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The constant market volatility we’re seeing is an indication that we are living through a period of uncertainty, chaos and turbulence. The concepts and principles found in the book Great By Choice by Jim Collins and Morten T. Hansen are especially relevant right now. In their book published in 2011, as the world was pulling itself out of the Great Recession, Collins and Hansen unlock organizational principles and concepts that highlight how the best companies that choose to be great navigate through difficult times. 


“Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice, and discipline.” — Jim Collins


A key concept in the book known as the “20 Mile March” pushes a company to consistently achieve forward progress in both good and bad times through obsessive preparation and discipline while tolerating extreme discomfort—the discomfort of trekking 20 miles through a blizzard, and the discomfort of holding back from exceeding 20 miles when the weather is perfect. 


Collins and Mortensen tell the story of two separate expeditions to the South Pole in the early 1910s led by Roald Amundsen and Robert Scott. Amundsen successfully led his team to reach the Pole, marching at ~20 miles increments through thick and thin, successfully making it back home to tell the story. Scott and his entire team, on the other hand, perished on the way back, having traveled 10 miles on some days, 40 miles on other days, lacking any kind of real consistency. Ultimately, the difference came down to preparation leading up to their expedition, discipline thought and action throughout the journey—all the while tolerating extreme discomfort.


So what would you look for in a company to determine whether its stock is undervalued given today’s climate of sticky inflation and imminent import tariffs?


A truly great company (or one on the verge of becoming great) that is on a “20 Mile March” expedition in today’s climate would likely:


Set realistic yet ambitious growth targets that account for inflation-adjusted returns by:

  • Accounting for inflation’s true impact on real returns and setting expectations accordingly but at the same time consistently hitting profitability targets.

  • Committing to achieving company-wide goals and objectives despite volatility and uncertainty.

  • Focusing on manageable and well-executed expansion over impractical scaling.


Sustain disciplined and mindful cost controls and capacity management while smartly raising prices to outpace inflation by:

  • Creating company-wide cost reduction and optimization initiatives that don’t run counter to the existing culture. The initiatives should serve to propel the company and keep its people marching forward; it should be self-reinforcing and not forced.

  • Incrementally expanding through proactive, comprehensive planning and preparation rather than reactionary pivots in response to environmental conditions.

  • Strategically transferring rising costs to customers without alienating them nor trading appreciable market share.

  • Focusing on real productivity improvements that help offset inflation while maintaining the delicate balance of yielding both efficiency and effectiveness.


Here are some key metrics that indicate whether a company will have what it takes to thrive in the context of high inflation, global tariffs and overall economic uncertainty.

  • Inventory Turnover:

    • In times of rising costs for raw materials, having the ability to quickly turnover inventory is crucial. Strong sales and efficient inventory management result in higher turnover.


  • Gross Margin:

    • Consistent or growing gross margins in an inflationary environment shows that a company is capable at effective cost management.  


  • Capital Expenditures (CAPEX) Analysis:

    • This analysis can tell you whether a company is investing in manufacturing technology that increases automation, reduces costs and improves production capacity and quality. 


  • Debt-to-Equity Ratio:

    • A company with low debt is in a better position to withstand economic downturns and rising (or already high) interest rates.


  • Current Ratio & Quick Ratio:

    • If these ratios are high, it means the company has strong liquidity and can meet near-term obligations, providing flexibility to manage rising costs during inflationary times.


  • Free Cash Flow (FCF):

    • Having healthy FCF means a company has more flexibility and can generate cash from its operations, to be used for growth, debt payments or for returning capital to investors.


  • Return on Invested Capital (ROIC):

    • A high ROIC essentially tells you that a company has an ability to return value to its shareholders.


  • Earnings Consistency:

    • The ability to consistently achieve earnings growth regardless of economic conditions is a fundamental indicator of a company on a 20 Mile March. This demonstrates resilience, strong leadership and discipline.


P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.


Happy Investing,

John


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