Barry Critchley Nov 28, 2011 – 5:30 PM ET | Last Updated: Nov 29, 2011 10:59 AM ET
Source: Financial Post
Barbara Gray is one of two partners at Vancouver-based Brady Capital Research, a firm, named after her one-year-old son, dedicated to “innovative investment research for a new generation of investors.”
The former all-star sell side analyst (her last job was with money manager Odlum Brown), has made social media and social capital the focus of her work at the firm.
This month, Gray produced a 40-page report titled “Social Capital: A New Strategic Play for Investors — Look for Companies with Heart and Soul.” Earlier this year she produced a report dealing with many of the same issues — and added that investors should avoid “shells” — the outer limit of a heart and soul company. Gray was one of the first, if not the first, to downgrade Yellow Pages Income Fund. Gray issued her downgrade in early 2008 when the stock was in the $15 range. Now it trades in the pennies.
In essence, Gray’s basic investment thesis is that “social media is ushering in the era of the Social Capital Revolution which in turn will change the underlying risk and growth profiles of companies. And that’s what many investors aren’t aware of,” said Gray. “Social media is leading to the creation of a new form of appreciating equity called social capital that will accelerate the value creation/erosion process for companies. And there are opportunities as heart and soul stocks offer long-term strategic investors a good play on the appreciating value of social capital.”
Gray illustrates her thesis by reference to four stocks: Chipotle Mexican Grill (Cmg/NYSE); Lululemon (Lulu/Nasdaq), Starbucks (Sbux-NASDAQ), and Whole Foods Market (Wfm-Nasdaq.) Those four make the list because they meet Gray’s four Cs criteria: conception (essentially the dream of the founder to build something that has a greater purpose than making money); core values (a consequence that flows from the greater purpose); community (the ability to attract a group of cult-like followers and which creates a strong stakeholder foundation) and culture (the ability to continue a firm’s cultural DNA.)
All four share another characteristic: organic growth and not a series of acquisitions or selling franchises that have underpinned their history. Starbucks started in 1987 and now more than half its 17,000 stores are company owned; Chipotle now has 1163 stores, compared with one in 1993; Lululemon has 147 stores and recently warned that “franchise stores may not operate stores in a manner consistent with our standard and requirements;” Whole Foods has 311 supermarkets in North America and the U.K. and while it did one major acquisition in 2007, was forced to sell a number of stores by the regulators two years later. In this way, Gray says analysts can get a better handle on the company’s earnings.
In an interview, Gray added Linkedin to the list. but was emphatic that Groupon would not make the list.
Another characteristic that’s common to the four: all seem to have pricing power.
Indeed Gray argues that social media will accelerate the value creation process for heart and soul companies by lowering the risk profile. In this way, it will allow them to grow comparable store sales, to expand their footprint and to launch new concepts. All four are now embarking on such growth: Starbucks (with Via coffee); Chipotle (with its Asian food development); Lululemon (which recently launched ivivva for girls not yet teenagers) and Whole Foods (which launched a wellness club.)
Gray says the stocks are neither fads nor simply high priced growth stocks. She argues that within limits they can command a premium valuation because they will continue to grow because of their social capital status. All four companies suffered during the global financial crisis.
Indeed Gray’s next goal is to connect with people and groups who share her investment thesis, to continue her research and to find companies “with passion and integrity” and, in time, with institutional investors who believe in the social capital theme, namely those companies that want to make a “positive difference.”