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

 


 

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

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

Latest Updates

Shares

Why the ASX may be more expensive than the US market

On every valuation metric, the US appears significantly more expensive than Australia. However, American companies are also much more profitable than ours, which means the ASX may be more overvalued than most think.

Economy

No one holds the government to account on spending

Government spending is out of control and there's little sign that Labor will curb it. We need enforceable rules on spending and an empowered budget office to ensure governments act responsibly with taxpayers money.

Retirement

Why a traditional retirement may be pushed back 25 years

The idea of stopping work during your sixties is a man-made concept from another age. In a world where many jobs are knowledge based and can be done from anywhere, it may no longer make much sense at all.

Shares

The quiet winners of AI competition

The tech giants are in a money-throwing contest to secure AI supremacy and may fall short of high investor expectations. The companies supplying this arms race could offer a more attractive way to play AI adoption.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Infrastructure

Renewable energy investment: gloom or boom?

ESG investing has fallen out of favour with many investors, and Trump's anti-green policies haven't helped. Yet, renewables investment is still surging, which could prove a boon for infrastructure companies.

Investing

The enduring wisdom of John Bogle in five quotes

From buying the whole market to controlling emotions, John Bogle’s legendary advice reminds investors that patience, discipline, and low costs are the keys to investment success in any market environment.

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.