From journalists to analysts: there is no substitute for on-the-ground research

The curiosity and perseverance characteristic of journalists can add real value to the investment process.

Par Robert Berner, Mara Der Hovanesian, Senior Investigative Analysts and Zhen Li, Investigative Analyst

Our Quality Growth research team includes three former investigative journalists who use their experience to think outside the box and gather information from non-traditional sources, including customers, suppliers, former executives and lawyers. specialists in the sector, or even academics.

By tapping into unconventional sources, our investigative analysts help identify trends ahead of the market, help avoid potentially costly investment mistakes, and can evaluate certain investment logics against unexpected insights. . In short, their contributions now constitute a valuable component of our Quality Growth research process.

Know how to interpret alarm signals

With decades of experience as an investigative journalist for BusinessWeek and the Wall Street Journal, Robert Berner knows how to identify new information that allows him to detect risks and opportunities that pure fundamental analysis might not identify. . Its findings often prompt our portfolio managers to rethink a holding or, in the case of RB Global, to strengthen the initial thesis. His research carried out in the field led the portfolio manager to increase this latter position.

Case Study #1: Increased Conviction in RB Global

Heavy equipment auction company, RB Global has acquired IAA, an online auction company for damaged cars. While IAA’s business model was seen as an effective way to sell cars quickly and get a high price for them, the company found itself in difficulty. It even lost a crucial national contract with Geico due to non-compliance with certain service level agreements.

The question arose whether RB Global would be able to reverse the trend for IAA? Robert then visited IAA sites in California, where he found cars arranged in a haphazard manner, in stark contrast to the neat rows of Copart, IAA’s main competitor. Conversations held with IAA site managers nevertheless revealed that RB Global was actively engaged in an improvement process. The group had thus set up a “dashboard” for its subsidiaries, which included six key performance indicators (KPI) and it had also developed action plans for sites showing below-average performance. Further discussions with insurance industry executives revealed that the market was eager to see the emergence of a strong competitor to Copart, which held promise for IAA. As Robert visited more locations, he found that the cars were arranged in a well-ordered manner, operations were more organized, and cars moved more quickly. Site managers and contracted tow truck drivers also reported more streamlined operations. The scenario of a recovery of IAA was unfolding, and Robert intends to continue to use his skills as an investigative journalist to follow its progress.

Prevent explosions

Journalists’ ability to ignore preconceptions proves particularly valuable to traditional research analysts when it comes to identifying confirmation biases to which they find themselves exposed. The case of Dollar General, a former holding, is a perfect illustration of this. After opening a position in early 2020, cracks began to appear in Dollar General’s mission. Former editor of BusinessWeek and reporter for Dow Jones Newswires, Barron’s Magazine and the Wall Street Journal, Mara Der Hovanesian had identified several financial difficulties faced by the customers of this large retail brand. She also found that Dollar General’s aggressive growth plans were generating increasing backlash. His research had prompted the portfolio manager to sell the position in May 2022, just weeks after the stock hit its all-time high and before a fine from the U.S. Department of Labor. Since then, the stock has collapsed.

Case Study #2: Selling the Position in Dollar General

Dollar General has, for decades, focused on retailing low-cost essentials in rural areas and low-income communities, allowing it to thrive in good times as well as in low-income communities. in difficult times. After going private in 2007 and going public, the Tennessee-based company adopted a streamlined strategy to keep costs low and, at the same time, embarked on an aggressive campaign expansion on a national scale. The number of stores has increased from 12,000 in 2015 to around 20,000 today, so that it overtakes rivals such as Wal-Mart and Target in terms of the number of new stores. Dollar’s winning store format has been one of the fastest growing in the U.S. retail landscape. New supply chain optimizations and labor cost rationalization have delivered high profit margins and strong financial performance.

What went wrong? Mara interviewed critical voices of this model who argued that the proliferation of Dollar General stores was contributing to the decline of small businesses and local grocery stores. This situation prompted some community activists and local officials to oppose the opening of new establishments, citing the effects such openings had on local economies and the character of the community. She also spoke with former employees, many of whom said working conditions were untenable. The company faced constant criticism over its labor practices, particularly regarding low wages and minimal employee benefits. Worse, often understaffed at late hours, stores became a magnet for crime. So much so that in 2024, the U.S. Department of Labor fined the company $12 million for failing to keep its employees safe and required Dollar General to step up enforcement. security and staffing in all its stores. These growing challenges have increased operational costs while impacting the group’s reputation.

Retail giants Walmart and Amazon have, for their part, begun to invest heavily in offering low-cost products; However, these two groups have greater resources that they can invest in technology, supply chain efficiency and improving the customer experience. Dollar General has fought to maintain its competitive edge and its promise of low prices. We nevertheless proceeded with the sale of its shares and, shortly afterwards, the company announced the closure of some 1,000 stores. Supply chain disruptions and rising costs then continued to erode profit margins, raising questions about the company’s ability to sustain growth.

Evaluation of investment theses

Our investigative analysts work on projects as varied as the geographies and sectors in which we invest. They sometimes revisit previous involvement to analyze the viability of a new product or service, assess competitive pressures, or examine changes that may have occurred in a company culture. In the case of cosmetics company Estee Lauder, Zhen Li, who is based in Hong Kong, had assessed Estee Lauder’s ability to turn around its business in China. Zhen Li has previous experience working for the New York Times in Shanghai covering China-related issues and later working as a freelance reporter covering China’s nuclear industry. Robert Berner investigated the impact of Estee Lauder’s corporate restructuring.

Case Study 3: Reinvestment Denied in Estee Lauder

While we had previously sold our position in Estee Lauder due to concerns over its operations in China, when we evaluated the opportunity to reinvest in this stock, we realized that concerns remained. Poor performance was seen as the result of cyclical weakness, but when Zhen began to delve deeper into the subject, she discovered significant company-specific issues.

In 2020, after speaking with cosmetics distributors, professionals working in duty-free stores and Estee Lauder’s competitors in the Chinese market, Zhen uncovered the problems the group was encountering in its duty-free sales channel. taxes. During the COVID pandemic lockdown in China from 2020 to early 2023, a high proportion of Estee Lauder products purchased in duty-free stores were resold through unauthorized channels, disrupting Estee Lauder’s official pricing system and damaged its brand image. Its stocks then increased excessively, and the practice of significant discounts then encouraged consumers to stock up on cosmetic products that would take months, even years, to use completely.

We concluded that there is no miracle solution for Estee Lauder in China: due to the deceleration of consumption, the intensification of competition from Chinese players and the company’s ongoing restructuring program. , there are indeed numerous elements which accumulate uncertainties.

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