Growing Places
There's a tiny oak sapling growing next to my driveway. It's about six inches tall. It's two years old. Weeds nearby dwarf it. It's at constant risk of being stepped on by the neighborhood kids—mine—and killed.
But, at the end of the block, its parent is a towering, sprawling 40ft high, 40ft wide monster. The genes for growth are there.
In a very long time, the old tree will die, and the new one will take its place. In the next five years though, you might not notice any difference for either of them.
Dendrology detour
Investors sometimes like to think about companies like sequoias rather than the oaks in my neighborhood. Sequoias grow up in a straight line. Companies trying to solve one big problem with one big solution often get a lot of investor attention. The oaks here grow up, but they also grow out. Branches bend weirdly searching for daylight. Many end up wider than they are tall. Companies often find winding paths to success, taking lots of detours and adjusting things along the way.
Our two-tree forest sorts investors into two camps of thought:
1. One Grand Vision of the Future (sequoias)
2. Try crap out (oak trees)
Both Sequoia and Oaktree have made investors tremendous amounts of money over the years. Either approach can work. Lamplighter has both in the portfolio. It tends to focus more, though, on the oaks.
Lamplighter looks for companies that grow up, sure, but it especially likes companies that grow along several different directions. It's more complicated, but that's a feature not a bug. Companies that branch out to find whatever daylight the market has can find success in ways investors don’t expect. Investors that keep to narrow investing lanes—tech, growth, emerging markets, small cap—sometimes they miss things that don't fall into neat rows. That's why there's opportunity.
If Lamplighter has themes in its portfolio, this is one of them. Where an investment isn't just one thing, where there are a few things going on and investors price the company only for the worst one.
A handful of companies in the Lamplighter portfolio follow this model.
Crossed lines
IDT makes most of its money from traditional telecoms operations. The business is shrinking but still makes a lot of money. It actually grew earnings nearly 20% recently. That's its third quarter in a row of cash flow growth. Solid stuff for a dying business. It'll generate cash for shareholders for years to come then, eventually, snuff out. Many of the company's investors have held over from the days when this was its only business. The company overall is priced like this is its only business.
It's also incubating a few other businesses. It has a point-of-sale platform tailored for single-operator convenience stores, tobacco shops and bodegas. It has a money transfer business catering to the customers of these shops. It has a modern telecom platform for call centers. About a third of earnings come from these businesses already. In a few years, they'll overtake the older dying ones. Investors expect the old dying ones to drag the business down. They don’t expect much from the new ones. That's where the opportunity is.
Sour memories
Rambus collects revenue from its portfolio of intellectual property related to DRAM memory. It works out ways to make memory work better that the three big memory makers—Samsung, SK Hynix and Micron—use in their products. The relationship used to be a constant knives-out courtroom scrape. It's hard for investors to pay up for something that might turn on a loose legal opinion.
Memory has historically been a commodity—though that may be changing. It's cyclical. It's hyper-specific. Rambus suffered the misfortune of being iced out of Nvidia's gear. It's tied to data center tech that's quickly being eclipsed by purpose-built AI designs. These are also reasons investors might feel skittish about paying too much for the company.
So, what's to like?
The courtroom dramas faded about 10 years ago. There's a tacit truce between Rambus and memory makers that Rambus'll use the loot to develop valuable DRAM-related technologies. It signed long-term agreements with all three of the memory makers. Around the same time, Rambus started expanding into actual products that it actually sells. You know, a traditional business.
Sales of stuff now pitch in 45-50% of the company's business, up from 5% a decade ago. Management has grown this venture at a near 30% yearly pace. Its royalty business, meanwhile, stayed about the same. Investors have clung onto that stagnation and that's how they've priced the business. That's where the opportunity is.
Your ad here
Criteo finds ways for brands to chase down consumers on the internet. The ads you see for a product you looked at yesterday on a different website? That's them. Criteo does this using cookies. Apple and Firefox got rid of cookies a few years back. Google tried, but couldn't quite shake them. This hasn't been a growth business for Criteo in years.
The company launched a new business using some of the same secret sauce, but without cookies and offered them up to brands to use their own sites as advertising platforms. Amazon has done this with sponsored listings. It's been a wild success for them. The Criteo solution has begun taking off.
Investors remember it for its retargeting business. They've set low expectations for the future. Its new line already earns a quarter of the company's profit and grew by a 25% last year. That's where the opportunity is.
Strong roots
This branch framework for looking at opportunities is just one that Lamplighter uses. Branches exist for many businesses. Execs love a side quest. They're always looking to expand. The important pieces for an attractive investment, though, are
1. when expansion adventures have real traction with real customers and
2. when investors don't seem to notice.
When you find both of these things, there’s an opportunity to harvest returns for a long time. The most rewarding investments aren't always the obvious sequoias reaching straight for the sky—they're often those oaks expanding in multiple directions, finding their path to growth wherever daylight draws them.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.