materially altered the investment landscape.

Right now futures are selling off which makes sense, given investors do not like uncertainty, but in a way I think there are newfound reasons to be bullish on US securities. Announcements like this point to greater market concentration. If 2 of the top 10 plane manufactures are Russian based then how does this ban not positively impact the demand & pricing power of Airbus & $BA?

What other second & third order effects could arise from Russia becoming exiled from the global economy?