This article is authored by MOI Global instructor Ari Lazar, senior research analyst at RGA Investment Advisors. Ari is an instructor at Best Ideas 2022.
A major part of my job as an investor is to piece together a view of how the future will play out amidst a backdrop of uncertain information. I, like all humans and investors, have a very limited and clouded view of the future. People who physically struggle to see wear eyeglasses to improve their vision. The equivalent to eyeglasses for me, as an investor trying to see a blurry future, is primary research. It allows me to improve my perception of the future through unique insights that can be gleaned through primary research.
Primary research takes me beyond SEC filings, management presentations, and industry reports. It is rolling up my sleeves to verify or seek out information for myself. Examples include site visits, channel checks, and conversations with employees (present and former), customers, suppliers, competitors, and/or partners. Information uncovered in this manner leads to a clearer and potentially differentiated view into how events may play out. If primary research can lead to strong conviction in a differentiated view, why doesn’t everybody do it?
Unfortunately, primary research is time consuming, expensive, and difficult. It often requires me to filter vast amounts of information. There are many potential conversation paths, and I must, through a combination of luck and skill, arrive at relevant tidbits of information. This must be done within the confines of my professional (or expert) network. I am always working to expand my professional network to get the information that I need. Performing primary research is very similar to being a detective.
I am still sharpening my abilities to effectively perform primary research. For me, some companies and industries are easier than others to obtain insights in. So far in my career, I have found the most success (and luck) finding unique insights on Cognex. My primary research on Cognex allowed me to gain conviction in a revenue inflection ahead of its occurrence.
For those that are not familiar, Cognex provides machine vision hardware and software. Their products capture and analyze visual information needed to automate distribution and manufacturing. Cognex is well positioned as a leader in the machine vision industry alongside Keyence. It is important context that machine vision is traditionally used in cyclical end markets, like consumer electronics and automotive, where large manufacturers employ machine vision engineers to maintain Cognex (or competitor) products. Additionally, logistics was Cognex’s third largest end market in 2019 (low double digit % of revenue).
My primary research on Cognex began unexpectedly on LinkedIn. LinkedIn is an excellent source of insights into product features that are not typically available within SEC filings. Through LinkedIn, I become aware of the Cognex In-Sight ViDi D900 (“D900”) product launch webinar. This webinar opened my eyes to the advanced deep learning product capabilities and sparked a strong motivation to learn more. Following the webinar, a Cognex sales employee called me to see if I had any questions or interest in purchasing the product. This call is part of an excellent sales strategy to fully utilize a webinar designed for potential customers. With full honesty around my intentions as an investor rather than a customer, I was able to have an incredibly helpful conversation with a Cognex employee about the D900.
Over time, I realized that after each Cognex webinar that I signed up for, a different employee or external sales partner would reach out to me directly. This allowed me to have many useful conversations about Cognex and piece together tidbits of information related to the company. Some of the calls were very insightful while others were dead ends. Finally, I was also able to use my professional network to commence a conversation with an employee of a competitor to verify some of the information that I had learned. The culmination of my traditional research on Cognex, the LinkedIn webinars, and my primary research was summarized in the following tweet thread eight months ago.
$CGNX has recently launched a new product line of advanced deep learning products that I believe will lead to an inflection in revenue growth. https://t.co/x9zbPPGLQ0 is a link to a webinar showcasing the D900.
— Ari Lazar (@pommelhorse9) June 24, 2020
I had gained high levels of conviction that Cognex was on the verge of an inflection to revenue growth. When @TheMuffinMan28 asked me “Why would rev growth accelerate from pre Covid levels? I know everyone has been hoping for that for a while” I provided five reasons supporting my prediction. The following two insights were essential to my conviction and learned directly from my primary research.
3. The D900 does not require a machine vision specialist to install/operate which could allow $CGNX to penetrate into new end markets as well as smaller customers.
— Ari Lazar (@pommelhorse9) June 25, 2020
4. Keyence is highly resistant to integrating with systems integrators/distributors when possible while $CGNX is embracing this as a key part of their growth strategy. This could be key in a world where endmarkets like logistics are closed to those that do not integrate
— Ari Lazar (@pommelhorse9) June 25, 2020
Four months after posting this thread, my research received feedback. Cognex reported “substantial revenue growth” and described the D900 product launch as “among our most successful new product launches ever” in their Q3 2020 earnings release. The strong momentum has continued into Q4 2020 and through Q1 2021 guidance. The primary research that I performed greatly helped clarify my view on Cognex’s future. I enjoyed the process and hope to continue to improve both my research abilities and my network. My goal is to obtain the same level of insights and conviction behind every company that I cover.
As a final thought, it is important to remember that luck always plays a role in determining how events play out. Luck can be good or bad. I humbly note that my thesis was aided by good luck because at the time, I had no insights into the increased consumer electronics end market demand until the company mentioned as much in July. I believe that this was a secondary factor in how events played out. It is a great reminder that luck can just as easily be negative and more than offset positive insights from excellent primary research. In the long run I have to believe that luck cancels itself out and that doing high quality primary research will improve investing results.
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