The social network experiments conducted by Stanley Milgram, Duncan Watts and Steven Strogatz have become pop-culture mainstays. Movies, multiple books, and spin-off experiments have all occurred as a result - so was born the expression, "six degrees of separation." But does the six degrees theory apply in the stock market, as well? Just how connected are the stocks we trade, the organizations we study and the industries that shape our financial stability?
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It's amazing what you can find inside financial documents like the 10-K and DEF14A. Stockholders really are quite inter-connected. Here goes.
The Maze Begins
Let's start with a company that I'm very familiar with, St. Louis-based private label food company Ralcorp Holdings (NYSE:RAH), which owns 19.2% of Vail Resorts (NYSE:MTN), one of the biggest ski operators in the world. From there, the 10-K reveals Vail Resorts owns 69.3% of Specialty Sports Ventures (SSV), a Colorado sporting goods retailer that not only operates store locations at some of the best ski resorts in the country, but also rents out more skis than any other organization in the United States. That's what I call vertical integration.
Anyway, we're on to our third connection. In May, 2007, SSV bought 18 Breeze Ski Rental shops for $6.5 million. Included in the purchase were two licensed Starbucks (Nasdaq:SBUX) locations in the town of Dumont, Colorado. Dumont sits along I-70 on the way to Vail and CopperMountain, and is an ideal spot for attracting skiers before and after hitting the slopes. (Learn more in Introduction to Financial Statements.)
We're Halfway There
It turns out that one of Starbucks' biggest partnerships is its 50/50 joint venture with Pepsico (NYSE:PEP) to distribute its Bottled Frappuccino and Doubleshot espresso drinks. Starbucks' global consumer products group, which involves the coffee partnership as well as an ice cream partnership with Dreyer's, increased revenues 13.6% in the first quarter of 2009, from $100.6 million in 2008 to $114.3 million in 2009. What's even more impressive is, its operating margin was 45.1%. That's the most profitable part of its business, albeit on smaller revenue.
And now we begin the difficult process of closing the circle.
A Square Peg in a Round Hole
As it happens, Pepsi owns 33.18% of the Pepsi Bottling Group's (NYSE:PBG) common stock, as well as 40.2% of the voting shares. PBG is essentially the sales arm for Pepsico. On the bottling group's board of directors is a man by the name of Barry Beracha, who was the executive vice president of Sara Lee Corp. (NYSE:SLE) until 2003 - a connection which allows me to close the loop. Sara Lee spun-off Hanesbrands Inc. (NYSE:HBI) in September, 2006 and conveniently, Ralcorp director J. Patrick Mulcahy also serves on the Hanesbrand board. It's a small world, indeed. (Corporate structure can tell you a lot about a company's potential. Learn more in Evaluating The Board Of Directors.)
The Bottom Line
While this was meant to be a fun exercise, there is an underlying message. We as investors need to look more closely at apparently-unrelated events, as they could lead us to future opportunities - and risks - that were previously unseen.