Six months ago, I sat down with the CEO of what used to be a $1 billion company. The company is well-known, and I can almost guarantee that you've heard of it. Here are some of the highlights of the conversation:
"We have to invest year after year to maintain our competitive advantage."
Ouch.
"There's little that we do that no one else can do."
Are you kidding?
"We continually have to adjust for some kind of 'vaporization' effect with respect to our write-offs."
Agghhhh! %$#@! No ...
Out of journalistic considerations, I can't tell you the name of the stock. But the simple truth is that since the interview, shares have dropped more than 40% anyway -- so people are definitely getting the picture.
Dime a dozen
You might be able to find the stock if you looked hard enough -- actually, you could probably find dozens more in a similar predicament. While I thought the exec honorable for his candid truth telling -- and that's a big plus in my book -- it's not good enough for any investment of mine. The point here is universal: If the person I interviewed sounds anything even remotely like the CEO of a company in your portfolio, dump that stock. Now.
A lasting competitive advantage is a vital element of a great business. Without it, a company's brief edge in sales or technology or whatever will disintegrate like a finely built sand castle on the beach.
Remember when IBM
A deadly trap
No matter how good a product or a service is, if it can be replicated by others, it's not worth much. In time, competitors will squeeze margins, batter revenue growth, and produce a red ocean of competition. More and more each year will need to be invested, only to receive a smaller piece of the earnings pie in return.
That's precisely why Intuitive Surgical has delivered over 200% gains in that past two years. No one is even close to replicating the company's da Vinci surgical robot technology. And it explains why businesses like General Motors
Investing legends will tell you the same thing. Among others, Warren Buffet has made billions identifying companies that leverage products or brands whose edge was not in danger. American Express
Back to the horror story
I knew going into the CEO interview that I didn't really like the company's position in the industry. So when I got a sense that he was willing to talk, I pushed harder. I asked him if they had any kind of ringer in the pipeline -- perhaps a blockbuster project in one important segment that investors could look forward to. His response?
"There's no killer application."
Man. Sell this stock.
Foolish bottom line
If you own shares of a company that has no real barriers to hungry competition, and it doesn't have anything in the works for the future, then what do you have? Not that much, really.
Instead, focus on the companies that do. Every single one of the recommendations in Motley Fool Stock Advisor leverages some kind of competitive advantage -- it's a crucial aspect of our selection process. And the strategy has paid off: We're currently beating the market by nearly 37 percentage points since inception in 2002. Want to take a look? Try the service free for 30 days.
Stock Advisor analyst Nick Kapur owns no shares of any company mentioned above and has zero material interest in the company whose CEO he interviewed. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Apple and Dell are Stock Advisor selections. American Express and Dell are Inside Value picks, and Johnson & Johnson is an Income Investor pick. No Fool is too cool for disclosure.
