YouSaid · the spoken record

Connor Leonard

lines on the record: 62
first: 2017-11-21
most recent: 2017-11-21
sittings or episodes: 1
sources: podcast

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“You had the growth of craft beer as a segment, I would say. You had them transitioning from a regional brewer to more of a national brewer. At the time, they were really the only craft brewer that had scale, where they could kind of bridge that gap from just an upstart and start selling into bars with kind of the buds and the cores and all that kind of stuff. And then you had the fanatical CEO. And the price, I'd say it wasn't a no-brainer, but it was certainly fair and the stock did pretty well. And that's, you know, that always helps, you know.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“First interview, you know, most of the interviews in finance, they're asking you brain teasers or how many ping pong balls in a Boeing 747 or something. And we just talked about the beer business in Sam Adams for an hour. And fortunately it wasn't two hours. I don't know if I'd have enough to keep going. But yeah, that's when I knew that this was the kind of group I wanted to be with. I said, what am I even signing on for here? And they said, well, you'll get to learn about public investing, private investing, you'll get to learn about business, and you don't have to do investment banking in New York. And I said, sign me up.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, a little background. I'm from Massachusetts. At the time I was in college, Peter Lynch would say invest in what you know. I knew that market fairly well, right? Also at that time, Boston Beer was not a very well-known company. It was more of a regional company. It was sort of before Craft Beer exploded. And I say maybe there was two sell side analysts at small shops that followed it. And I just got obsessed with that company. It's a fairly simple business. It's a good business. The beer business has made a lot of rich people all across the world. And they have this fanatical CEO who I love. He, I think was a sixth generation brewer with three degrees from Harvard. So these are all great places to start. And I did a lengthy investment pitch on that company for an investing class in college. I used that company for every class project I could possibly use in my strategy class or operations class. So I knew that thing cold. I knew it inside and out. And so when I came in and talked with them for the”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“The way that he didn't have to do, but he was always really great at looking out for other people, and I think it gave him, it made him fulfilled, and that's how he lived his life. So it was a great, great role model.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“I'd say to go back to Quentin, just he's top of mind. I had this passion. I'd say borderline fanatical interest in being a public markets investor. And to be honest with you, that's not really what our business is. It's not our core business at IMC. Our core business is buying private companies. That's what I've been doing for a number of years. But he saw my interest and he gave me an opportunity to do really what's my dream job inside a company with people who I respect and admire. I don't know how anybody can do something kinder than that. Now hopefully, you know, he thought I could actually make him some money in the process and do well for the IMC shareholders and trust me every day nobody wants that more than I do. Not just to prove him right, but also I really believe in the IMC story and our model and I just feel fortunate to be a part of that. So my life is just so much better because my path crossed with his and he's just done so many things along.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Investor. I love this business. I love the game. I'm trying to get better. Do you have some opportunity to talk on the phone or meet in person? And you'd be surprised if you send out letters like that to people more often than not, they respond. And I think that's just part of the tradition of value investing is to sort of give back to people who are earlier on in their journey. And I don't think there's a lot of secrets that are given away because most of this stuff is fairly straightforward, but it's really difficult to do day in, day out. So those people have been really supportive along the way.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I'd say I would have to start with Quentin Maynard. He was our chairman and CEO. He unfortunately passed away a couple months ago at age thirty eight from Cancer, which is really sad. But he hired me right out of college, which is very unusual. Our first interview, we just talked about one stock for an hour, which was Sam Adams or Boston Beer, and he offered me a job. I didn't know what I was signing up for, but I'm really glad I took that job in hindsight. And so I got to learn about business, public investing, private investing from him. Say his dad, James Maynard, who's most closely associated with Golden Corral, but he's also just an incredible capital allocator, and he's great at thinking about financing. I'd say if they ever write the outsiders part two, he should really be in consideration for that. And then I'd say there are just some investors that I respect and admire. And what I do is I'll write a handwritten letter to people and just say, I'm a young investor.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Open as an investment fund anymore. They shut down recently a couple years ago. They've had an incredible track record of compounding. And it's really the style that sort of matches up with the way I like to do things concentrated, great businesses. They had big positions in Amazon and Costco and a couple others. So that's the kind of stuff that I get excited about is when you come across shareholder letters where it's not just We have 50 positions and we're constantly going in and going out. It's a guy who lays out his thesis for why this business should go on a good run and like Nick Sleep laid out why you should buy Amazon in 2000.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Certainly, some people from Berkshire would be on there. I was just at the Liberty Media Investor Day yesterday. John Malone would certainly be on the Mount Rushmore of Capital Allocators. He just seen him in person. He's a savant. I mean, he's playing chess and we're playing checkers. It's just incredible. And he's done it as an investor and as a business operator, so I have a lot of respect for that. I would say if you want to get more into the traditional fund manager side of the world, I'm a big fan of Seth Clerman and Bao Post. That's really how I learned the business. One of the partners in our fund when I was in my first week gave me the book Margin of Safety. I remember reading the first chapter, late one night, and it was literally the light bulb went off, and I became obsessed with value investing from that point. And I've been that way ever since. Nomad Capital in London, they're actually not.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Power in there, and then you've got a management team and a board who has signed up to just systematically buy back shares. So that's what Charlie Munger would call a cannibal. I think an example of that in the public markets today would be Verisign. Verisign is essentially a toll road business on the internet. If you have a dot-com name, you pay $8.99 to Verisign. You might have bought it through GoDaddy or something, but ultimately that's where it's going. And it's probably the most dominant business you'll ever come across in terms of lack of competition because they essentially have a regulated monopoly and they earn 70% plus margins. They generate tons of free cash flow. And fortunately, they have Lou Simpson, who traces back to Berkshire on the board, and they just cannibalize their own shares. So that's one where you say, now we've got the benefits of a capitalized business, and we've sort of removed that variable of, well, what if they buy something crazy? So that's really your job.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“There is at the board level and the management level, how are they allocating the capital? Because when a business is generating an enormous amount of cash and there isn't an obvious place to put it, you do run the risk that they can start putting it in less than ideal places. So some examples would be Coca-Cola, I think at one point owned a movie studio and also like a fish farm or something like that. And then they started buying all the bottlers. And so it's a problem where you almost have so much cash and maybe it's an ego thing or something. You don't want to just give it back. So you want to do something with it. And chances are you're just not going to be able to put it in a place that's as good as your original business. So you'll probably be diluting the business over time. What I like to see kind of the dream scenario would be a capitalite compounder that's got some growth runway ahead of it, meaning it's underlying volumes can grow and maybe even price.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I would say it depends on what you're looking for and what you're comfortable with. So I think some people like that Walmart example that I cited earlier, that really works for people because capital allocation is less of a risk there, even though the business requires capital to grow, it's a very straightforward path. Like at the board meeting for Walmart 40, 50 years ago, I don't think there was a lot of discussion in terms of what's our plan for capital allocation. It was open more stores. So I think if you have a lot of conviction in the unit economics of that next store, that can work well for a lot of people. I would say technically if you're splitting hairs, again, we're talking about the best of the best businesses out there. I would say the capital light business is slightly better. I think Buffett said the best business is a royalty on the growth of others requiring little capital itself. Sounds pretty good. Yeah, it sounds pretty good to me. I would say the factor you have to look at.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sort of famously frugal is a nice way of putting it. But if you get that culture from the CEO, it can kind of filter down through the rest of the company. And those are ones I really like because you can develop almost a trust in the management team where you know that they're working, they're kind of on your team. They're not looking out for their own interest. Their shareholders also, and we're really all on the same side. And then even if the business maybe sells off in price. So let's say the business is doing well, but the stock has a rough patch. You're almost excited in a way because if the business, if the price falls thirty percent, they're going to take advantage of that and start buying back the shares in sort of this lumpy fashion. So those ones where if you find that management team early and you trust them and you think that they can redeploy that capital for a long period of time, that's again you want to buy one of those, hopefully make it a concentrated position and sort of get out of the way.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“10 years from now. An executive is focused on hitting next corner's earnings target. So if they're compensated based on next quarter's earnings target, it's going to be very difficult to act in that long-term manner. And then you look for some other factors that I'd say are probably less obvious, but they kind of get me excited when I find them. So it might be that the annual report is just a very bland brown cover, and it's been that way for 20 years or something. Or you go on to Google Maps and you look up their office and it's a nondescript office building in Florida. It's not a skyscraper in Manhattan or something. And you just hear stories about how they travel like Mark Leonard from Constellation Software. He wrote a shareholder letter. It was probably 10 years ago where he said in painstaking detail he described a flight to Europe where he flew coach even though he's six foot seven. So does that one cos actually matter? No, but it says the tone for the whole company. And I think Fastenal is another company that's”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I think this is more on the qualitative rather than the quantitative side of things. And I think for some people, that scares them a little bit. It's a different set of filters that you're applying. But really, the key tool feed there would be shareholder letters. And I'd say just qualitative clues along the way. So really what you're looking for is what is their capital allocation philosophy. First of all, if they don't write a shareholder letter and they don't tell you that, it's going to be really hard to figure it out. But I'd say for most of these companies, the management team takes a lot of time and effort to put together a very thorough shareholder letter, which shows that they actually care about the outside shareholders. They treat them more like partners rather than a nuisance or something. And then you just see factors along the way in the company. Like if you go through the proxy and you see how are they compensated, how much of the business do they own? We want owners, not executives. An owner is somebody who's focused on cash flow, who's focused on increasing intrinsic value.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, or you could think of it like it's a private equity fund, but you're not paying $220 just to use Transdime as an example. Their management team is more capable of buying aerospace businesses than you or I would be. They probably get better access to deal flow. They know how to finance them. They know what kind of margins they can take those businesses to. So I would rather they keep the money and buy those companies because I think that they can earn above 20% returns on that incremental capital.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Than we could on our own. So, for a company like that, you would rather that management team retains the money and buys the businesses for you in a sense rather than sending it out to us, paying taxes on the dividend, and then we look for opportunities ourselves. So that would be one category. That's your legacy moat plus outsiders.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Callie, who said, say, a Hall of Fame capital allocator. And then he's using that in a very disciplined structured way to buy more businesses. So the difference between how TransDime or Constellation software operates and how typical business operates in terms of M&A is that typically M&A gets a pretty bad reputation amongst public company shareholders. And I think the evidence is pretty conclusive that M&A makes the company bigger. It might make the CEOs role more prominent, but it doesn't always add value to the shareholders, especially on a per share basis. But you've got this small percentage of companies out there who have these outsider management teams, and they've got a proven playbook where they basically stick to one niche that they know incredibly well. They know how to finance the businesses, they know the multiples that they can pay, they have operating executives who can go in and reconfigure the businesses if necessary. And I would say that they can actually redeploy the shareholders' money better.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure, so I'd say there's two circumstances. First would be a category that I call legacy motes plus outsiders. So William Thorndike has been a guest on your podcast. His book, The Outsiders, is one of my favorite business books. There's a handful of management teams out there that I would say are outsider management teams. Some examples in the public markets today would be constellation software, transdime, Danaher. Basically, these businesses are a collection of legacy motes with almost like an internal private equity fund that sits on top of them. So they take the cash that the subsidiaries generate, so to use Transyme as an example, I think they own 36 operating businesses. They use the cash that those businesses generate, which are each great businesses, but their legacy modes, and they don't really have the ability to redeploy within those subsidiaries. They basically send it up to the headquarters in Cleveland where you've got”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Big companies that are getting all the headlines today. And so that's the advantage I can say no to so many things. I can say no to, I'd say, above average ideas and hopefully wait for a really exceptional idea. And what I've found is that it requires a lot of patience, but when you find those ideas that are absolute no-brainers, you can have concentrated positions in them. If you're right, it'll tend to work out really well. And hopefully if you have enough margin of safety, even if you're wrong, you'll still be okay and kind of live to fight another day.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“It's not like you're. Every company I'm looking at when I'm first going through a 10K, I'm trying to say, is it no mode? Is it legacy mode? Is it reinvestment mode? Is it a capital light compounder? And I'll classify businesses on my watch list or even in my portfolio in those terms. And basically if it's a no moat business, I'm probably kind of throwing it out and moving on. It's not that you can't make money on no moat businesses. I think you definitely can, but I try and stick to what I know well. And if I only have to have five to ten holdings, I don't need to have an opinion on every business out there. I can pick my spots, and these are the areas that I like to work in. And my whole theory with that is that there's so many smart people out there working in this field that I try and find kind of these little niches, little mix and crannies. I try and go into the minor league, so to speak, and find a company that I think has the characteristics of those.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Is that the public markets are very, very competitive? I have a lot of respect for the peers that I'm playing against. And to think that you're going to find 100 or 200 incredible ideas or find 30 new ideas a year, I certainly can't do that. Can I find maybe one to two new good ideas a year that I think are no-brainers or that I'm really excited about? Hopefully if I put in a lot of work. So our theory is infrequent but concentrated actions. So I'm studying hundreds of companies a year. I'm filtering them down and then hopefully I'm finding maybe one or two and then when we find them if I have that conviction I'm comfortable making that 10 to 20 percent of my capital. That's an unusual thing to do I'd say in the world of professional investing but I bet if you ask a lot of people what they do in their personal accounts it looks just like that so the way I describe it is that our business model it's very simple”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, what do you own in your personal account? They'll say, oh, I own this stock, and it's 30% of my personal account, and I will say, well, do you own that in your portfolio? Or do you own it? Does it your fund own it or whatever it might be? Well, no, our fund is a different product. So what I saw is that there was a divergence in terms of how do people invest when it's their own money and how do they invest sort of as a professional investor. So our theory at IMC is that if you applied that mentality of a principal investor, of it's your own money, but you sort of added the benefits of being full time, having all the tools in your toolbox, that you could actually produce results that are hopefully materially better than the relevant benchmarks. So our game plan, how I employ that day to day, is I tend to have five to ten holdings. So we're on the hyperconcentrated side, I would say, a starter position for me would be 5%, which is typically maybe a max position for somebody else. And really, our whole theory.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I'd say the biggest advantage I have going for me is that the mandate I have is literally it's to invest as if it's your own money. So what I've seen in the industry is that a lot of investment operations are forced to almost create a product that sort of fits into a certain box. So that might be like large cap growth or whatever relevant index that they need to track. And if they find a very interesting company but it falls outside of that box, they can't own it. And then their fund might have, whether it's regulatory restrictions or just the way they choose to structure things, they might have 100 positions or 200 positions. to 200 basis points or something like that. Contrast that to how a lot of people in this industry invest personally. A lot of people in this industry have a personal account. You'll ask them.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Widens over time. Some people use the term flywheel or virtuous cycle. So basically for a business like Amazon or JD or hopefully Zoo Plus, as they grow, their economics get better. They can sell the same goods to customers at lower prices. Their fulfillment costs kind of per package decrease over time. And so if you and I were trying to enter that industry cold tomorrow, we're so far behind we basically have no chance. And it's the same thing in a lot of these network businesses if we wanted to start up a Facebook or an eBay or something like that tomorrow. Good luck. That ship is sailed in a lot of ways. And as those businesses grow, network effect just keeps getting stronger and stronger.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Scale to compete, but they're actually a lot more capital efficient than I think people give them credit for, mostly because they can stretch out those supplier terms. And so they can actually produce great results. And the best part about them is that the results actually get better over time. There's really a couple business models that I like to focus on. One would be scale economics and the other would be network effects. And the reason why is because they're really the only two business models I can think of that improve or the companies get stronger as they grow. So if you think about it, if we had a business that was producing great results, kind of the laws of capitalism would say that new entrants will come in and try and take some of those profits for themselves. So that's why everybody looks for a mode. Well, I'm sort of greedy. I don't just want a moat. I want to moat that widens over time. So I found that scale economics or network effects are the type of business models where as the business grows, its mode just naturally”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“And where are the physical assets they need to run this business? And then you're comparing that to the earnings power. And what you'll find with a company like JD and a lot of internet retailers is they actually have massively negative working capital. I think their days outstanding at something like one day outstanding for receivables and it's 58 days outstanding for payables. So that gets back to that dynamic where negative working capital means that your suppliers are in a sense financing your growth. And then the fixed assets aren't actually as high as I think a lot of people think. And then sure, is it a low margin business? Yeah, it might be a couple percent operating margin that's increasing over time. But if you compare that to a very light asset base, it's really incredible return. I'd say the whole group of internet retailers, they get this knock as an asset heavy, low margin business, and they are fairly low margin because it's a very efficient business and you really have to have skill.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. Well, I would say sticking with the theme of internet retailers, I think a lot of the story with internet retailers is that they're incredibly low margin, they're not profitable, they're burning shareholders money, and they're very CapEx heavy. I think that would be the narrative of a company like JD.com in China. If you just did a first pass through their financial statements, it would look like a business that has a big balance sheet that's earning negative margins and is therefore not earning a great return on shareholders' capital. So what you have to do sometimes is kind of pick apart the balance sheet, get some of the items out there that don't really impact the day-to-day running of the business. What I'm looking for is what's the amount of capital employed, meaning what's the amount of capital that you would actually need to run that business? So you're taking out things like goodwill or intangibles. You're taking out investments in JVs or minority interests in other companies that they have. And you're really getting down to what's the working capital.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“I would just say there are some companies that you find where it's a cloud enterprise software company or it's this generic business and it's a platform or you know whatever it might be but I want to know”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I would say, generally speaking, I don't look at the world on an industry classification. I'm a generalist investor. I just try and fish where the fish are, so to speak. And really for me, when I'm going through an annual report for the first time, I'm trying to figure out how does this company make money? What are the unit economics? Meaning, what are the economics of one transaction? And if I can figure that out, then I'd say the company is fair game. If I can't figure out how the company makes money within my first passive at 10K, we're probably going to move on to the next one.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Versus Amazon, and you ask yourself, where would I buy this from? And really what you're looking at would be the price, the selection, the shipping terms. And what I found was that Zoo Plus, if I had that friend in Europe, I would 100% tell them to buy from Zoo Plus because you're going to get the breadth of products, the depth of products really great price in many cases is significantly lower than Amazon. And you'll get very consistent shipping. So I think that's just the benefit of having, they're a pet specialist. All they do is pet food versus Amazon's more of a generalist. And what I've found is that if you want to try and beat Amazon at their own game, it's almost impossible, right? The scale they have. But if you focus in these very specific verticals, I think there is a world where a vertical can compete effectively against Amazon. I think even within Amazon, Zappos or Dipers.com or examples of that.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Transcripts, it could be going through message boards or just different places to extract information. In the case of zoo plus, one of the things I did, a question I wanted to answer that I sort of assigned myself is if I had a friend in Europe who had a pet and they were buying dog food every month, how would I pitch to them why should you buy it from Zoo plus maybe pets at home which would be like a pet smart in the US or Amazon for example? So I told myself if I can't answer that question if I can't confidently say this is exactly why you should be buying it from Zoo Plus I probably can buy that company. So basically what I did was I put myself in the consumer's shoes. I went through Zoo Plus's top five European markets and price shopped a basket of fifty skews that I came up with that roughly approximates their sales distribution and I use Google Translate heavily and you basically go through skew by skew country by country zoo plus versus pets at home.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“And every single earnings call transcript that has ever happened. And I think you can get a little bit lost in that. So what I like to do is sort of take first a step back and say, what are the three to five variables that really matter? Because in my experience, if you get those right, and of course you'll go through the details just to make sure, but typically all grade investments are you can actually simplify them into maybe just a couple paragraphs and it'll be those three to five key factors. Now once you've identified those, that's when it's time to put on your journalist hat. So your journalist is you're assigning yourself a story and the story is those three to five key variables and you become obsessed with those variables and you look at different forms of information to try and answer those questions. So that could be talking to people who are involved with the company or suppliers. It could be sort of the traditional work meaning reading annual reports and”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“To Neyer, and they say, Here's one of my favorite positions. That's a great one to put on a list and say, I'm going to read that annual report and give it a shot. So that's how Zoo Plus specifically came about. And I think once you're kind of in there looking at the company, I really break down that process into, I'd say, two parts. I really think of myself part as a almost like a board member and part like a journalist. So what I mean by that is when I'm initially screening through the company, I'm trying to put on my board member hat. And what I mean by that is I'm trying to find the three to five key variables that really matter for the business. And now why I say board member is that a lot of people in this industry are investment analysts and their job is to know everything about the company that's ever existed. Like where did the CFO go to high school or something like this? And you can get really bogged down in the details. I mean, you read the last 10 years worth of 10Ks or 10K.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I would say I wish there was a secret publication that had all the best ideas. That's just not the case. It's really, it's a combination of a lot of factors. I'd say, one, I'm just constantly reading all day, every day, and that can be a range of publications. It's newspapers every morning. It's trade journals. It's reading other companies' filings that I'm interested in. It's reading annual reports. And so you're just trying to get as many data points as possible. And then my job is to really filter those data points. So when I get a company that kind of comes across my radar like Zoo+, in this case, one of my friends told me about it. He's another investor and I respect the way he looks at businesses. And I found that's to be a really good source not for making an investment decision, but if you think about it, there's, I think, 20,000 publicly traded companies in the world, and I'm a one-man operation. So how do you sift through all that? If you talk to other investors, you respect.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Within that pie, you have online structurally taken share from brick and mortar. Because basically if you buy pet food online, you pay less money, you have a bigger selection, and you don't have to carry the bag.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Domesticane pets for 15,000 years. That's what the book Sapiens said. But it's changed a lot, I'd say, in the last 100 or 200 years. If you went back a couple hundred years ago, pets lived outside, they got table scraps. If something happened with the pet in terms of health, you wouldn't necessarily took it out back, right? So today, you know, you've got the dog spas, the organic dog food, the dogs that go through these elaborate surgeries. And the reason why is because people think of pets as part of their family. And so if you feed yourself organic food, then of course your dog would want organic food too. So what you see, and this is across the world, the pet food market is incredibly resilient, meaning in recessions you're still going to feed your pet. And it's also growing because people are spending more of their discretionary income on their pet. So it's growing about two to three percent a year. So really with Zoo Plus, would you have is the overall pie growing a couple percent?”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Early on the morning, they sell pet food across 30 European countries. And I think just from a consumer perspective, buying pet food at a store is sort of a pain. It's not a very fun process. It's a heavy bag. It's the same product every time. So it's really more of a chore. You know, a business like TJ Maxx can give the shopper an experience, the thrill of the hunt. Pet food doesn't really have that. So it's something that you're basically buying almost like a subscription. And it works really well as an e-commerce business because while most e-commerce businesses deal with about 30% returns, pet food, it's only about 2% returns. So pretty much the dog gets the same food every month. And as long as that's working, you're going to order it again the next month. So it's sort of a recurring revenue business model. The whole pet food market is one that I like to spend time on and just look at companies in there because you've got this trend, the humanization of pets, which is basically, you know, what I like to say is humans have been”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Company I've talked about publicly in the past is Zoo Plus out of Germany. They're Europe's largest online pet food retailer. So they sell 50% of all the pet food online in Europe. It's a business that gets me really excited for a couple of reasons. What I'm really looking for as an investor would be a business that has a great competitive position today, a business that I think can widen its mood over time, that has structural tailwinds, and then has a management team who has that long-term mentality that's willing to forego short-term earnings to grow the long-term intrinsic value. So the highlights on Zoo Plus would be only about 78% of all pet food is sold online. I think in other markets, you know, online penetration is 20 to 50%. And I think that over time, pet food will get there also.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Many U.S. analysts or U.S. funds looking at it. So I study those companies not really with an intent to invest in them, but to learn from them, then hopefully apply that to the smaller companies where if I'm right on it, that business could conceivably go up five to ten X versus Facebook or companies like that today. They just might run into the law of large numbers at some point.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“I think they're all exceptional businesses. I think Buffett's touched on this a little bit recently that it's a unique time in American business where the biggest businesses that are growing the most actually deploy basically no tangible capital. So that's just a really big shift from think of railroads or different business models that have dominated in years past. So I think for us, I'd say those businesses are a little bit more in the what I'd call the major leagues, meaning Facebook, Google, companies like that. We're talking hundreds of billions in market cap, so many analysts and funds are following that. So what I like to do is study those companies intently, but then apply those business models hopefully to something that's more in the minor leagues. So what I mean by that is my sweet spot for an investment might be 500 million to 5 billion of market cap. When you get down there, and it might even be in a foreign country where there's just not as”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Years because as long as we build up that base, we're in this incredibly dominant position where we can then focus on monetizing it. So if you were an outside investor looking at a company that's EBITDA negative, let's say, but it's because it's growing 100% and because they're focused on building up that liquidity, as long as you have conviction on where it's going, you might actually be able to buy something that's incredibly cheap based on future earnings power. You have to have the patience to stick with it. But that's something that we think we can bring to the public markets that maybe not everybody else can.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“And even some that have been listed for 20 years continue to grow 10% plus. So very long runway. And then if you pair that with some really good capital allocation, meaning if you have a management team who actually responsibly uses that cash to buy back shares or to send it out to the owners, in a lot of ways twenty times EBITDA can actually be really cheap. Now you have to have conviction on all those factors, but I would say for a classified business in a lot of cases, 20 times EBITDA is incredibly cheap. And so the advantage that you could have there is just framing the problem a little bit differently. The other thing that you might look for is a business that isn't fully earning what it potentially could be earning today. So typically when you're starting up a classified business, you forego current earnings to widen the mode. You're basically saying our focus right now is to get as many buyers and sellers on our platform and we will try and maximize our profitability in five years or ten years.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“I really learned this business by studying Seth Claran and some of those traditional value investors. And I think a lot of value investors have that hard coded in our DNA that you can't pay above 10 times earnings for a business. You can't pay above book value. And I think that that's certainly a great investment strategy and a lot of incredible careers have been built on that. But I think it can bias us in some ways against businesses like this where a lot of these classified businesses have been publicly traded for a decade plus when they were listed a decade ago they traded at twenty times EBITDA and so a typical value investor would look at that and say no way I can't touch it I think if you take a deeper look at it and you see okay this is a business that pretty much EBITDA equals free cash flow so these are real earnings that you could put in your pocket as an owner they have long growth runways where some of these are growing 20 to 30 percent”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Invest in their website since 1995. It doesn't look like a lot. And still, they're the dominant force in the US classified business.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Constantly. And typically, what happens in these businesses is you get to a point where it's essentially a winner take-all type dynamic. Why wouldn't you sell your couch on Craigslist? That's where the most eyeballs are. You'd be crazy to go anywhere else. So what you'll see in these various markets around the world is that the dominant classifieds business will have three, four, five, up to 20x the market share of the number two. And there's a company out there, Shibstead, in Sweden that's one of the premier owners and operators of classified businesses in the world. They've basically said that if they try and enter a market and they can't get to that number one position in classifieds, they'll just give up. They'll kind of pack their tent and move on because there's really no point. So that shows you the strength of the moat. Once you've built up that liquidity and you've built up the network, it's almost impenetrable. And I think the best example of that is Craigslist. I don't know how much they've”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, when I say classifieds, think of Craigslist, which is privately held in the US. And then there's a host of other companies internationally that would be the Craigslist of Sweden or New Zealand or Australia. I mean, a lot of those are publicly traded. The interesting thing about a classifieds is that it's a very difficult business to start up. It's sort of the chicken and the egg problem. Let's say I have something that I want to sell. Maybe it's an old couch. Or where do I want to sell it? I want to sell it to whatever site has the most buyers. Well, where do the buyers want to go? Well, they want to go wherever the most couches are, if that's what they're looking for. So you kind of have to get that network effect started up. And what I'm really describing there is liquidity. You need to get liquidity in your marketplace. And typically as you are building a business like that, you would forego making money on it or monetizing it as you build up your liquidity. And as you build up your liquidity, you're widening your mode.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Basically, and that comes when your customers pay you up front. So that's why it's typically a subscription business. And that benefits you as a business owner because your customers are in a sense financing your growth. And then you're looking for a business that's more reliant on intangible assets versus physical assets. So I think your classic manufacturing business, well, how do you grow? You build a new factory? Well, that requires capital investment. If you take a business that's a two-sided network, like a marketplace business, a classifieds business, they can add incremental customers and it really doesn't cost them much. The incremental margins are incredible because once you already have the platform built out, sure, you have to add some new developers over time. Or there's some costs as you grow. But the incremental margins are just incredible.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“So, this category came up because somebody asked me, well, what happens if a business can grow without deploying any incremental capital? And I thought to myself, well, that's even better. So there's this other group of companies I would call capitalite compounders. And these are businesses that can increase their earnings power, therefore increase their intrinsic value, that actually deploying any incremental capital. So they can kind of have their cake and eat it too, in a sense. An example of that would be right move in the UK or any business that is maybe a classified business, a two-sided network business, a subscription business model. So the factors you're really looking for there would be negative working capital.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source
“Or less. You're looking for a business that's earning high returns on its invested capital would typically be the best indicator. But I think within that world, there's two buckets that I classify. One would be a legacy moat and one would be a reinvestment. So we'll start first with the legacy mode because I think within that world this is much more common. In a legacy mode, to me is a business that earns high returns on prior invested capital. So an example of this would be a self-storage facility. Imagine you and I owned a self-storage facility in a small town. There's limited competition. It has high occupancy rates. It's a good business. Maybe we invested one million dollars into constructing this.”
2017-11-21 · Invest Like the Best · Connor Leonard - Capital Light Compounders & Reinvestment Moats - [Invest Like the Best, EP.64] · IDENTIFIED FROM THE TRANSCRIPT · source