Thoughts

In lower volume offerings that have taken big drops, there seems to be a somewhat predictable cycle of lower prices leading to underinvestment (or underplanting in grains), which then leads to shortages and a big moves off of bottoms on futures….

Although the Ethanol market clouds the picture, this occured with corn, and with wheat.

When pork was in a similar situation last fall (06′), I don’t believe that reversal was as direct as the demand from China derived from diseased animals was somewhat exogenous.

In all, it seems like when lower than average prices combine with diminished supply (lower plantings, weather, exogenous events), there is often a spring-back effect to be had if you can ride out short-term volatility…

Is it a cop-out to remain unconstrained on how to find new ideas? Is it cheating to subscribe to a newsletter?

The best feedback I’ve gotten thus far is to seek out areas where you can leverage what you know. This is resonant for people with tech, or engineering, or industrial, or even retail experience. What do I ‘know’ – restaurants? outdoor sporting goods? financial services? – but really only as a consumer, not an insider.

I think the crux is to focus on working to understand the interplay in an industry on a relatively simple level independent of someone else’s point of view on the space.

Real Estate is a good starting point, as I have a good sense of what matters in the space.

Next Steps: Frame out an evaluation methodology:

Tentatively:

1. Identify Favorable Space
2. Figure out best part of the Value Chain – Test using Porters
3. At best part of Value Chain identify public/private players and do a quick/dirty assessment
4. If step 3 yields anything choose no more than 3 players
5. Read Investor Presentations and Business Descriptions in 10K’s
6. Evaluate level of Street Coverage
7. Map Porters Framework for the relavent players
8. Put last three years’ Income statement into a Model and calculate growth rates and margins
9. Determine whether stock has catalysts, is undervalued, or has opportunity for margin expansion
10. Make list of 10 drivers and then attempt to stress test them to boil down to 2 or 3 with biggest impact on earnings and/or operating results.
11. Arrive at a modeled bull case and bear case based on divergance in key drivers.
12. Identify key evaluation metrics and commit them to paper with both bull and bear scenarios.