Actively managing our family portfolio over the past 15 months, I have made some mistakes and had several successes but, most importantly, I have learned and become a better investor. Today’s transactions are the manifestation of my recent resolution to focus more critically on a company’s competitive advantage.
With the confluence of potentially historic hurricane activity and CEO Bob Iger’s warning regarding lower-than-expected earnings in fiscal 2017, shares of The Walt Disney Corporation (NYSE: DIS) traded lower on Thursday. As a cautious-opportunistic, I executed a measured approach to increase our stake in DIS by 50%. Today I invested half of the new capital allocated to DIS with the residual due to be invested in two weeks (if Mickey’s theme parks are still standing).
DIS has not kept pace with the overall market over the past year due in part to increased competition for its cable television business, but the company’s ability to create, distribute, and license its media properties (especially action blockbuster franchises and family-focused content) provides a unique opportunity for investors. Long-term-focused investors can capitalize during the current market weakness due to uneven growth in revenue and earnings.
I love burrito bowls, but Chipotle’s (NYSE: CMG) success is difficult to expand and may be more challenging to defend against competition. After buying shares of CMG at $396.35 per share in June 2016, I liquidated our stake at $305.03 and realized a gain-offsetting capital loss.
CMG prides itself on the quality of its food and service, but recent operational miscues and the tight labor market are significant challenges to attract and retain “top-performers.” Employees of our local Chipotle confirmed staffing shortages delayed new store openings. Though expansion provides employee advancement opportunities, new locations are less likely to be well positioned (a suburban strip mall just can’t compete with the foot traffic in urban areas), and, to fill openings created by redistributing talented employees to manage new stores, CMG may need to relax hiring. New store profitability will struggle to match the profitability of existing stores and may even cannibalize existing sales.
The failure of the ShopHouse concept and uninspired offerings currently in incubation do not encourage confidence in CMG’s ability to expand to different types of cuisines. ShopHouse was a unique concept with potential for mass expansion, but, menu complexity proved a detriment to the customer's’ experience. Now CMG has turned its focus to upscale pizza and burger restaurants which, though not as challenging to operate as ShopHouse, face fierce competition from similar offerings from Five Guys, In and Out, and every town’s local favorite burger or pizza joint.
Ultimately, I plan to avoid the restaurant business going forward. Restaurants are not difficult businesses to open or operate. Customers have many available direct or indirect substitutes (including services that deliver meal kits or groceries). Most importantly, investing in a restaurant distracts my focus from businesses that are more likely to repel aspiring competitors.