Frank Thoughts: The Shoe
Frank Boland
November 11, 2010
In 1930 the global headquarters of Boston-based United Shoe Machinery Corporation was an international colossus. The “Shoe,” as it was affectionately called by Bostonians, was the largest manufacturer of shoe machinery in the world. USM did business in over 50 countries and was truly an international monopoly. The headquarters dwarfed downtown Boston. In fact it was the city’s first and, in 1930, only skyscraper. Its manufacturing plant, 30 miles north in Beverly Massachusetts, was in excess of 1,600,000 square feet! The “Shoe” was the newly industrialized world’s equilvant of Intel, Microsoft, and IBM … rolled into one company. Fortune Magazine said its stock, “… was regarded by the most conservative Bostonians as one of the bluest of the blue-chip investments.” But now, less than 100 years later, how many investors have any historic awareness of the company? There is no better example of Schumpeter’s theory of capitalism being “creative destruction” than United Shoe Machinery. It was, if possible, too successful. The federal government brought the Sherman Anti-Trust Act against the “Shoe” in 1947 ... charging the company had been a monopoly since 1912. The suit marked the beginning of an inexorable decline for the company … and the stock.
Unrealized, or certainly unappreciated, by most investors is that corporations experience a bell-curve life cycle, just as we do. There is birth, followed by a period of rapid growth, then maturity, a gradual aging decline and … eventually … death. The ideal time to buy a stock is on the left side of the bell curve … a period of high growth. Alternatively, one should sell a stock when it moves to the right side, indicating a period of relative price weakness. Our research is based on this. Unfortunately, it is during this decline that investors often idealize the business, and stock, as a blue chip.
A dramatic example of this occurred in the summer of 2000 when our research produced a strong sell call on technology. As I sat in a conference room, I told a young (30ish) portfolio manager to sell Cisco …the darling of the Internet bubble. “You didn’t tell me to sell it at $70! I should be buying it here at $50!!” he challenged. I calmly asked, “Tell me what these technology companies had in common: Digital Equipment, Data General, Prime Computer, Data Terminal Systems, Sanders Associates, Wang Labs, Transitron, Bolt Beranek & Newman etc.”? He stared at me blankly. “They were all leaders in their space … all within 40 miles of downtown Boston and ... and now they are all gone,” I answered.
Ten years later Cisco is nowhere near $50, let alone $70. But it’s not unique. The same could be said for Merck Drug, Intel, Microsoft and Wal-Mart … and many other stocks now called blue chips as well. The historical investment wisdom is to declare companies “blue chips” as they reach maturity and enter their declining years. United Shoe Machinery was just a dramatic example.
FRANCIS PATRICK BOLAND
11-10-10
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