Frank Thoughts: The Perfect Stock
Frank Boland
September 15, 2021

It’s what we all hope to own. But if you don’t know what attributes it must have, you won’t find it. First, and foremost, it should be a fairly small business run by an entrepreneur. Personal pride and creativity drive a new business. Secondly, the founder must own a significant amount of stock. Such a C.E.O. has a different mindset than an executive of a large company. They’re also different skills. A large corporation needs business school graduates trained in managing people and product lines.  

Ironically, most entrepreneurs are college dropouts. Bill Gates of Microsoft and Mark Zuckerberg of Facebook are but two current examples. Secondly, while there is always a primary leader in a startup, he must have at least one partner. Bill Gates had Paul Allen, Steve Jobs had Steve Wozniak, Phil Knight of Nike had Bill Bowerman. But help can also come from friends or employees. Nike’s first employee, Jeff Johnson, came up with the name Nike which replaced Dimension Six as the brand name.

For major investment success, it is critical for a “perfect” stock to have close to a universal market opportunity. If it’s a product or service almost everyone needs or, even better, desires it’s close to perfect. Ideally, such an opportunity should be in a highly fragmented business. If your chosen stock is the dominant company in a highly fragmented business, you are almost home free. The absolute key is … does the company’s net income exceed sales growth? If so, you have the rare perfect stock!

All of this I was only vaguely aware of before a lunch in 1978. At the time, I worked for Lehman Brothers which was a pure merchant investment bank. Merchant because the firm put its own capital into private companies and eventually brought those companies public. There were hundreds of such corporate clients and research analysts were prohibited from writing reports recommending a corporate client’s stock. It was a good policy, but years later it would help “blow-up” the firm.

The lunch was in Quincy Market hosted by Charlie Lazarus and Norman Rifkin of Toys R Us. The stock was $5 and I had purchased it at $10. The toy industry was then an eight billion dollar a year business. Virtually every retailer sold toys in November and December. Toy R Us did it year-round and was the largest retailer of toys in the industry with 250 million in sales. Thus, Lazarus was able to make a deal with manufacturers. He would order toys and not pay for them until January 31st the following year.

At the lunch, Norman Rifkin – who was the C.F.O. – was doing all the talking … until one of the other three guests at the table asked the question, “When did you buy your first Barbie Doll?” That question caused Charlie Lazarus – the founder – to jump out of his chair and gently push his friend down. “It was 20 years ago, and I remember …” and so he went on. In my previous 13 years in the business, I had never seen anyone so excited about his business … and I had heard countless C.E.O.s.

But still, I felt something was missing from my “perfect” thesis. Then one day I had an insight. Price! How does a new product or service compare to those already available? In retailing – like every business - it’s price to quality. Sam Walton replaced K-Mart with Walmart. Jeff Bezos replaced everyone else. I then decided while net income growing faster than revenue is crucial to investing in a small company, its importance diminishes as a business grows larger, but it still must be profitable. Today’s profitless Uber like companies exist because interest rates are 0%. As interest rates move higher their stocks will go lower. The blitz scaling model benefits management, employees, CPAs, investment bankers and VCs. Everyone, but the long-term investor looking for the perfect stock!         

-Francis Patrick Boland

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