Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 65

Don’t set and forget

As value investors, we buy high quality companies with good long term prospects. A company that is able to produce a product that is in high demand, whilst maintaining its competitive advantage, may be able to enjoy above average returns for a considerable period.

Yet the lure of excess profits can be too much for competitors to resist. A strong competitive advantage supports earnings growth, but there may come a time when a company’s defences are breached, and the share price comes tumbling down. This reversion can be quite dramatic, so while we advocate investing for the long-term, it doesn’t mean you should discount short-term developments.

To illustrate this concept, there have been three market darlings that have experienced material share price declines in recent months. These companies are Coca-Cola Amatil (ASX: CCL), Super Retail Group (ASX: SUL) and Cochlear (ASX: COH). Investors that maintained an active interest in their investments would have been better placed to identify the negative structural shifts experienced by each company than those that kept their holdings in the ‘bottom drawer’.

You would all be familiar with Coca-Cola Amatil, one of the largest bottlers of beverages in the Asia-Pacific region. The company controls iconic brands, which has translated to strong financial performance. Between 2006 and 2011, the company’s earnings per share grew by 12% each year.

Yet since 2012, Coca-Cola’s volumes in the Australian soft drink market have declined from 50% to 42%. The oligopoly that makes up Australia’s grocery retail landscape has put Coca-Cola Amatil on a strict diet of shrinking volumes, values and loss of market share, particularly to ‘private label’ soft drinks.

As such, it has become unclear if Woolworths, Coles and Aldi are significant distributors of Coca-Cola Amatil’s products, significant competitors, or both? To find the answer, the company has launched a strategic review, which typically marks the beginning of a prolonged, and costly, turnaround programme. The CCL share price has declined from over $15 to around $9.50 in the past 14 months, such is the uncertainty of the company’s long-term prospects.

Super Retail Group is another company that has generated consistent earnings growth with quality brands such as SuperCheap Auto, BCF, Rebel and Amart Sports. Between 2006 and 2013, the company increased its average annual earnings per share by 20%.

Super Retail Group has experienced a number of hurdles this financial year; the leisure category has been impacted by customers in regional and mining areas spending less on fishing and recreational equipment; the implementation of a company-wide IT system has not gone to expectations; and existing store sales have been cannibalised by an overlapping store network.

One of Super Retail Group’s core competitive advantages has been its ability to integrate large acquisitions into its network – Rebel Sports being a case in point. But the more time management is focused on remedying the above issues, the less time is spent looking at large scale acquisition opportunities to assist growth.

While management has a clear strategy to remedy these issues, they cannot confidently state if these benefits will be realised in 2016, 2017 or 2018. The market has certainly reacted unfavourably, with the share price falling by around 35% in the past six months.

The final example is Cochlear, the company that brought hearing to the deaf with the cochlear implant. This incredible leap in technology allowed the company to enjoy many years of favourable growth. From 2004 to 2011, the company grew earnings per share by an average 24.7% per annum.

But problems began to emerge in 2011 when the company was forced to announce a product recall. Recalls can be very costly events, in terms of the financial burden to replace the damaged goods, and the potential reputational damage. Cochlear was able to maintain its strong brand power after this event, and by the end of 2012 the share price was above the pre-recall price.

Yet since the beginning of 2013, the company’s share price has again declined materially. It is becoming increasingly apparent that Cochlear is ceding market share to its competitors. Even for a company like Cochlear that is dedicated to a strong innovation, research and development program, it seems that competitors have been able to replicate their technology and are stealing market share with lower prices.

The aforementioned companies have built their quality reputations by withstanding and overcoming adversity. But during these periods of material uncertainty, even the companies with the longest records of success may not emerge with their competitive position intact. While investors should always invest with the long-term in mind, at times it can be quite painful to simply ‘set and forget’.

 

Roger Montgomery is the Founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able

 

  •   6 June 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Which type of investor are you?

Telstra: the dominant player in an improving industry

In a short-term world, take a longer-term view

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Latest Updates

Retirement

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Financial planning

How much does it really cost to raise a child?

With fertility rates at a record low, many say young people aren’t having kids because they’re too expensive. Turns out, it’s not that simple and there are likely other factors at play.

Exchange traded products

Passive ETF investors may be in for a rude shock

Passive ETFs have become wildly popular just as markets, especially the US, reach extreme valuations. For long-term investors, these ETFs make sense, though if you're investing in them to chase performance, look out below.

Shares

Bank reporting season scorecard November 2025

The Big Four banks shrugged off doomsayers with their recent results, posting low loan losses, solid margins, and rising dividends. It underscores their resilience, but lofty valuations mean it’s time to be selective. 

Investment strategies

The real winners from the AI rush

AI is booming, but like the 19th-century gold rush, the real profits may go to those supplying the tools and energy, not the companies at the centre of the rush.

Economy

Why economic forecasts are rarely right (but we still need them)

Economic experts, including the RBA, get plenty of forecasts wrong, but that doesn't make such forecasts worthless. The key isn't to predict perfectly – it's to understand the range of possibilities and plan accordingly.

Strategy

13 reflections on wealth and philanthropy

Wealth keeps growing, yet few ask “how much is enough?” or what their kids truly need. After 23 years in philanthropy, I’ve seen how unexamined wealth can limit impact, and why Australia needs a stronger giving culture.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.