Update on Current Industry Focus

After a few weeks of digging into the types of industries that exist in South Florida, I’ve whittled down a list of the ones that seem the most exciting. They are:

Software Services & IT (B2B)

Much of my professional background is in computers so, of course, anything computer related is an area of interest. The world of B2B software is vast and there’s more to it than the hyper-growth unprofitable tech companies trading on the NASDAQ. There are likely quite a few profitable slower-growth software companies (especially SaaS companies) that cater to particular niches. Similarly, although general IT support is also interesting, I’m especially interested in IT firms that have carved out a unique niche… say supporting dental practices. Which brings me to my next area…

Healthcare (Practices, etc.)

I’ve always been interested in medicine. I’ve been fortunate to have the opportunity to scratch that itch a few times in my past: from forming a startup that attempted to develop a low-cost MRI to getting my EMT certification to doing a stint at a clinical research organization. Needless to say, I’d love to be involved in healthcare again. 

Healthcare requires minimum scale. The smallest entities won’t work because, since I’m not a doctor, I have to pay someone else to oversee medical care. However, there are numerous searchers who’ve either built up a medium sized medical organization or bought a small group. Florida allows non-physicians to own medical practices except in dentistry and optometry. Luckily, one could set up a “managed service organization” (MSO) in order to get involved in those two areas. That’s exactly what Giovanni Barbat and Erick Laseca, two University of Chicago Booth School MBAs, did when they acquired American Vision Group, a South Florida chain of eye care clinics (ETA Podcast Series).

Animal Hospitals & Veterinary Clinics

I don’t think I need to go into much detail about why pet-related businesses are exciting. Who doesn’t love furry friends of some variety (I’m a dog person myself, although I also like the rather non-furry turtles). The business perspective on pet health is almost as exciting to me as a piece of well-done steak is to a certain mini labradoodle I know. Two factors, growing pet ownership among millenials (they’re actually the generation with the highest rate of pet ownership, about 70%) and the “humanization” of pets. Pet owners want the best care they can find, they’re likely willing to pay for it, and there are more young people becoming pet owners each day. And that was true even before COVID!

Home Services: Plumbing, HVAC, and Electrical

I was inspired by Rich Jordan’s entrepreneurship in home services (listen to his episode on Alex Bridgeman’s excellent Think Like an Owner podcast). I’m a somewhat mechanically-inclined person (although I’m a neanderthal compared to some of my engineering school friends) so plumbing, HVAC, and electrical just look like fun things to learn more about. But it also looks like a sector where a solid operator could grow a business from a stable base.

Security Systems and Fire Alarms

I also have an interest in safety and security on a personal level. On a business level, these areas have one big advantage: recurring revenue. Do a good job and there’s little reason a client will switch.

Industrial Services & Manufacturing

Also related to my mechanical interests. I like this area because it’s often obscure (who knows about the company that makes fire hose testing devices or the company that makes a particular kind of valve critical for some industry). And, despite potential capital intensity, these businesses can still be very profitable if they have a competitive advantage: sole source supplier, distribution challenges, etc.

In South Florida, I’m seeing a lot of machine shops and metal processors (fabrication, powder coating, plating, etc.). Although these types of businesses may have a limit to maximum scale, they still might be very good investments so long as you’re not trying to get a return on $20MM in capital.

Packaged Food Manufacturers & Distributors

This wasn’t one I even considered initially. Consumers seemed to fickle. In my mind, I was thinking there’s simply too much competition. Don’t like a food product? Just eat something else. Despite knowing of Berkshire Hathaway’s success with Coca-Cola and See’s Candies, I kept thinking that food was a risky, fad-based industry.

But as I kept coming across food manufacturers and distributors in my research of South Florida companies, I eventually started looking a handful up. I realized that there are a few really fine companies that might have moats. Here’s the simple reasoning from Berkshire’s Warren Buffett: 

“If you give a box of See’s chocolates to your girlfriend on a first date and she kisses you … we own you,” the investor said in “Becoming Warren Buffett,” an HBO documentary. “We could raise the price of the boxes tomorrow and you’ll buy the same box,” he added. “You aren’t going to fool around with success.” (via Business Insider)

Buffett warns of the consequences from not bringing See’s, at least in CA:

“In California the girls slap you when you bring Russell Stover, and kiss you when you bring See’s.” (via Seeking Alpha)

Of course, See’s is a retailer in addition to being a manufacturer and distributor, but the idea still holds for a more focused food company. A company a quarter as good as See’s would still be a great and delicious investment. Side-note: the Sugar Free Peanut Brittle and the Assorted Lollypops are my personal favorites. Side-note to the side-note: that’s food advice, not investment advice. I currently own shares of Berkshire Hathaway.

Government Contractors (Misc.)

Government contracting isn’t so much an industry as it is a customer type. Certain types of government contracting, especially to state and local governments, might give a business a moat when companies in its industry usually struggle to find one. Landscaping is one example. To start a landscaping company, you don’t need much. Buy a couple lawnmowers and a used pickup truck if you don’t already have one then you’re good to go. There’s not much reason to buy an existing landscaping company over starting one from scratch.

…Unless that landscaping company has government contracts for stuff that must get done. We’re not talking about planting daffodils in cul-de-sacs to beautify the neighborhood. We’re talking removing branches that are causing a safety risk on a six-lane highway. Governments generally tend not to screw around with unproven competitors and, when safety’s involved, there’s the added bonus of the government’s spending being non-discretionary. So businesses with government contracts for non-discretionary spend are appealing.

The same is true even when the customer is another business. If the landscaping company has contracts from energy firms for clearing brush for access to oil pipelines or to expose solar panels to sunlight, those energy companies are going to be sticky unless the landscaper is downright negligent or demands an absurd price.

Paper, Packaging, Recycling, and Waste Disposal

I don’t think these four areas are normally grouped together but, in my mind, they are. There are two large-scale trends I see: (1) demand for environmentally-friendly packaging and disposable products and (2) efficient, safe recycling or disposal of materials. Importantly for a searcher, because of the low value-to-weight or value-to-volume of these products/services, I’d bet that many businesses within these sectors develop moats on a geographic basis. 

It’s similar to concrete plants: a ton of concrete isn’t worth that much and is expensive to ship long distances. Thus, concrete buyers won’t pay to ship it from hundreds of miles away. A concrete plant might have a shipping radius of 50 miles. Moreover, if another concrete plant were to open up within the first one’s radius, neither plant would make money. That single concrete plant has a monopoly over its 50 mile area.

Now, I’m making broad generalizations here. Corrugated cardboard boxes, for example, might be shipped in bulk across the country at low cost for all I know. And specific types of hazardous or medical waste might be shipped long distances to centralized processing facilities (although this may still require a local waste company to manage the packing and transport). This is just a hypothesis; I could be wrong. Send me a message if I am wrong!