Investment ideas and how to find them

Ideas are crucial to an active investor. But what defines an investment idea? For our analysts it’s that moment of recognition when they find a company whose intrinsic value - or potential value - is not built into the current price.

Screening for meaning

Finding investment ideas is an analytical and creative process. We use sophisticated financial screening to explore price moves and company performance, seeking anomalies worth exploration.

Recently our screens lit up over a comparative anomaly. We were looking at two AI stocks - one Asian and one from the US. We noticed a threefold increase in revenue for the Asian stock had gone relatively unrewarded by the market. Its US comparator, with revenues up ‘only’ 40%, had risen sharply.

That anomaly alone wasn’t enough to label the laggard as investment-worthy. But the screening process got us looking deeply into both companies and gave us a live investment idea to explore. It may well lead to an investment decision.

Pattern recognition

Idea generation is often about ‘pattern recognition’.¹ In investment, that comes from experience, deep research, wide-ranging conversations and enough reflection to make connections.  

Ball Corp is a leading US can manufacturer. It was a Covid beneficiary as consumers had spare cash and needed beer and Coke to get them through long days at home. They increased plant capacity.

Post-Covid, soft-drink and beer companies increased prices aggressively to offset inflation. That hit demand for cans.² However, we knew the soda/beer companies could only tolerate falling volumes for so long. Eventually they would cut prices to restore volumes and protect market share. We also calculated Budweiser sales would rebound. We were happy to invest in Ball after the stock fell from US$90 to US$44 on lost volume. As we expected, it bounced back into the high $60s as the market regained confidence in Ball’s sales volumes

Bouncing Balls and cheaper chips

Our analysts recently spotted a similar pattern with Lamb Weston, America’s largest chipmaker (the potato kind).

Like Ball Corp, Lamb Weston boomed during Covid and added capacity. Quick Service Restaurants (QSRs – an industry term for businesses like McDonalds) also expanded. Then raised prices to offset inflation. As sales slowed, Lamb Weston fumbled a major technology integration which meant they couldn’t track inventory or deliver to customers. Market share fell.

We thought these were temporary issues. We knew QSRs couldn’t tolerate falling sales for long and would discount to bring back customers. McDonald’s $5 value meal is a classic response. We think Lamb Weston will solve their integration problem and win back customers. So we were able to buy a company with a 40% share of its market after their price fell from US$110 to US$80 and it hit record low valuations. We see a similar pattern to the Ball story. There’s a good chance the outcome will be the same.

Smart enough to ask the obvious question

Recently, industry veteran Andrew Clifford was discussing the AI boom within the team and asked: “Where’s the money coming from?”

The ensuing insight – that AI investment sucks budget away from areas like Cloud technology – has us researching which Cloud companies will suffer and which can continue to grow.

Investment ideas come from different places. Some come from grinding investigation. Some are instants of inspiration.  Yet as Louis Pasteur said, “…chance favours only the prepared mind.”

 

1: Science writer Michael Shermer calls humans “pattern-recognition machines.”
2: The Bud Light influencer scandal also had an effect, costing Anheuser Busch – a key Ball customer – US$1.4 billion in lost sales (Source: Fortune)