What's the Problem?

Monday, June 5, 2006

Michael Moe, ThinkEquity Partners, http://www.thinkequity.com/

Some of my colleagues at ThinkEquity Partners start to roll their eyes when I insist that we look at every investment with the “4P” framework – People, Product, Potential and Predictability. It’s so simplistic, how could I imagine thinking this could ever be applied to such a serious and sophisticated endeavor?

Guilty as charged – it is simple, but the essence of successful investing is to distill complex issues into very straightforward fundamentals. Every great growth company I have ever seen has scored extremely high in the 4Ps.

Being systematic and strategic at hunting for companies that incorporate the 4Ps is how we find the Stars of Tomorrow – the fastest-growing and most innovative companies in the marketplace.

The first two Ps – People and Product – are straightforward enough – great companies have great People. And great companies have a leading Product or claim to fame.

The fourth P – Predictability – is important, showing visibility to the growth potential and operating leverage a company seeks.

The third P – Potential – seems obvious, and in many respects it is. We want to invest in companies that have huge market potential, small companies that can become big companies.

Using a Megatrend framework is useful to think about how secular waves such as globalization, outsourcing, the internet, convergence, consolidation, brands and demographics affect an opportunity.

One of the best questions we ask ourselves in looking for companies with huge potential is, “Where are the problems?”

The biggest investment opportunities are often where there is a problem – the bigger the problem, the bigger the opportunity.

For example, in a global marketplace and a knowledge-based economy, there is no bigger problem than how to better educate the populace. Education makes a difference not only in how an individual does, but how a company does and for that matter, how a country does.

As evidence of this, the pay gap between somebody who has a high school education and a college education has gone from 50% to over 110%. Yet, just 25% of the U.S. adult population has a college degree. U.S. high school kids are finishing near the bottom in international comparisons of key 21st century subjects such as math and science.

Big Problem – Big Opportunity

An aging population creates problems for the health care system, for the retirement system, and for medical products.

$70 a barrel oil prices and the reality that there is a finite amount of oil is a problem. That it’s dirty is a problem too. And that most of the oil we consume comes from another country is unacceptable.

Water, pollution, and infectious diseases are huge problems that create an opportunity for innovative companies to create solutions.

Looking out over the next 20 years, we see unmet challenges in 20 areas including:

1) Education
2) Digital Divide
3) Energy
4) Global Warming
5) Aging Population
6) Clean and Available Water
7) Infectious Diseases
8) Illegal Drugs
9) Immigration
10) Virtual Security
11) Security-security
12) Intellectual Property Rights
13) Global Poverty
14) Population Control
15) Food Processing and Storage
16) Common Language and Communication
17) Global Commerce
18) No Parent at Home
19) Africa
20) The Middle East

Many of these problems will require political and business solutions. But these 20 areas will provide active areas of opportunity for innovative entrepreneurs looking to make a difference and a fortune.

With Memorial Day behind us, last week’s holiday-shortened week started out miserably as the two prior weeks were. As the week progressed, so did the averages, with the S&P 500 finishing up 0.6%, the NASDAQ up 0.4% and the Dow off 0.3%.

Job growth was 100k short of expectations and in Wall Street’s perverse logic, this is good because it could provide Fed. Chairman Bernanke the catalyst to stop raising rates.

The Vonage bomb – off 31% from its IPO price – has cast a pall over the IPO market, but strong inflows ($1.4 billion last week), and we believe an overall constructive environment, will have the IPO market improve during the summer.

We remain bullish based on fundamentals, valuation, demand imbalance for equities, and sentiment.

Michael Moe is Chairman and CEO of ThinkEquity Partners. ThinkThoughts is ThinkEquity Partners' newsletter for investors and executives focused on the growth economy. Mixing market analysis with commentary on topical events, ThinkThoughts reflects the intellectual capital at the core of ThinkEquity Partners.

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