The Week That Was (7th-13th November, 2021)
"Wealth flows from energy and ideas." William Feather
We are seeing the fastest year on year growth in earnings since Q2 2010! (Factset) And earnings growth could grow more than 20% in Q4 and by more than 40% for the full year!
Isn’t that amazing?
These are extraordinary times to be an equity investor.
How many companies with the consistent revenue growth of a Hubspot or a Shopify even existed in 2000? And what were corporates paying in interest costs back then?
We need to think through what all this means for valuations. PEs to infinity over the next few years?
Currently, the market looks cheap. Yes, the percentage of companies trading over 10x sales is significantly higher than it was in 2000 but a lot of that can be explained by digitalization. The market share gains of some vertical SaaS plays are just formidable each quarter.
For me, there is no reason to sell until mid January.
There is actually a lot to look forward to this Christmas
Pfizer’s Covid pill was the pandemic’s atomic bomb. It signified the end. Jim Cramer has a way with words sometimes.
The infrastructure bill has passed. (The first of many?)
People will head back to work. Isn’t it safer now?
And we are going into what will be one of the best holiday seasons ever.
E-commerce stocks should do well. Was ARK buying Shopify on Friday?
Let’s not forget Apple
Apple’s share price has been relatively sluggish this year. But I think it will get going in 2022. The big driver, short term, might be iPhone sales.
China gave us a glimpse of what demand might be like over the Christmas period this week. On 11th November, China’s biggest shopping day of the year, China’s JD.com sold $15.6 million of iPhone13 in the first two seconds of a sales campaign.
Apple has been doing really well in China over the last few quarters in all parts of its business. Perhaps the Chinese consumer is becoming as loyal to the Apple ecosystem as everyone else ends up becoming. It’s hard to find a company with better net promoter scores than Apple (customer satisfaction/loyalty). That is a key component of its secret sauce.
It’s not just iPhone sales, though.
In April, Apple gave its customers the ability to opt out of targeted ads. Already, over 60% of Apple users have decided to opt out. And we’ve already seen the impact on earnings for companies like Snap, Facebook, Peleton and Poshmark.
The winner in all this is clearly Apple. As well as being a killer strategic move, it only boosts Apple’s standing with its customers.
Apple is on the side of good. It is on the side of privacy.
Gone are the days when Eric Schmidt, former Google CEO, could claim:
“If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”
In 2009, when he made the statement, the public didn’t really understand how the digital advertising industry worked. They have a much clearer understanding now.
(Btw, wasn’t Schmidt mixed up with Ghislaine Maxwell allegedly? Oh, the irony!)
The gravitational pull of Apple’s ecosystem is just insane. Everything gets pulled towards it. For me, Apple stock is better than bitcoin and gold.
Legendary Investors: You’re only as good as your last trade
Imagine a world without Cathie Woods! It would be a sad one. She has been amazing!
She has got the macro very right and has made some killer stock calls - Tesla being the main one. If you had listened to her over the last 5 years, my guess is you would have done well and if you listen to her now, you will do great over the next few years.
Now compare her to GMO’s Jeremy Grantham.
He left the golf course this week to tell us the market was in a bubble and there would be a crash. That’s cool but he’s been saying the same thing since 2010.
Fund management is a numbers game but, for some reason, the performance data on professional fund managers isn’t front and center when they make their calls.
The Americans love sport stats. But interestingly, they don’t demand them from the finance community.
Why don’t we get fund management performance stats clearly marked on TV when a talking head makes a big statement? 1 year, 5 year, 10 year absolute and relative performance? They could be like baseball hitting scores.
It would quickly become clear that a lot of “legendary” investors have actually underperformed for years!
The young rich cohort, who are killing it in the stock market and with crypto, are becoming emboldened. I’ve noticed they are asking the tough questions on chat channels that the media and my generation refuse to ask.
So far they still haven’t really turned their attention to the Mother Theresa of investing, the Sage of Omaha, Warren Buffet. He might have the halo effect still but there is just too much contradictory information out there for it to be ignored much longer.
First, his underperformance versus the S+P over the last 12 years stands out.
Second, his investments in energy are definitely not what Greta Thornburg and her ESG crowd would like. This never gets any attention from TV “journalists.”
Third, he wears his cash balance like a badge of honor but why can’t he find opportunities at this inflection point in technological progress? Why buy a Japanese trading company and not one of the natural tech monopolies at least?
Before you say the average SaaS company isn’t a typical value stock, it’s worth noting Geico had no characteristics of being a value stock when he bought it. Perhaps it was easier for him to work out the government mandated barrier to entry Geico had (his Father was a Senator) than think through the wonderful moats a stock like Bill.com could build over time.
And what about stewardship?
KKR, who would arguably have been just as big as Berkshire if their mandate had allowed them to hold on to assets, have managed a very successful transition of leadership. Why not Berkshire?
And if you don’t mind, please let me return to Apple briefly. I wonder what would have happened to Berkshire if Charlie Munger hadn’t forced Warren into buying Apple. There’s a chance it would be being split up very much like what’s happening to GE this week.
We need a Christopher Hitchens style expose on Buffet, similar to the one Christopher wrote on Mother Theresa or Henry Kissinger.
Let’s go!
“Japan today reminds me of the 1960s and 1970s in the United States.” George R. Roberts, KKR, 2019.
It’s been rough going being a Japan specialist for the last 20 years.
Most “Japanologists” spent years learning to read the Nikkei newspaper in Japanese and learning the difference between the various factions in the LDP to little avail. It was “China this” and “South-East Asia that” from about 2003.
But perhaps the moment has come for Japan evangelists.
There are plenty of precedents for US companies splitting up to unlock value. Think Hewlett Packard and HPE in 2015, for example.
But there has been no precedent in Japan for what Toshiba announced it will do this week. One of the oldest and most celebrated global brands in Japan is getting under the hood and recalibrating its growth engines. It’s splitting into three.
That is HUGE.
Hasn’t this been what the investment community have wanted for years? Daniel Loeb’s Third Point tried to force the issue with Sony but couldn’t get them over the line in 2013.
Toshiba’s move might open up the gate for similar moves in Japan. There is significant top down pressure on corporates to change and think differently about corporate policy.
It proved tough to get rid of the zaibatsu (huge pre war conglomerates) after the second world war. They re-emerged in the form of Mitsubishi, Itochu and Mitsui. But this is time for structural reform and although it’s taken a bit longer than we would have liked, there are clear signs that Japan is, in fact, changing.
Value creation doesn’t just come from splitting companies up, of course. It also can come from improved capital allocation decisions. For years, Japanese companies maintained far too much cash on their balance sheets.
Recently, social networking service, Gree, announced it would buy back nearly 17% of its outstanding stock instead of just leaving the cash on its balance sheet.
Imagine if that had happened in 2005 during the Koizumi boom. The bull market would have continued into 2007 instead of dying in January 2006. But it’s not just about single stocks and investing. Japan is a useful forerunner to analyze for what is happening in the US.
Abe’s Three Arrows have many similarities with what Yellen/Powell/Biden are trying to do in the US, which is a three pronged approach too: an accommodative Fed, huge public spending and structural reform.
As Abe’s policy is nearly 10 years old now, we can see some of the results:
1. The deflationary funk has ended.
2. Stock prices and house prices are up. Credit Suisse notes people are wealthier in Japan across all cohorts.
3. The middle class has grown, according to Japan’s Labor Survey.
4. And the bottom end of earners have seen wage growth.
These would all be great outcomes in the US.
What might not be so easily measured is the renewed swagger amongst some of the young people in Japan. Surveys indicate there’s a new desire to take more risk and to start companies rather than join one. Also, after a couple of generations of low participation in stock market, the number of trading accounts amongst the young are exploding. Sound familiar?
Why is this important?
Deflation saps the life out of countries. The rich hoard their cash and the young, the middle class and the bold stagnate.
Higher stock prices and higher property prices bring a confidence to people. Confidence plays a crucial role in economic growth. It’s fundamental.
This is why Fed Chair Jerome Powell has done a great job since Covid in the US. He has kept thing buoyant. The alternative would have been disastrous, especially in a country like the US. He should remain in his seat.
Structural reform must now be combined with an accommodative Fed and the infrastructure spending plan to keep the magic alive in the US. It’s crucial to stick with the plan. China’s slowdown will be very deflationary.
Everyone wants to be like Blackstone
I don’t have time to read many books but this holiday season, I will read Stephen A. Schwarzman’s “What It Takes.”
From everything I have read about him, the man is a genius when it comes to business. His use of leverage to create significant wealth for himself, his employees (he pays them really well) and his shareholders is a lesson for any individual, company and government. (Governments should use the most debt, surely?)
He also led the way when it came to perpetual capital vehicles for the private equity industry, something that is being copied by the venture capital industry (see recent Sequoia news) and even Izzy Englander of Millenium this week.
Venture Capital firms suffer from the same issue private equity funds deal with. They need to harvest their investments within a certain period of time.
Blackstone realized quickly that pools of long-term, patient capital gave them the luxury of time. There’s no requirement to return money to investors. There isn’t an obligation to sell assets at prices they don't like. Commitments are longer, which means less fundraising activities.
For me, Blackstone and KKR seem to be good bets going forward as stocks. The constant stream of management fees is what a huge part of the market wants right now.
My guess is with the shift to longer-term capital, alternative funds will take a bigger share of the broader multi-trillion dollar asset management industry’s pie. And the distinction between PE firms, Hedge funds and Venture Capital firms will blur.
Competition will be even fiercer for the best deal flow at and post Series B in the venture, high growth space.
I’ve often thought that with Series B and beyond, the analysis of companies is less about conceptualizing a new business model (the bean bag and latte stuff) and much more about analyzing a smallish mid cap growth company - the bread and butter of a Lone Pine or a Viking.
Tiger Global has shown that its hedge fund DNA can be applied to that challenge with very positive effects. Why can’t the traditional PE firms do the same? Why can’t the top analysts do it who work for Millenium?
It’s going to be interesting to see Steve Cohen go head to head with Bill Gurley.
Let’s see what happens. I think it just means valuations get even more silly.
As always, thanks for reading. If you like what you read, please share it with friends, colleagues and family. I am still in the building phase. As always, feel free to send me feedback. I can handle abuse. Apologies for not getting back to some people this week. I’ve been slammed.
DISCLAIMER: None of this is financial advice. The opinions expressed are purely my own opinions and it is imperative for you to do your own research. They do not represent the views of any company I am associated with.