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Mom & Pop.
Trailer Parks. Cemeteries. Canines.
Hi Everyone 👋,
Happy Sunday! Hope you’ve all recovered from the dizzying Election Week. At least the stock market has been (surprisingly) resilient. Rallying nicely alongside our friends Bitcoin & Gold. Welcome to the +670 NEW subscribers who have joined us since the last email! If you’re reading this but haven’t subscribed, join our community of smart, curious investors. Subscribe here!
Now let’s get started!
Mom & Pop.
I’ve made a lot money in the stock market over the last 15 years. But it has NOT been on sexy high-flyer stocks.
Quite the opposite. It’s been on boring companies. So, boring I can barely stay awake reading their decks.
The pitch always goes something like this. Some guy (or girl) from some random industry has this underwhelming insight:
“There’s ten thousand (insert any industry here) companies in America and they are all owned by “mom & pops”. If we buy a bunch of them and stick them together we can make a lot of money”
For example, a fellow named Jay Hennick had this insight. He went from pool boy to billionaire rolling up property management businesses. I was lucky enough to play golf with Jay four summers ago in Muskoka. Lovely guy.
So what strategy did Jay use to become so wealthy?
Roll-up the Rim to Win.
Introducing the “Roll-Up” or what the elite private equity crowd calls the “Consolidation Play”.
When done right, this strategy, can generate 10-15% annual stock returns over 10, 20, 30 years!
Boring strategy. Unboring returns.
So how does it work exactly?
1 +1 = 3?
The strategy is pretty straightforward.
Figure out a way, by combining two businesses or more, to increase revenue AND decrease expenses SIMULTANEOUSLY. Thereby achieving both top and bottom line growth.
It’s called finding a SYNERGY. It is the holy grail of making money at scale.
In complex math terms: 1 + 1 = 3
Sounds easy right? Yes and No.
You would be surprised how many people screw it up.
Drugs & Bad Actors.
Valeant Pharmaceuticals is a perfect example of a fantastic failure.
They attempted a roll-up in the pharmaceutical sector. They went on an insane drug buying spree. Sending the stock skyrocketing +300% in less than 12 months. They were paying investment bankers millions of dollars. They became a market darling.
But then it all ended very badly. Insider trading scandals, aggressive accounting practices and a fantastic 90% stock collapse. Oh and Bill Ackman lost a couple billion dollars on it. No biggie.
Here is the truth. When you scrape away all the illegal stuff, Valeant was never a true roll-up. They never found a SYNERGY. All they were doing was buying drugs and jacking up prices. Unethical and unsustainable.
So how can you spot a GREAT roll-up strategy?
Look Carefully. Be Patient.
Roll-ups take a VERY long-time to SCALE. Patience is paramount.
Successful roll-ups have stock charts that look very uninteresting for a long period of time…
UNTIL THEY DON’T!
Which is why many investors ignore them until it’s too late.
“Where there's mystery, there's margin”
So what kind of industries make great roll-ups?
They typically share these qualities:
Fragmented Industry (ie. one in which many companies compete and there is no single or small group of companies which dominate the industry)
Aging Owner without succession plan
Synergy with Scale
Basically the opposite of a penny stock promote ; )
Cemeteries. Trailer Parks. Canines.
Most of the best roll-ups actually stay private.
That’s because the “smart money” aka Private Equity loves them. Because the business model is repeatable, dependable & highly lucrative. “Rinse Wash & Repeat”!
Here’s a couple impressive Canadian ones:
Dental Corp. Launched in 2011. Now the largest network of dentals clinics in North America. +$850MM in revenue. This company is worth billions now.
VetStrategy. Vets for Pets! Acquired by Warren Buffet this summer for $1B.
Fortunately, there are some great ways to play roll-ups on the public side. I reveal my top picks at the end. Below are are some of the top industries I would focus on:
Cemeteries & Funeral Homes
Ones I am NOT sure about yet:
E-Commerce. Apparently people are rolling-up Shopify & Amazon stores and doing very well at it. I am not clear on the synergy here yet.
Why Invest in Roll-Ups Now?
1) Money is cheap (and will be for a long time). This creates a long runaway for companies to borrow & buy businesses.
2) High Demand for Growth Stocks. People are starved for returns and many are scared of investing in the NASDAQ at these levels. In the short term I would be a little too (chart below).
Roll-ups could be a great alternative.
How’s Grit Playing It?
I’ve been investing in roll-ups for the last 15 years. I became infatuated with them early on because I realized I could sleep better at night owing them.
Here is the list of roll-ups I currently own and have for the last 3-6 years. I would still BUY them all today.
Descartes (DSG-T, $5B). E-commerce is booming. They are logistics middle men. They make money every time a package gets shipped on their network.
Boyd Auto Collision (BYD-U, $4.2B). Cars get in accidents and need to be fixed. Necessary service.
StorageVault (SVI-T, $1.3B). Self-storage is a large & growing market. Still highly fragmented <15% controlled by top 4 players.
Park Lawn (PLC-T, ~$900M). Population is aging and more people are dying.
Akumin (AKU-US, $350M). Health-tech imaging. Service is moving from expensive hospitals to clinics. Up-listed to NASDAQ. CIBC just initiated coverage this week and an advisor bought 10MM shares (4.2% of company).
On the private side, I am long:
Trailer Parks: I am a co-founder of a trailer park roll-up with 3 other finance pros. It’s a wonderful sector because affordable housing is in short supply, the industry is highly fragmented, you can raise raise rents faster than inflation and it’s a land appreciation play.
Auto Dealerships: I made 100% return on a private auto dealer roll-up run by a former PE friend of mine. He is an absolute beast. Started from zero and rolled-up $1B revenue in less <4 years.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Bitcoin is up +12% this week #HODL
What else we Grittin’ On:
Breakout. Bitcoin hits a 3 year high this week. Up ~300% since the financial crisis & 4,201% over the past 5 years. Sad that ZERO institutional sales people wrote about it this week.
Inflation. World’s Negative-Yield Debt Pile Has Just Hit a New Record. I am not worried about inflation until money velocity picks up. It’s actually doing the opposite. It hit a new low in 2020.
NASDAQ Profit Taking. “Triple leverage long NASDAQ 100 ETF saw record outflow, while triple leverage short NASDAQ 100 ETF daw a record inflow”. Short term profit taking on hot tech stocks.
Two Freebies for this week:
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