To Our Investors and Friends,
The S&P 500 increased 3.4% in the month of November as concerns of an economic slowdown dissipated, and investors began to focus on a stronger 2020. Oil prices (WTI) increased almost 2% to $55 a barrel. The 10-year increased modestly to 1.78%, while the spread between the 2 and 10-year remained at a more recent norm of 17 bps. The Russell 2000 Growth took the lead this month, increasing 5.9%. The Russell 1000 Growth finished up 4.4%. The Russell 1000 Value expanded by 3.1% and the Russell 2000 Value returned 2.3%.
Older companies are being forced to change their business models to adjust to their newer, cooler competitors. Disruption usually impacts businesses when a cheaper, simpler, and faster model is introduced to the marketplace, challenging the status quo. The challenges became apparent for two companies this month as they introduced their answer to these disruptive forces. Disney (DIS) introduced the Disney+ service to compete with Netflix (NFLX), and Ford (F) introduced the Mustang Mach E, an all-electric version of their Mustang Muscle Car, to compete with Tesla (TSLA).
Bob Iger once said that if someone is going to “eat their digital lunch, it might as well be them.” Disney+ was launched this month as a response to Netflix’s popular VOD service. The new service has a similar layout and functionality with some obvious shortfalls. The content consists of a library of animated and live-action films and television shows from Disney’s more than 90 years in the entertainment business. Still, the content is just a fraction of Netflix’s offering, and a large amount of it appears dated and irrelevant to today’s global consumer. The most relevant content, Disney’s most recent releases, are not on the service until they complete their DVD windows for consumer purchase at retail. And here is where the problem begins. In the end, Disney must compete with itself in order to move forward. Old content monetization methods such as movies at theaters and for purchase or rent options are all under fire, without which Disney is a much smaller and less profitable company. I don’t know what impact Disney+’s service will have on Netflix, if any, but I do know that it will be very harmful to Disney’s legacy business as consumers realize they no longer need to buy the same content multiple times.
Ford’s Mustang 2021 Mach E (Tesla purposely doesn’t have model years) will be available for purchase in about a year. It has a familiar touchscreen console in the middle of the dash, and is similar to the Tesla in both range and acceleration. Unlike the Tesla, it produces a sound reminiscent of a roaring engine. What is missing, however, is wireless updates and autonomous features that really put the Tesla in a class by itself. The biggest challenge Ford will face is that the dealer network, which serves as Ford’s entire distribution channel, is going to be left wanting. Electric vehicles do not require oil changes and require minimal maintenance. Dealers make almost all of their money through both service and financing. It is likely they will either need to be heavily incented to sell the electric vehicles, or will simply steer the consumer to those vehicles that will maintain their profits.
We believe these types of challenges will pressure both the revenue and profits of old blue chip companies while the challengers are growing their revenue and profits with scale. In the end, few of the old guard will thrive, and many will not survive. We welcome you to join us on the path of discovery of the next generation blue chip companies, those using the tools of the Fourth Industrial Revolution to disrupt the old industrial base.
All the Best to You,
AKW