Mastering the art of Quality Investment Research II
Part II
Last Sunday, we introduced several concepts that we at DualEdge Invest focus on when conducting Qualitative research on a company. We explored MOATS in depth and discussed how to evaluate a company’s management. This Sunday, we are building upon that foundation. Today, we will discuss a few key qualities that a company should ideally possess. If these qualities are absent, there must be a significant other advantage for a company to be considered investment-worthy. We will cover recession resistance, the ability to effectively manage or even avoid innovation challenges, and finally, pricing power. Assessing whether the company you are analyzing possesses these characteristics is essential in qualitative research, as these traits indicate whether a company has an exceptional business model.
Weathering the Cycles
Economic cycles are anything but predictable. Booms create opportunities, but downturns test whether a company has the durability to survive and even thrive. Evaluating resilience under pressure is a key part of qualitative analysis—and it often reveals more than balance sheets alone.
Some businesses stay afloat during recessions because their products or services are indispensable. Utilities, for instance, are non-negotiable—people need electricity and water regardless of the economic climate. Others maintain stability by flying under the radar. Visa and Mastercard, for example, process payments with fees so small they barely register, enabling them to sustain revenue even in downturns.
Market positioning also plays a role. Monopolies and oligopolies, protected by limited competition, often act as safe harbors when markets become turbulent.
But the most fascinating examples are what Nassim Nicholas Taleb calls antifragile businesses—companies that don’t just withstand shocks but emerge stronger because of them. These organizations adapt to adversity, using disruption as fuel for growth.
Take "The Golden Croissant." When faced with a recession, it didn’t simply weather the storm—it reinvented itself. By launching a subscription-based delivery model, it created predictable revenue and deepened customer loyalty. Simultaneously, it invested in marketing to attract corporate clients looking for meeting refreshments. Rather than shrinking back, "The Golden Croissant" expanded its reach and solidified its position as a market leader.
Of course, not all companies thrive during downturns, and that’s not always a deal-breaker. Cyclical industries, by their nature, fluctuate with the economy. The key is benchmarking performance against peers. If a company outperforms competitors in tough times, it’s likely to excel when conditions improve.
The Price of Popularity: Analyzing Pricing Power
Next, let’s talk about pricing power—the ability to raise prices without losing customers. This isn’t just about profit margins; it’s about brand strength, perceived value, and competitive dominance. Companies with pricing power don’t just survive inflation or rising costs—they pass those costs along and continue to grow.
“The most important decision in evaluating a business is pricing power”
Warren Buffet
Premium Pricing in Practice: The Golden Croissant’s Edge
We go back to “The Golden Croissant” which demonstrates pricing power through a combination of factors that create a strong value proposition. Its use of premium, locally sourced ingredients appeals to health-conscious consumers willing to pay more for quality. Artisan techniques and exclusive recipes differentiate its products, making them hard to replicate.
Brand perception also plays a key role. Through strategic marketing campaigns and collaborations with influencers, The Golden Croissant has cultivated an image of luxury and exclusivity. Limited-edition flavors and seasonal collections heighten demand and create a sense of urgency, encouraging customers to pay a premium rather than miss out.
Scarcity further reinforces its pricing power. With limited production capacity and a focus on small-batch quality, The Golden Croissant controls supply, ensuring high demand and perceived value.
Finally, customer loyalty programs, personalized experiences, and exceptional service strengthen emotional connections with buyers. These elements make customers less price-sensitive and more likely to view their purchases as investments in quality rather than mere expenses.
Of course, pricing power isn’t just about fancy ingredients and Instagram-worthy pastries. Running a bakery takes more than knowing how to bake—it’s part art, part science, and part circus act. From managing rising flour costs to navigating customer preferences and convincing Karen that yes, the croissants are worth the price, it’s clear that successful pricing strategies require more than a good recipe. It’s about understanding value, storytelling, and keeping the ovens—and profits—hot.
Recognizing Pricing Power: A Skill Worth Mastering
Being able to spot pricing power in a business isn’t just useful—it’s essential for identifying high-quality investments. Companies with this ability can protect margins, resist economic pressures, and create long-term value for shareholders. Learning to recognize these traits involves more than analyzing financial statements. To evaluate pricing power effectively, look for companies with strong brand recognition, loyal customer bases, and unique product offerings. Examine their ability to raise prices without losing market share. Additionally, studying past price adjustments, customer retention rates, and competitive positioning can provide insights into a company’s pricing power.
With a solid grasp of pricing power, we now shift our focus to another critical factor—innovation. While it can fuel growth and open new markets, it also has the potential to disrupt even the most established companies. In the next section, we’ll explore how innovation can act as both a killer and a catalyst for growth.
Innovation: Friend or Foe?
The greatest threat to a strong business model is disruption. This can take many forms, such as:
Technological changes (for example, digital photography that replaced Kodak).
Changing consumer trends (such as streaming services that replaced traditional video rental stores like Blockbuster).
Emerging competitors with innovative solutions (such as Tesla challenging traditional car manufacturers).
For this reason, innovation is seen by a certain group of investors as a company's greatest enemy. There is truth in this, as companies that fail to innovate or adapt often fall behind and lose market share. Consequently, a strategy has been developed in which investors only invest in companies with a business model that is immune for disruption.
While it’s comforting to invest in companies whose business models are unlikely to be disrupted by new technologies, ideas, or products, this approach isn’t without flaws. Some investors focus exclusively on stable sectors like utilities, waste management, and consumer staples, believing these are shielded from innovation. While these industries often benefit from steady demand and high barriers to entry, the reality is that no company is completely immune to disruption.
Take the energy sector, for example. Renewable technologies have forced traditional utility companies to reinvent themselves or risk becoming obsolete. Similarly, waste management faces challenges from zero-waste movements and circular economies. Even staples like food and beverages are adapting to trends like plant-based diets and sustainable packaging. Avoiding disruption entirely is an illusion—what matters is whether a company can adapt or lead the change.
Two Paths to Thriving Through Innovation
Rather than running from disruption, investors should embrace two types of companies that thrive in the face of innovation. The first category includes disruptors—companies that actively redefine industries. Tesla, for instance, challenged legacy automakers by spearheading electric vehicles and vertical integration, forcing competitors to rethink their models entirely. Its ability to innovate has made it a dominant force in an industry once thought untouchable.
The second type of company to watch is the adaptable incumbent—firms that evolve and reinvent themselves to stay ahead. Microsoft provides an excellent example. Once reliant on software sales, it pivoted toward cloud computing and AI services, transforming its business model and maintaining relevance in an ever-changing tech landscape. This ability to adapt ensures not just survival but sustained growth.
Closing Remarks
We have now reached the end of our second part on qualitative research. After focusing primarily on MOATs and Management in part 1, this second section has delved deeper into the importance of recession resistance, pricing power, and managing innovation. We will conclude this research with a final part 3 next Sunday. Additionally, at the beginning of 2025, you will see how we apply all this theoretical knowledge to a deep dive on a company we both own. As you can see, there is still plenty of interesting content coming your way. So don’t forget to subscribe, and we’ll see you again next Wednesday!
Solid!