Podcast Summary
Identifying opportunities in chaotic logistics industries: Real estate manager Principal Asset Management uses a 360-degree perspective to find investing opportunities in logistics and building products distribution. Industry veteran Brad Jacobs starts QXO to revolutionize building products distribution with a focus on efficiency and profitability.
The logistics and building products distribution industries, which play a crucial role in the economy, can be chaotic and inefficient, but also present significant opportunities for innovation and technology. Principal Asset Management, as a real estate manager, leverages a 360-degree perspective to identify compelling investing opportunities in this space. The creation of a new company, QXO, by industry veteran Brad Jacobs, aims to revolutionize building products distribution with a focus on efficiency and profitability. Despite the challenges, the potential for innovation and growth in these industries is substantial. As Holly Robinson Peete noted on the Visibility Gap podcast, the movement of physical goods, from lumber for a shed to freight transportation, can be complex and inefficient, but also ripe for disruption. The tension between the physical and digital aspects of these industries presents opportunities for those who can navigate the complexities and harness the power of technology to streamline processes and create value.
Building Products Distribution Industry ripe for disruption: The building products distribution industry, worth over $800 billion, is fragmented and ripe for disruption through technological advancements, including e-commerce, electronic pricing, AI, and automation, to reduce costs, increase safety, improve accuracy, and better meet customer demand.
The building products distribution industry, which is worth over $800 billion between North America and Europe and is growing at a compounded annual growth rate of 7%, is highly fragmented and ripe for disruption through technological advancements. The industry is currently largely reliant on face-to-face interactions and manual processes for customer interaction, pricing, and inventory management. However, there is a significant opportunity to digitize these processes through e-commerce penetration, electronic pricing, AI and machine learning, and automation in both picking and packing and inventory management. By optimizing these areas, companies can reduce costs, increase safety, improve accuracy, and better meet customer demand. The focus of the targeted business is on buying wholesale and selling retail, with a goal of serving the residential, commercial, and infrastructure markets.
Real Estate, Housing, and Infrastructure Sectors: Enabled by Technology, Not Disrupted: The real estate, housing, and infrastructure sectors are aging and require significant investments, but technology will enable improvements rather than disrupt these industries.
The industries related to real estate, housing, and infrastructure are aging and require significant repairs and investments. These sectors, including housing, commercial facilities, and infrastructure, are not going to be disrupted by technology but will be enabled by it. The XPO family of companies, including QXO, GXO, RXO, and XPO, have been strategically divided into focused units to cater to different investor preferences. XPO primarily focuses on less-than-truckload (LTL) carrier services, GXO on supply chain and warehousing, and RXO on asset-light transportation and tech-enabled brokerage. This division has led to improved market valuation for the companies. In the real estate sector, Principal Asset Management delivers local insights and global expertise across various equity and debt investments. However, investing always comes with risks, including potential loss of principal. The speaker plans to expand QXO by acquiring multiple companies in the building supply distribution sector. Previously, the speaker had experience building up assets through acquisitions, including distribution and landfills.
Integrated supply chain benefits businesses: Focusing on customer needs and an end-to-end supply chain solution leads to cost savings, growth, and customer satisfaction in the building materials industry.
Successful businesses create an integrated supply chain that caters to customer needs and appreciates the service provided. This was exemplified in the landfill business, where buying different parts of the supply chain led to cost savings, an end-to-end solution for customers, and impressive earnings growth. At QXO, the focus is on staying focused on distribution of building materials to residential, nonresidential, and infrastructure segments. While infrastructure spending opportunities are considered, the business plan is not based on government handouts but rather the aging infrastructure requiring significant investment. Similarly, the residential sector's need for repair and remodeling is driven by the average house age and is not reliant on government funding. Communication in industries like building supply distribution remains low tech, highlighting opportunities for innovation and improvement.
Technology Adoption in Truck Brokerage vs Distribution Sector: Despite advancements in truck brokerage, the distribution sector lags behind in technology adoption due to short-term earnings pressure and private equity ownership. Long-term investors recognize the importance of investing in technology for a competitive edge and significant returns.
The truck brokerage industry has undergone significant technological advancements in the last decade, with a majority of transactions now being conducted electronically. However, the distribution sector is still lagging behind, and the adoption of technology is hindered by a lack of investment due to short-term earnings pressure and the nature of private equity ownership. Companies with long-term vision and patient investors, on the other hand, recognize the importance of investing in technology to gain a competitive advantage and achieve significant returns. The success stories, such as XPO and United Rentals, demonstrate the potential for exponential growth through technology investment.
The Role of Humans in Freight Brokerage: Despite the digital transformation, human relationships and communication remain essential in freight brokerage. Leading players like RXO leverage tech while maintaining human touch for growth and pricing power.
While the freight brokerage industry has become more digital, there is still a significant role for humans in connecting shippers and carriers. Although there are fewer humans involved in the process compared to a decade ago, the industry remains heavily reliant on human relationships and personal communication. The future of brokerage may be more tech-driven and automated, but for now, the transactions are still largely handled through emails and phone calls. RXO, a leading player in the industry, is growing at three times the industry average due to its tech-powered approach, but human involvement remains important. In the new distribution business, pricing power is also crucial, and consolidation can help in achieving that. Matt Levine and Katie Greifeld's new podcast, Money Stuff, will delve deeper into these topics and more in the world of finance.
Thinking Differently for Significant Success: Unique thought processes are essential for building a multibillion-dollar company. Techniques like cognitive therapy, self-hypnosis, meditation, and thought experiments can help. Thorough research and informed decisions are crucial. Scaling up, procurement savings, mergers, and acquisitions are key strategies for growth.
Thinking differently is crucial for achieving significant success in business and life. The speaker, who aims to build a multibillion-dollar company, emphasizes the importance of unique thought processes. He shares his personal experiences of using various techniques such as cognitive therapy, self-hypnosis, meditation, and thought experiments to think beyond the ordinary. He also mentions the importance of thorough research, like due diligence on companies, to make informed decisions. The speaker's business strategy involves scaling up and getting procurement savings to lower costs and pass some savings to the end user while keeping some for the company. To achieve the desired growth, mergers and acquisitions are expected to play a significant role. The speaker's book recommendation, "How to Make a Few $1,000,000,000 dollars," emphasizes the importance of thinking differently for creating something big and successful.
Detecting deception and identifying profitable industries during due diligence: Effective due diligence involves detecting lies through body language, language, and non-verbal cues, and focusing on key questions to identify profitable industries and companies.
Effective due diligence is crucial for success in business, especially when it comes to detecting deception and identifying profitable industries. The expert interviewer shared his experience working with a world-renowned deception detective, Phil Houston, who taught them how to detect lies through body language, language, and other non-verbal cues. This skill has been invaluable in their business dealings, particularly during due diligence on companies and job interviews. Additionally, the interviewer emphasized the importance of a systematic approach to identifying industries and companies to invest in. By focusing on key questions such as future revenue, profit, and cash flow, they are able to efficiently gather essential information and avoid wasting time on irrelevant details. Overall, the ability to detect deception and identify profitable industries is a game-changer for businesses, saving time, money, and resources in the long run.
Understanding a company's long-term growth: Successful investing requires analyzing a company's revenue, profit, and cash flow growth over the long term to create value and generate alpha. Look for industries with market opportunities and applicability of proven investment strategies.
Successful investing comes down to understanding the revenue, profit, and cash flow growth of a company over the long term. This concept is the foundation for creating value and generating alpha. The physical space or industry may not be abstract or sexy, but it offers opportunities for mergers and acquisitions, optimization, and value creation. The attraction lies in the market opportunity and the applicability of proven investment strategies. When considering various industries, it's essential to ensure they align with the investment strategy and offer viable opportunities for growth. Ultimately, the success of an investment hinges on the cash generated by the company over the next few decades.
Focusing on long-term value in business: Successful entrepreneurs and investors prioritize long-term value, considering demand and supply over time to create and predict value. Operating in industries with potential for scale and efficiency, even in physical space, can lead to success.
Successful entrepreneurs and investors focus on the long-term value of a business rather than being swayed by temporary trends or "sexy" opportunities. Brad Jacobs emphasized the importance of considering the demand and supply of a product or service over an extended period to predict and create value. This fundamental approach is often overlooked by many investors and businesses. Additionally, the conversation touched upon the potential impact of AI on journalism. Although Brad acknowledged the likelihood of job losses in this field, he did not suggest a specific solution. Instead, he expressed concerns about regulatory issues in the advertising sector. Throughout the discussion, it became clear that Brad's businesses, despite their range, share a common thread. They all operate in industries where there is potential for scale and efficiency, even in the physical space. Furthermore, the unequal distribution of technology presents opportunities for those with access to capital to achieve scale from the outset.
Opportunities with insufficient capital: Investors can seize high-return opportunities in energy assets due to capital scarcity, but thorough research is crucial
Key takeaway from this episode of the Odd Lots podcast is the existence of attractive business opportunities that lack sufficient capital. Brad Jacobs mentioned this in relation to certain energy assets, where the potential for high returns exists, but the necessary funding remains elusive. This situation presents an opportunity for investors to seize the alpha. However, it's essential to note that not all industries face this issue, such as the media business. The podcast also touched upon the importance of due diligence and introduced the new Bloomberg podcast, Money Stuff, which will delve deeper into Wall Street finance and related topics every Friday.
