Barbara Gray, CFA – April 7, 2014
What is a Social Impact Growth Company?
A Social Impact Growth company is an elite class of company that is Purpose-Driven, Stakeholder-Centric and focused on Sustainable Long-Term Growth.
Why Invest in Social Impact Growth Companies?
Our investment thesis, that Social Impact Growth companies will deliver alpha, is starting to play out. In November 2011, we published our research report titled “Social Capital: A New Strategic Play for Investors: Look for Companies with “Heart and Soul”” and launched Brady Capital Research (BCR) with four “heart and soul” companies in our BCR Portfolio. Although all four companies have significantly outperformed the S&P 500 at different points over the past two and a half years, as of now, Whole Foods (WFM-NASDAQ) is up 49%, in-line with the gain in the S&P 500 over this period, lululemon (LULU-NASDAQ) is down 3%, Starbucks (SBUX-NASDAQ) is up 62%, and Chipotle (CMG-NYSE) is up 64%. In May 2012, we published an in-depth research report on LinkedIn (LNKD-NYSE) titled “LinkedIn: Disrupting By the “Power of We”” and added LinkedIn as a fifth name to our BCR Portfolio. LinkedIn’s stock price, which rose by 130% from our $110 initiation price to peak at over $250 in late September, is currently at $166.
Who Should Invest in Social Impact Growth Stocks?
As Social Impact Growth stocks tend to trade at premium valuation multiples and have a high beta (i.e. stock price is highly volatile), they are suitable only for growth-oriented investors with a high level of risk tolerance and a long-term investment horizon. Due to their social mission, these stocks are ideal for more socially conscious investors that are looking to invest in line with their beliefs and values, as we discussed in our March 12th BCR Insight “Millennials: The Emergence of the Socially Conscious Investor”.
Why Do We Believe Social Impact Growth Stocks Will Generate Alpha?
We believe Social Impact Growth stocks will generate alpha as the market for this elite class of companies is still inefficient. The new Social Era of transparency, connectedness, and stakeholder empowerment is leading to a structural shift in companies’ risk and growth curves based on a function of their Social Capital. Yet the majority of investors have not yet factored Positive Social Capital (i.e. the shared value and positive externalities these companies generate for their stakeholders) into the analysis and valuation process. We believe the four following unique business characteristics of this elite class of Social Impact Growth companies will result in superior long-term shareholder value creation:
- Sustainable Business Strategy
- Long-Term Growth Potential
As Zillow is the latest addition to the BCR Portfolio of Social Impact Growth stocks, we use examples from our new report “Zillow: Disrupting the $75 Billion Realtor-Centric Machine” to illustrate the value-add of each unique business characteristic.
1. Purpose-Driven versus Profit-Driven
Zillow is an early-stage online residential real estate marketplace company that is disrupting the $75 billion realtor-centric machine through its greater purpose to “lead a revolution in online real estate to empower consumers”. One way to identify companies that are purpose-driven versus profit-driven is to look for companies, like Zillow, that state their focus on long-term value creation as a risk factor in their 10-K “…we will in the future forgo, certain expansion or short-term revenue opportunities that we do not believe are in the best interests of consumers, even if such decisions negatively impact our short-term results of operations.”
2. Stakeholder-Centric versus Shareholder-Centric
In less than a decade, Zillow has created a thriving ecosystem comprised of over 70 million unique visitors, 800-plus employees, 650,000 real estate professionals, four leading media distribution partners, and the U.S. government. It has achieved this significant scale and influence by focusing on generating Positive Social Capital (i.e. shared value and positive externalities) for its community of stakeholders. Although Positive Social Capital is an intangible asset that, unlike goodwill, will not show up on Zillow’s balance sheet, the reality is that it will result in a reduction in its following company-specific factors: economic cyclical, pricing, commodity price, consumer trend, innovation, labor, acquisition, dependence on a key supplier, and regulatory.
3. Sustainable Business Model
In order to create long-term shareholder value, a company needs to have a business model that is able to convert the Positive Social Capital it creates for its stakeholders into real revenue and profits. And in order to leverage its unique purpose-driven stakeholder-centric business model, a company needs to ensure its primary revenue driver is aligned with its greater purpose. For this reason, we prefer non-advertising-dependent social networking plays such as Zillow, whose primary path to monetization is through client acquisition for its subscriber base of Platinum Premier Agents. And by focusing on building Positive Social Capital for its members, Zillow will be able to sustain its competitive advantage through the following four generative economic moats: low cost producer, intangible assets, high switching costs, and network effect.
4. Long-Term Growth Potential
Although our investment thesis also applies to Social Impact Value companies (such as Unilever), we believe greatest investment opportunity is with Growth companies. By leveraging their purpose-driven stakeholder-centric business models, Social Impact Growth companies, like Zillow, will be able to expand their thriving ecosystem by attracting a high caliber of consumers, employees, and partners who believe in their greater purpose and are seeking to align their values with those who they buy from, work with, and do business with.
Disclaimer: I have a LONG position in Chipotle Mexican Grill Inc. (CMG-NASDAQ), LinkedIn Corporation (LNKD-NYSE), lululemon athletica, inc. (LULU-NASDAQ), Starbucks Corporation (SBUX-NASDAQ), Whole Foods Market Inc. (WFM-NASDAQ), and Zillow Inc. (Z-NASDAQ).