Girton Capital Growth Letter

Discovering and tracking great growth franchises

The Girton Capital Growth Letter is a quarterly publication providing you with our latest economic and market analysis and portfolio company updates. A sample Girton Capital Growth Letter ("Behavioral Finance and the Sentimental Market") is available at the bottom of this page. Contact us via email for subscription and sample log-in information.

2009

Social Networking – The Return of the Peace Dividend
December 2009 (PDF)

Social networking sites such as Facebook, Twitter and LinkedIn have grown exponentially and assumed a prominent role in society in the past few years. Mark Zuckerberg launched Facebook at Harvard University on February 4, 2004, based on the University’s yearbook, or “facebook.” This social networking site grew to 5,000 Harvard students in a matter of weeks and within months 150,000 college students nationwide were on the service. By the end of 2004 there were more than one million members and now, according to The New York Times, “The social networking service just reached a whopping 350 million users,” and is adding users at the astonishing rate of 600,000 per day. The Facebook community worldwide now exceeds the United States population!

The birth of Facebook was preceded by other social networking sites, such as Friendster and MySpace, but Facebook seems to have found the secret ingredient that has mobilized the masses – that is, an easy way to correspond with old and new friends via messages and pictures. Facebook’s meteoric rise has diminished other sites, as Friendster was just bought by a private equity firm for $100 million, and MySpace was bought in July 2005 by News Corporation. As you can see from the graph to the right, Facebook has ...

Water has been the object of many conflicts and wars since the discovery of the first springs and wells. The United States has its own water war stories, including how major metropolitan areas such as Los Angeles and New York City “appropriated” their water from surrounding regions. One of the largest political questions in California is how much water goes to the central valley’s agriculture versus large cities, as irrigation represents 80% of the state’s water usage. In addition to the quest for conservation and the fair distribution of water, important water issues include the privatization of worldwide water sources and the depletion and contamination of groundwater aquifers. We can solve many long term water imbalances through water conservation and sharing, including adoption of techniques such as hydroponic vegetable gardening and the use of “xeriscaping,” or landscaping using water sparingly with drought tolerant plants.

Water is used in developed countries at a much higher rate per capita than in developing regions such as China, India or Africa. As well, developing countries have much higher water related disease rates and deaths. Water use varies significantly in the US - in the Western US, water usage per household is 7000 gallons per month versus 4000 gallons per month in the wetter Eastern US. This is ironic since according to the author Wallace Stegner, “aridity, more than anything else, gives the western landscape its character.”

A number of recent water DVDs, such as Blue Gold (2009), Flow (2008) and Thirst, and the books Bottlemania, and Water Follies have indicated that water management continues to be a divisive worldwide problem. They raise the question whether drinking water is a basic human right or something to be bottled and sold for a profit... (Read more....)

Better Healthcare through Electronic Health Records
June 2009 (PDF)

Imagine this – everyone in the United States is covered by healthcare insurance, and receives high quality healthcare – from the loftiest politician to the poorest homeless person. Can this be achieved and can we afford it during one of the worst economic downturns in US history? Or alternatively, can we afford not to reform healthcare to make our country more productive and competitive versus other developed countries in the world? Whether or not major healthcare reform is passed later this year (and we think it will) President Obama has already signed the Health Information Technology Act of 2009, which is expected to result in safer, more efficient healthcare.

Central to Obama’s healthcare platform is the idea that healthcare insurance be made available to every American, and that better efficiencies help pay for the additional coverage. The cost for insuring the 47 million uninsured Americans is estimated at $1 trillion over ten years. The health insurance industry says it can cut $300 billion in costs, and Obama has asked for total healthcare cuts and taxes of $950 billion. The health insurance industry has vowed to make the cuts necessary but in return... (Read more....)

Investing in Green Building and Infrastructure
March 2009 (PDF)

The Obama administration has hit the ground running, and its new agenda is sweeping in size and scope. In his first two months, President Obama has appointed his cabinet, promised to close Guantanamo Bay prison, ended US use of torture, and sent Secretary of State Clinton on a worldwide diplomacy tour. Obama will allow the State of California and other states to set their own mileage per gallon (MPG) rates, and is investing in new battery and electric car technology, which will drive adoption of more efficient cars. He has announced major new initiatives in education and health care reform, including developing a comprehensive medical records system and the resumption of stem cell research in the US.

On the financial front, Obama signed a new $787 billion economic stimulus bill, started a $75 billion effort to help keep people in their homes, and announced a “small business” stimulus. President Obama unveiled a $3.55 trillion 2009 budget, including a $1.75 trillion deficit, and he said the federal deficit would be cut in half by the end of his first term. Feedback from Republicans and “Blue Dog” Democrats indicate that the budget deficit is too large and in response the Democrats recently cut the budget by $100 billion. However the budget impasse plays out, many of Obama’s plans are likely to be implemented due to his strong approval rating and a predominantly Democratic Congress. The areas of the plan likely to get the most funding are ... (Read more....)

2008

Food for Thought: The Dawning of a New Era
December 2008 (PDF)

The recent book In Defense of Food by Michael Pollan says, in short, to “eat food, not too much, mostly plants.” Pollan means that we should eat whole foods, such as whole grains, fruits, vegetables, cheese and some meats. Second, we should eat in modest portions, as the French do. And third, we should eat mostly plants, that is, salads, vegetables and fruits (which is what my mom has always told me to do). Pollan’s book also points out that the continued proliferation of processed foods fills us up without providing us with proper nutrition. Much of our diet is now composed of products that originate with mono-cultures of corn or soy, and are grown with chemical fertilizers and pesticides to boot. Soils have been depleted of critical minerals and nutrients; in fact, according to Pollan, we receive about 30% less nutrients than our parents did in the same foods.

This suggests that we might want to supplement our diet with natural vitamins and nutrients, but preferably not those originating in China, where manufacturing conditions are still suspect due to the melamine scandal. However, according to Pollan, the theory of using supplements and vitamins is too reductionist. There are many other wonderful nutrients in oranges than just vitamin C, some of which are not fully understood by scientists and dieticians. Several private companies, such as First Organics, are making food-based vitamins to address this growing market.

U.S. sales of organic food and beverages have grown from $1 billion in 1990 to an estimated $20 billion in 2007, and are projected to reach... (Read more....)

Growth Plus Income through Clean Renewable Utilities
September 2008 (PDF)

In our June letter, we articulated the goal of powering plug-in electric vehicles using solar energy, thereby eliminating the need for petroleum or natural gas for transportation. This goal would require adding a new layer of renewable energy plants from utilities, as well as from consumers (on their rooftops). The need for carbon-neutral renewable sources of electrical power has not been lost on the nation’s public utility firms. In addition to solar energy, utilities worldwide are already installing wind power, hydro, geothermal, and even wave power plants. The most active renewable sector being built today is wind power, due to its competitive power cost of about $.07 per kilowatt hour. About 5,000 megawatts of wind power were installed in the US in 2007, to reach over 20,000 megawatts currently, or enough energy to power 5.3 million homes.

Renewable energy sources, by definition, do not produce any carbon dioxide, as opposed to coal or natural gas fired plants. With both U.S. presidential candidates in favor of some kind of “cap and trade” program for carbon dioxide reduction in the United States, (first cap carbon emissions, then trade carbon credits) it appears that... (Read more....)

Solar Outshines Oil - From Solar Rooftops to Electric Cars
June 2008 (PDF)

A recent article in the San Francisco Chronicle relates the story of a Berkeley couple who tap into the solar power cells on their roof for all their energy needs, including their electric car. With oil prices doubling this year to $137 per barrel from $70 last summer and California gasoline prices up 42% to $4.59 from $3.24 last year, people are starting to trade in their trucks and SUVs for small cars like the Toyota Prius and are even starting to ride their bicycles again. The astronomical price of oil and gasoline is a reminder that, indeed, global peak oil production has arrived. Meanwhile, wind energy has become cost-effective and solar energy is expected to reach “grid parity” by 2012.

This means that solar electricity generation for peak daytime watts in many regions of the country will be as cheap as... (Read more....)

The New Nifty Fifty: The Best Places to Work Worldwide
March 2008 (PDF)

I walked into REI the other day to buy some new shoes and a bicycle seat, and quizzed the shoe salesperson about whether I could return the products if I was not satisfied. He replied in the affirmative and then related the story of an REI customer who received a refund on a propane tank several years after he bought it. When I went to the front desk to check out, the sales clerk asked if I had received a 20%-off coupon from the brochure they had recently sent me. I replied I did not have the coupon, thinking that would be the end of it. Instead, the clerk took the 20% off the highest priced item (the shoes), and then informed me I also had a $2.36 dividend due from an earlier purchase which he also removed from my bill in a cheerful manner – talk about great customer service!

As you can guess from the newsletter's title, REI, or Recreational Equipment (private), is one of Fortune’s 100 Best Companies to Work for in America in 2007, according to the February 4th Fortune magazine. The Fortune Best Companies are judged by... (Read more....)

2007

Let's Clear the Air and Stop Global Warming
December 2007 (PDF)

As many of us know by now, this thing called “global warming” may be more serious than we had thought. While the theory that CO2 emissions are causing global warming may not be proven for decades, it has galvanized action around the world. Low lying countries such as Micronesia are particularly alarmed because projected temperature increases of 5 to 10 degrees Fahrenheit could submerge its islands under one to 20 feet of water (250 feet if all the ice melts). Melting glaciers and snowcaps could reduce local supplies of fresh water, and changes in the jet stream and ocean currents could alter climates, threatening species and entire ecosystems.

Whether or not you believe in global warming, a welcome side-effect of this worldwide concern is that... (Read more....)

The Quest for Universal Health Care Coverage
September 2007 (PDF)

The 2008 Presidential elections are just around the corner and health care reform is re-emerging as one of the toughest and most emotionally charged issues facing the country. It is one thing for private equity firms to lay off thousands of people in the name of efficiency, but it is another thing altogether to deny critical treatment to your child or your aging Aunt Mildred just to save money. Since Hillary Clinton’s failed effort to introduce universal health care in 1993, universal health coverage has been transformed into a less threatening and somewhat less partisan proposal. According to Hillary’s website, health care insurance “premiums have almost doubled since 2000…and if left unattended, health care spending will double to $4 trillion per year over the next 10 years…” or close to 20% of GDP. Hillary is now offering a less controversial “American health choices plan” to cover uninsured Americans, coupled with administrative efficiencies and tax increases.

Republican Governor Arnold Schwarzenegger points out that there were 6.5 million uninsured Californians last year... (Read more....)

Organic and Natural Foods Enter the Mainstream
June 2007 (PDF)

If you are in San Francisco and want to sample some fresh organic foods, you might visit the Rainbow Grocery at 13th and Folsom Streets. This cooperative, open for over 20 years, was one of the original organic and natural food co-ops. Today, a varied selection of fresh herbs greets the customer near the door and Rainbow heeds its vegetarian roots, eschewing a fish and meat department. Our research shows that the most profitable part of the store for Rainbow Grocery or for a Whole Foods Market is ..(Read more....)

Getting Charged Up on Battery Stocks
March 2007 (PDF)

For those who watched the movies “Who Killed the Electric Car” and “An Inconvenient Truth,” the natural question arises, when will electric cars be in the mainstream? The short answer is, when the batteries are ready. We view battery technology as the gating event for two major advances in alternative energy—one, mainstream electric or plug-in hybrid vehicles, and two, the storage of solar energy for overnight use. If the “battery question” can be answered in an environmentally responsible way, it could solve two huge problems—global warming, and energy dependence.

The development of new, powerful long range batteries is being pursued vigorously in the $50 billion battery industry, and in 2007, we see at least 10 different companies beta testing new world-beating battery technologies. Two new vehicles (Read more...)

2006

The Community Banks of Marin County: A Microcosm
December 2006 (PDF)

One key advantage of community banks is that they are small and closely knit with the community which they serve. These banks are usually run by local community leaders, and receive deposits and make loans nearby their branches. With local relationships and well-developed trust, community banks can grow faster than larger banks, capturing market share. Two banks in Marin County that fit this description are Bank of Marin and Epic Bancorp (owner of Tamalpais Bank).

Community banks can be viewed in terms of an investment cycle. First, a small de novo bank is formed by a group of former bankers. They open a branch or two, and may expand to ten or more branches as their assets grow towards $1 billion.(Read more...)

Sustainable Growth Through Clean Water Stocks
September 2006 (PDF)

The beauty of water is that it is a sustainable and renewable resource. The amount of water on Earth is a finite and well-known quantity, but with the advent of global warming, patterns of drought and water abundance are likely to change. With 97% of the earth’s water in the oceans, and 2% in the polar ice-caps, only 1% is readily available for human usage via lakes, rivers and streams. As demand for water increases, we are likely to see increased water prices for the foreseeable future, paired with increased water conservation. When you consider its long term value, water is superior to oil or natural gas, in that it will never be depleted, and its value is likely to increase steadily over time.

In 2002, the United Nations reported that 83% of the world population lacked access to sustainable clean drinking water, but it is not only developing countries that face clean water scarcity and quality issues.(Read more...)

Searching for the Internet's Best Growth Stocks
June 2006 (PDF)

The Internet has been searching for its business model for years, and it has finally “found the money” – in search! Today, Google, Yahoo, MSN and Ask, allow their advertising customers to bid against each other for the best page position, while giving them the statistics to track their ad campaign on a daily basis. This new “sponsored search” category represents the “monetization” that the Internet companies have been looking for. While online advertising has always been important, Google’s application of higher math to search (to “google” arose from a 1 followed by 100 zeros) has resulted in a productive way to drive customers to businesses. Google’s search engine is now a money machine as it directs customers to businesses and gets paid for that process.

A recent Yahoo analyst presentation says that the number of Internet users is expected to grow from about 1 billion users in 2005 to 1.8 billion users by 2010 – that’s nearly one in three people in the world.(Read more...)

That's Digital Entertainment! -- Focus on Digital Cinema
March 2006 (PDF)

The digitalization of media has surrounded us for so long that many kids don’t know what an “analog” record or record player look like. Music comes on digital CD’s or is delivered straight to your Apple iPod via the digital Internet. Most TV watchers have replaced their video cassette player with a DVD (digital video disk) player, and the more extravagant have outfitted their living room with the latest digital 50" high definition TV, with digital 5.1 surround sound (including subwoofer)!

Now digitalization is taking the next “quantum leap,” if you will – DVD’s are being replaced this spring with new high-end players such as Sony’s Blu-Ray or Toshiba’s HD-DVD. As disks carry more information, up to 50 gigabytes on Blu-Ray...(Read more...)

2005

Charting a Positive Course with Money Flow
December 2005 (PDF)

Technical stock analysis has a long, grand stock market tradition rivaling that of fundamental stock analysis. After all, divining a stock chart intuitively (technical analysis) is much more interesting to most people than digging through annual reports, proxy statements and analyst reports (fundamental analysis). The original guru of technical analysis was Charles Dow, a Wall Street Journal editor, who said in the late 1800’s that a well-established stock price trend is likely to continue until proven otherwise—or in today’s parlance, “the trend is your friend.” This main tenet of Dow Theory compares the market to a vast ocean composed of surging and ebbing waves (trends) of financial activity. Dow Theory also relied on trend confirmations – for example, the transportation index was supposed to rally first, followed by the industrials. Fundamental stock analysis, on the other hand, was formulated by Benjamin Graham, whose Security Analysis, is the bible of value investors such as Warren Buffett, the world’s richest investor.

An area of analysis, which seems to bridge the divide between fundamental and technical analysis...(Read more...)

The Time is Right for Solar and Wind Energy
September 2005 (PDF)

It is clear that oil and natural gas cannot meet our long term energy needs, as analysts are concluding that we are halfway through our global oil reserves. Since our “Isn’t it Time for Alternative Energy?” report two years ago, oil has more than doubled from $28 per barrel to $66 per barrel. Natural gas has rocketed from $4.70 per mcf to $12.59. Hurricane Katrina not only swamped New Orleans, but has led to a 45% increase in gas prices, to over $3.00 at the pump in California, while the S.F. Chronicle reports that PG&E’s natural gas bills “will leap by an estimated 40 percent this winter.” The price increases in oil, natural gas, gasoline, and electricity has people scrambling for energy alternatives for their home and transportation.

The following graph from 1930 to 2050 by Colin Campbell shows that the world is reaching peak oil and gas production,(Read more...)

Hedge Funds and Derivatives: Is the Tail Wagging the Dog?
June 2005 (PDF)

Every decade or so, a new financial paradigm emerges, awarding profits to those who understand the resulting changes in the market. Today, the hedge funds’ growing financial power and leveraged use of derivatives (the “tail”), are giving them the potential to wag the “dog” (the market). In the 1950’s, a simpler time, people invested mostly in their house, plus some stocks and bonds, unaware of the Nobel prize-winning work being done in 1952 by Harry Moskowitz on Modern Portfolio Theory. In the 1960’s, mutual funds, or baskets of stocks and bonds, became popular, and now exchange traded funds (ETFs) are the latest trend in that paradigm. In the 1970’s, so-called derivatives, such as stock options arrived, due to the options pricing model developed by Fischer Black and Myron Scholes in 1973.

Finally, in the 1980’s and 1990’s, hedge funds, invented by Paul Tudor Jones in the 1960’s, attracted more wealthy private and institutional investors into the fold. In 1987, the market crashed over 500 points...(Read more...)

Worldwide Connections Through Optical Networking
March 2005 (PDF)

At the peak of the Internet boom, optical stocks such as JDS Uniphase, AMCC, PMC Sierra, Lucent, Nortel, and Ciena, among others, traded for ten to thirty times or more their current levels. Lucent, once a $100 stock, is now $2.87 per share. JDS Uniphase has dropped from $100 to $1.75. Of course, annual network spending at that time was twice where it is today, $84 billion versus $42 billion. What has caused the decline in spending, and will this sector ever recover?

There are several influential factors: first, the Internet boom of 1999/2000 brought on a vast increase in telecom spending to build out the Internet’s infrastructure, which has faded over the following four years. Second, the recent consolidation(Read more...)

2004

Thriving on Organic Growth in Natural Foods
December 2004 (PDF)

In the past year, some alarming stories have been published about the safety of our food supply. The San Francisco Chronicle wrote about the high level of mercury in tuna and other fish. In 2004, the first case of a cow with BSE, or mad cow disease, was reported in the United States. There were stories about the high level of waste and other toxins in farmed salmon and perchlorates on lettuce and in milk. A recent story in Barron’s points out that 12% of US crops, or 110 million acres are planted with genetically modified seeds, many produced by Monsanto, which focuses on corn, soybeans, canola and cotton. While some seeds convey pest-resistance, others make plants herbicide resistant, allowing farmers to spray more herbicides around food plants to kill nearby weeds. The convergence of healthy living trends with newly emerging food safety trends is leading more Americans to choose organic and natural foods, and business in the sector is thriving.(Read more...)

Productivity and the Consolidation of Enterprise Software
September 2004 (PDF)

In our view, the $194 billion computer software industry is largely responsible for the U.S. surge in productivity over the past decade. Software vendors drive their customer’s productivity (increasing revenues while cutting costs) by helping them efficiently serve their own customers. New software purchases, however, are highly dependent on GDP growth, and as growth slowed in the second quarter of 2004, a number of smaller software companies reported fewer and/or smaller software sales (while the large companies such as SAP and Oracle did okay). With hundreds of applications, operating systems, languages and tools, the software industry is no longer the vibrant, young industry it once was, although new companies such as(Read more...)

The Communications Revolution: Voice Over the Internet
June 2004 (PDF)

The telecommunications industry has consolidated dramatically over the past few years, but it appears that the outlook for new consumer services and devices has never been better. Industry revenues sagged 10% from 2001’s $292 billion to 2004’s projected $262.5 billion, and during the same time frame, total industry capital fell by over $100 billion to $380 billion. Investing heavily in the heady internet boom days of 2000, the industry has lately been focusing instead on... (Read more from the June 2004 Girton Growth Letter...)

Behavioral Finance and the Sentimental Market
March 2004 (PDF)

In the past twenty years a new science called Behavioral Finance has sprung up, making the claim that the behavior of the “rational investor” is, in fact, riddled with irrationality. The budding field is a composite of probability theory, statistics, finance, and psychology. Two defining books on the subject were published at the height of the Internet market mania in 1999, the academic Beyond Greed and Fear, by Hersh Shefrin, and a layperson’s book, Why Smart People Make Big Money Mistakes – and How to Correct Them, jointly written by Gary Belsky and Thomas Gilovich, former Money Magazine writer and psychologist, respectively.

Following are a number of behaviors from the above books that appear to be irrational and counterproductive. Read this entire issue of the Girton Growth Letter...