Most all companies ultimately rely on one person for the success of their business. That person is you… the consumer. But, not all companies sell directly to the end consumer and finding these types of companies many times leads to an exceptional investment. Outside of the technology sector, unearthing these gems is the challenge. Let’s dig deeper…
We are referring to companies that sell a product to a business that needs this product to provide their service or even make their product. The downside is, you are reliant on another company’s success. But, the upside is there are (or should be) many more companies for you to sell to… hence diversifying your customer risk. In addition, you can easily enter new markets as selling an improved product to companies decreases the number of customers you need to reach.
A great example of investing within an industry, is The Middleby Corporation (MIDD), a company that sells cooking/kitchen equipment to restaurants. A somewhat boring company, but one that has immense opportunity. For instance, if as an investor you like the quick service restaurant segment… rather than choose between investing in McDonalds or Wendy’s, you can invest in MIDD, who sells to both these restaurants and most of the others in the space.
During recessionary times, MIDD will share the same grim fate as most companies but in a growing economy, they will continue to grow along with all of the restaurants, most likely avoiding any specific operator error. In addition, they can expand into other dining segments quite easily… just offer another oven, deep fryer, etc. to a new channel. If McDonald’s wanted to expand into a new segment they would need to create a whole new concept. That would take years and lots of dollars to barely sniff some success. Give me the boring company selling within an industry, every chance I get.