The Right to Win

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More than a moat

“The most important thing [is] trying to find a business with a wide and long-lasting moat around it . . . protecting a terrific economic castle with an honest lord in charge of the castle.” — Warren Buffett, Berkshire Hathaway Annual Meeting, 1995

At GreenWood, we’re open to looking at anything and going anywhere to find companies trading at a discount to our view of the fair value of their assets. It leads us down many thought-provoking roads to learn about companies that do all kinds of interesting things. As self-diagnosed “value investors”, we’re like moths to a flame when we see an ugly stock chart, and thus we filter through and diligence many companies that are struggling to compete or execute to their highest capability.

In order to separate those businesses that are cheap, and will remain so for a good reason, versus those that are experiencing a temporary dislocation, I often ask the team a simple question: What is this company’s right to win? In essence, why should this business be able to recover and win in the future?

One of the initial ways we and most investors analyze a business is by examining the company’s financials, because if the company has produced best-in-class returns in the past, it’s possible the company may be able to repeat them again in the future. There are, of course, many factors that can produce great financial results and so we want to understand the drivers of those results.

Much time has been spent by investors analyzing, identifying and quantifying the importance of a company’s competitive moat. The drivers of a moat help explain why a company consistently wins customers, why those customers stay, why it has pricing power, or why it earns better returns than competitors. The list of questions investors ask can go on, but most importantly, we want to know why those things should still be true years from now.

The concept of a competitive moat and the right to win are intrinsically linked. In some ways, it is this idea that led to the emergence of the “Quality Compounders” theme – buy the best businesses with significant moats at any price. Unfortunately for us, these businesses tend to sport very elevated valuation multiples. Our goal is to identify and invest in companies when they’re at the Value or Turnaround stage and help them to become Compounders.

While a moat tends to describe what protects a business, the concept of right to win goes one step further as it seeks to identify why a business should have the ability to continue to expand its moat. So, when we talk about a company’s right to win, we are really asking two questions at once: What makes this business advantaged, and why should we believe management and the company’s culture or process, can compound that advantage over time?

That second question is typically where we spend the most amount of time and often where our constructivist efforts really begin. What we are trying to identify is the additional qualities within the organization that makes the competitive moat more durable. While a competitive advantage can be key to a successful investment, when an organization also has high-quality people, the right culture, or a repeatable process, it then leads to having the right to win. The strongest businesses tend to have several advantages that reinforce one another in creating an outcome that should be repeatable.

jack in the box: Testing the Right to Win

“Winning is fun, but winning is not the point. Wanting to win is the point. Not giving up is the point. Never letting up is the point. Never being satisfied with what you’ve done is the point.” — Pat Summitt

The burger QSR (Quick Service Restaurant) industry is an extraordinarily competitive one. Consumers have no shortage of choices creating relatively limited pricing power, and the largest brands have significant marketing budgets to help reinforce their brand position and awareness.

When we first looked at Jack in the Box (JACK) in 2024, we were not immediately convinced that the company had a right to win. Clearly it was inexpensive relative to history and its peers, but the company had been financially over-optimized for years leaving it with an upside-down balance sheet. We needed to understand whether there was something besides the valuation that could support an investment case for re-invigorating growth and creating a more durable business. 

Our work therefore started with a very basic question: Is there still a valuable brand franchise here?

What became increasingly important to us was the distinction between the negative LFL (like-for-like) performance of the business and the underlying strength and resilience of the brand. As we tested the thesis, we found evidence that Jack in the Box continued to occupy meaningful consumer mindshare.

Furthermore, with an installed base of roughly 2,200 restaurants spread across the western United States, and over 90% of units franchised, this was a Top 20 national brand with a dependable royalty-fee revenue stream. This scale and high brand recognition could make for the beginnings of a competitive moat.

However, these were just pre-requisites to continue diligence as a recognizable brand can become less relevant if its marketing efforts don’t evolve to include a younger consumer demographic, and a large restaurant footprint can become a liability if unit economics deteriorate. For JACK to have a right to win, we felt, at the time, that the company was missing a sense of urgency within the culture and people with skin-in-the-game.

Once those pieces began to fit together, we saw a path by which the business could become formidable again. Thankfully, we now have fantastic governance in place – and we are thankful to Mark King, JACK’s interim-CEO and Chairman, and Alan Smolinisky, Lead Independent Director and sizable shareholder, for bringing both a sense-of-urgency and an ownership culture to the company. And we’re very eager to see the impact that future CEO, Taylor Montgomery, will have on the company.

Our conviction did not come from assuming a turnaround was automatic. Rather, it was built by engaging with the company and partnering with those who could help enact change – the right executives, the right incentives, and the right governance around a high mindshare brand. Jack in the Box had not been winning, its same-store-sales were negative when we invested, but the right to win is being created by combining a quality brand and assets that, under improved stewardship, could give it the ability to win again.

GPGI: Process as a Right to Win

“If you wish to improve operations in your organization, proceed deliberately. Focus on changing underlying mind-sets, transforming the culture so process change becomes permanent.” — Dave Cote, Winning Now Winning Later

One of the clearest examples of a right to win is when the advantage becomes embedded in how the organization operates, rather than depending on a single product, executive, or regulatory advantage.

At GPGI (which stands for Great Position in Good Industries), thankfully not only do we have exceptional managers (Dave Cote and Tom Knott) and quality assets, but we also see that the company’s culture is engrained via the Resolute Operating System (ROS), a repeatable framework for improving the businesses it owns.

ROS starts from the simple premise that most organizations have processes that are more inefficient than they realize, and that sustainable improvement requires more than a one-off cost-cutting plan or a pithy new management turnaround slogan. It requires deep cultural change, elevating operating discipline, and a consistent cadence of execution. The right to win is the repeatability of the system and managers at GPGI have demonstrated its effectiveness across multiple previous companies.

A process-driven right to win is a different kind of competitive advantage that tends to be more difficult for the market to quantify. It’s an intangible that doesn’t necessarily show up until the results are proven out. The ROS framework helps create a shareholder value creation flywheel – improve the processes that support growth, take cost out without impairing the franchise, convert those improvements into cash, and reinvest the resulting margin dollars back into the business. Done consistently, the process strengthens the underlying company while creating the capacity to compound over and over again.

The ROS operating process, and its people, is the kind of competitive advantage we are trying to identify when we ask about a company’s right to win. We believe that the strongest businesses do not rely on everything going right once, but rather they build systems with high quality managers that make good outcomes more repeatable.

The Right to Win

“The market can do anything.” — Jesse Livermore

After the management meetings, the competitive work, the financial modeling, the valuation analysis, and the debate, we come back to the same question: What is this company’s right to win?

It’s something our team constructively engages on to help evolve our investment thesis and understanding of a company. If we are underwriting market share gains, why will customers increasingly choose this company? If we are underwriting higher margins, what allows the business to capture more of the economics? If we are underwriting pricing power, why can’t competitors undercut it? If we are underwriting years of growth, why won’t new capital enter and compete those returns away?

We should be able to articulate a company’s right to win with an answer to any of these, or other proposed questions. If we cannot explain why a company should win without referring to its stock price, its valuation multiple, or why our earnings estimates are above consensus, we probably do not understand the investment well enough yet.

There is no single formula that determines a company’s right to win, but with every company we diligence, it tends to become easier to spot. There are times it is obvious, yet others it’s buried deep in the culture, incentives, or operating model of a business.

After time and research, we might come to learn that it’s actually the accumulation of dozens of small decisions over time that place a company ahead of their competitors. And sometimes, as with Jack in the Box, the right to win is obscured by recent performance. A right to win has to be created by combining the quality of the underlying assets with upgrading its governance and operating behaviors.

Our job is not simply to identify situations where an investment could make us money, but it’s also to understand and identify why the probability of making money on an investment is skewed in our favor –  because it has a right to win over the long-term.

We are honored to be a small part of the process that is giving an iconic Californian brand a renewed right to win.

Disclaimer:

This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The author’s opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC.

Past performance is no guarantee of future results.