Here's a news flash: You are never, ever going to find a company that everyone is positive about. You will always find people who dislike a company at a certain price, and some who dislike it at any price. Not even investing legend Warren Buffett gets a pass on this: There are many who, from time to time, claim that he's lost it, are upset that Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) doesn't pay a dividend when it sits on more than $30 billion in cash or some such. Last year there was even this completely bizarre piece of daftness in CBS MarketWatch (NASDAQ:MKTW) about Buffett not using the most up-to-date trading techniques. (And my response.)
I've said it before, and I'll say it again now. No company is perfect, and there will always be problems that you can point to with any company. In fact, last March I showed exactly how diametrically opposite two profiles of the same company could be when I took the most bullish cut and the most bearish cut possible at one of my favorites, UST (NYSE:UST).
You should always listen to reasonable opinions that differ from yours. When I say "reasonable," I don't mean the all-caps gobbledygook that you find on most message boards. "Your stupid and smell and who pays you to write this!!!" isn't keen insight into a corporation or its prospects and valuation.
But I've noticed something, and an interview in the latest Outstanding Investors Digest with Davis Advisor's Chris Davis reinforced it for me. One clear sign of a truly strong company is that the biggest risks that bears point to keep changing. Similarly, if the bull case keeps shifting, this might be a sign that the company truly is terrible.
This isn't to say that a change in business model isn't sometimes warranted. Kodak (NYSE:EK), for example, would be on the bullet train to irrelevance right now if it had fought the digital revolution in photography rather than embracing it. Instead, Kodak turned the battleship, recognizing that film photography was waning in importance, and attacked the new market with a competitive series of digital cameras along with its terrific website, Ofoto.com, which captures some of the repeat purchase benefits that Kodak always enjoyed with film. The bull case for Kodak changed because reality did.
But what about sad-sack companies like Research Frontiers (NASDAQ:REFR)? Thirty years without appreciable revenues; all the while the next big thing was always right around the corner. In 1997, Research Frontiers trumpeted its agreement to let Hankuk Glass Industries use its patented technology to produce "smartglass." The project never yielded commercial revenues. Then in 2001, Research Frontiers announced that ThermoView Industries (AMEX:THV) would be selling "Smart Windows" using Research Frontiers technology. The biggest positive output here, once again, seems to have been the press release.
As my friend Tom Jacobs noted in an article on Research Frontiers in 2001, when the company's shares were 200% higher:
"In 1992 REFR was promoting SPD smart windows through a REFR licensee with Japan Steel Works, Ltd. Since 1986 REFR has announced at least eight licensing deals for the manufacturing and sales of SPD products ranging from sunglasses to aircraft cabin windows. In 1989 REFR announced the successful testing and planned commercialization of SPD sunglasses.
"In 1994 Automotive News reported that REFR was close to selling SPD self-dimming rear-view mirrors. In 1997 REFR claimed profits were possible in 1998. REFR is 35 years old. Neither REFR nor any of its licensees have ever sold an SPD based product. REFR has also announced three licensing deals to manufacture SPD emulsion since 1999 and five licensing deals to manufacture SPD film since 1995. We found no evidence that any SPD emulsion or film has ever been sold."
These are quotes from Manuel Asensio, who has dogged the company for years. Notice how the bull case has kept changing, while the bear case -- that the company's biggest output has been press releases -- has remained the same?
Sort of a slam-dunk example, but illustrative nonetheless. Much the same has happened with Krispy Kreme (NYSE:KKD), where the bears have consistently made the same claim, for years on end: The franchising strategy employed by this company and its management is horribly flawed. It took some years to bear this out, but this is exactly what has taken place.
Bill Mann has beneficial interest in Berkshire Hathaway.
