Competition is fierce in the great big world of multinational corporations. As one company comes out with a product, each of their competitors scramble to at least put out something similar to keep up. For your portfolio, is it worth doubling down on a single business, or should you consider buying competitors?
Competitors battle one another for shelf space in grocery stores, store locations, through marketing and advertising campaigns, and in every other imaginable way. There’s often no love lost when it comes to claiming a stake on the dollar of the working person.
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Buying Competitors in the Stock Market
One of the best examples of a classic rivalry is that of The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP). For decades these juggernauts have waged beverage wars. While many associate these companies simply with their namesake flagship brands, they also compete in sports drinks and other diverse categories.
This, of course, leads us to one of the most common questions we are asked:
Is it okay to buy two companies that compete with one another, or should I choose just one?
We’ll try to shine some light on that here with three points to consider:
- Research Companies Independently
- Apples To Apples Isn’t Always What It Seems
- Diversification
Research Companies Independently
The key to success as a long-term value investor is to do your due diligence. Understanding the companies in your portfolio is protection against making serious mistakes that are detrimental to your wealth building.
One important factor when analyzing a company is to also understand said company’s competitors. So, while you may be taking a qualitative view of how you feel prospects will be for the next decade or two, you should also be considering the prospects of competitors in the same industry. Their success or failure will have a hand in how the initial company does.
While doing research on one company and coming across another, you may actually find that you prefer the sound of the competitor (or like it equally). Once that happens, however, you need to complete full due diligence on that company before making a purchase. Knowing about companies peripherally is not enough to warrant your hard-earned investment dollars.
Now, if you do find that both your initial company and their competitor are two quality companies in their own right, it can sometimes make sense to own both. The emphasis is that you have researched both and understand them well.
Apples To Apples Isn’t Always What It Seems
While we may compare companies that operate within the same industry, it is worth noting that the waters are often murky. For instance, although this article has mentioned the beverage portfolios of The Coca-Cola Company and PepsiCo, the latter also boasts a solid snack portfolio which adds to their diversity.
So, while buying competitors may lead to some overlap, there are important differences to consider as well. This is most often the case and as an investor it is important to recognize that no two companies are created equal. Even if two companies had virtually identical product lines, they still would have different management.
As such, it is prudent to not overlook a company simply because you feel at first glance that it is too similar to another company you own. Diversification is important, but profiting from two key players within the same industry is also very possible.
Diversification when Buying Competitors
One of the soundest strategies to protect your wealth from a sudden and unexpected catastrophe is to diversify your funds. In the stock market that often means investing in a number of different industries. Doing this allows you to insulate your earnings in the event that one industry faces some serious headwinds. If one area of your portfolio slows down, another area is able to pick up the slack as the economy and business cycles wax and wane.
Once a diversified core portfolio is established, it is possible to come full circle and pick up other companies operating within the same industries as those you already own. This provides an added layer of diversification as your earnings will then be protected on two fronts, from:
- Industry risk
- Individual company risk
Using the example above, this would mean that by owning shares of both The Coca-Colca Company and PepsiCo, you have actually strengthened the foundation of your portfolio; if either company were to falter, you would still have the other one to bolster yourself (assuming, again, that the rest of your portfolio is properly diversified). By owning both you also need not worry about “picking the wrong one”.
Conclusion
Owning shares of companies that compete with one another can often make sense. In every industry there are a number of quality companies which each merit investment. Opportunities should not be overlooked simply because you already own shares in a given industry.
So long as due diligence has been performed on each company you are considering an investment in, there is no need to rule anything out. No two companies are exactly the same and it is worth keeping an open mind about investment opportunities.
While at the moment I enjoy only an ownership stake in The Coca-Cola Company, there is a very fair chance I will add PepsiCo when I find the valuation attractive, subject to funds and other opportunities at the time.
Always remember that in the world of dividend growth investment, income protection is a key concern. Each time you broaden your income stream, you protect it. If you plan to Get Rich and live off of your dividends, you will want your moat to be as wide as possible around your castle of income.
Thank you.
– Ryan
Do you believe it can make good investment sense to buy competitors? How many companies should someone own before circling back to buy competitors?
Full Disclosure: Long KO