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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

Invest in Exclusivity for Unfair Advantages

Unique companies with a valuable source of intangible assets, moats and super-normal returns

At Urbem, we love to find companies associated with some exclusivity – anything that is unique: for example, exclusive rights on conducting certain businesses, exclusive mindshare among target customers and exclusive links to high-value content. In our experience, such businesses typically have unfair disadvantages, if capitalizing well on their intangible assets of exclusivity, to earn super-normal returns for their enterprising investors who seek long-term alpha. They are also well-moated and more forecastable, being considerably less prone to replication and competitive risk.

Take a look at VeriSign Inc. (NASDAQ:VRSN). The Virginia-based company exclusively operates the registry for domain names ending in .com and .net among a few others. Every time that you start a new website with these name extensions, chances are that VeriSign will be collecting an annual registration fee from you as long as the site is running. The business can be compared to the toll bridge of the internet.

Check out the consistently high returns on assets at the company for the past five years below.

Ferrari NV (NYSE:RACE) is another example, per our observation. The 80-year-old Italian heritage brand owns exclusive mindshare among ultra-high-net-worth individuals when it comes to sports cars. It was also ranked the world’s strongest brand this year by Brand Finance, which cites the fact that “many consumers, who might never own a Ferrari car, want a bag or a watch emblazoned with the Prancing Horse.” Plus, it is interesting to see that the word “exclusivity” appears more than 30 times in the company’s annual Securities and Exchange Commission filing for fiscal 2019, somewhat demonstrating the management’s focus and commitment.

According to the chart below, Ferrari earned an annual return on assets ranging from 6% to 17% over the last five years.

Our last example of “exclusivity” plays is Nike (NYSE:NKE), which has built its sustainable competitive edge through a highly appreciated global brand. Interbrand ranked the swoosh 16th on its list of “Best Global Brands” – far above the closest peer, Adidas (XTER:ADS). Nonetheless, the market-leading position does not stop the world’s largest sportswear manufacturer from trying to advance even further. The company leverages exclusive long-term partnerships with highly valuable, scarce content providers to widen its brand-based economic moat for the years to come. For instance, Nike replaced Adidas as the NBA uniform provider in 2017 for the following eight years and joined a 10-year uniform partnership with MLB last year. Additionally, the company managed to extend its uniform deal with NFL another eight years when the current contract expires this year.

The annual returns on assets at Nike ranged from 8% to 19% over the past five years, as illustrated below.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Nike.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website


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