If you think about it, today's marketplace mimics the evolutionary process quite well. Companies that do a great job survive, companies that don't ... don't. The bonus for us is that instead of nature being the natural selector, the consumer -- you and I -- is the one that winnows out the losers.
Use a time machine
In evolution classic The Selfish Gene, author Richard Dawkins offers up an interesting thought experiment: "If you had sampled the [evolutionary] soup at two different times, the later sample would have contained a higher proportion of varieties with high longevity/fecundity/copying-fidelity."
In investing terms, what he's saying is clear: The companies [evolutionary soup] that will still be around years from now will all share.
Below, I'll be taking seven of the Fool's most popular consumer stocks and running them through a test to see if they are built to survive our natural selection. You can do the same with any stocks of your choosing.
High longevity: I'm gonna live forever!
The only way for an organism to reproduce is if it's around long enough to do so.
Looking at this from a business perspective, companies need to be built to last -- both in their markets and on their balance sheets. For my money, to pass this test, companies needed more cash on hand than debt.
|
Company |
What It Does |
Got Longevity? |
Reasoning |
|---|---|---|---|
|
E*TRADE |
Stock trading brokerage |
No |
It has four times more debt than cash and is reportedly looking for a buyer. |
|
Sirius XM Radio |
Satellite radio |
No |
These folks are survivors, but the company has nearly six times more debt than cash. |
|
SodaStream |
At-home soda machines |
Yes |
It's still early in the game, but it has just about no debt, a great sign. |
|
Eastman Kodak |
Photographic equipment |
No |
More debt than cash for this once-formidable company. |
|
Clearwire |
Portable wireless broadband network provider |
No |
Things have gone from bad to worse here, and it has almost five times more debt than cash. |
|
Travelzoo |
Travel and local deals |
Yes |
Survived the first dot-com bust and has no debt at all. |
|
Coldwater Creek |
Women's apparel and accessories |
Yes |
Though some have their doubts, Coldwater passes this test with more cash than debt. |
High fecundity: Like rabbits
If organisms don't reproduce on a regular schedule, they'll die out quickly. In the business world, consumer companies that don't have customers coming back on a regular basis are destined for a similar fate.
Let's break down how these seven companies do when we consider their ability to get customers to use their businesses over and over and over again.
|
Company |
Got Fecundity? |
Reasoning |
|
E*TRADE |
Yes |
Customers don't have to trade on a regular basis, but if they've set up their own individual account, they often do. |
|
Sirius |
Yes |
Subscription model -- 'nuff said. |
|
SodaStream |
Yes |
When you run out of syrup or CO2 for these things, you've got no choice. Classic razor-and-blades model. |
|
Eastman Kodak |
No |
People do need to refill their supplies, but there are too many competitors out there to guarantee success. |
|
Clearwire |
Yes |
The company's "Clear" modems have a subscription model. |
|
Travelzoo |
No |
Travelzoo has a pretty loyal base, but there's nothing -- especially during tough times -- that'll always keep people coming back. |
|
Coldwater Creek |
No |
This is a tough category for any retailer to pass, as customers have lots of choices to meet their needs. |
High copying fidelity: How reliable is this?
When two whales mate, they're pretty sure the result will be another whale. But what if a kangaroo came out instead? I know, it sounds ridiculous, but if species can't reproduce an accurate copy of themselves, there's little hope for their survival.
The same can be said for businesses. I'm not going to bring my car to a repair shop where I'm not sure if I'm going to get an expert craftsman or a dope with a wrench. Consumers like reliability; it keeps them coming back for more. How reliable are our seven companies?
|
Company |
Got Copying Fidelity? |
Reasoning |
|
E*TRADE |
Yes |
I've been using the company for years, and my experience has always been solid. |
|
Sirius |
Yes |
Though you can never guarantee what'll come up on talk shows, the best hits of the '60s won't be changing anytime soon. |
|
SodaStream |
Yes |
Unless someone's tampering with the formulas, this has to be true. |
|
Eastman Kodak |
Yes |
Supplies are supplies. |
|
Clearwire |
No |
I've been a customer for a couple of months, and there is a noticeable slowdown in speed at certain hours -- even though we bought its premium connection package. |
|
Travelzoo |
No |
Though it does a great job ensuring that there are quality deals, it simply doesn't have the same amount of control over the customer's experience as other businesses. The same holds true for all deals-oriented companies. |
|
Coldwater Creek |
Yes |
Hmmm, the goal is usually to have a diversified and changing collection. But the company still has full control over what it's offering and knows its customers pretty well. |
And the winner is...?
Want to know if these companies will still be around 10, 20, or 30 years from now? Of course, these are just predictions, but let's see how the seven companies stack up against the forces of evolution.
|
Company |
Going to Survive? |
|
E*TRADE |
Probably (2 of 3) |
|
Sirius |
Probably (2 of 3) |
|
SodaStream |
Yes (3 of 3) |
|
Eastman Kodak |
Probably not (1 of 3) |
|
Clearwire |
Probably not (1 of 3) |
|
Travelzoo |
Probably not (1 of 3) |
|
Coldwater Creek |
Probably (2 of 3) |
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