2020:1 moat versus growth, payment processors value chain, accounting anomalies, vaccin, the EU Green Deal, 2012 US stock market and Belgian mobility data.
This week, quite some interesting material came across my desk. And not surprisingly these days, lots of it came in the form of a podcast or Twitter. Below you will find some highlights.
And because this is the first time:
As you will see, I mostly try to highlight or give some interpretation to existing work of other people (source always mentioned). A Charlie Munger quote summarizes this approach:
“I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.”
And just to be sure: this is no investment advice, just me wrapping up some thoughts.
On Friday, I listened to the capital allocators podcast with Mike Trigg from WCM. I liked the way he talked about moat typologies, moat versus growth and the two aspects of culture. Lots of highlights:
they are finetuning their process along the way with for example historical industry case studies and improving their culture questions
Trigg talks about moat typologies across industries (something Paul Black also talks about in a previous podcast). Examples are:
outsourcers: 1/ runway in terms of TAM 2/ small part customer P&L but crucial (which makes for a “cosy” customer relationship) 3/ fragmented customer base 4/ room to move up the value chain (towards and “outsourced R&D” arm type activity) (eg CHR Hansen)
luxury: 1/ higher pricing points and 2/ controlling your own distribution works better (eg LVMH versus Kering)
Mike Trigg adds that the moat typology framework helps for pattern recognition and to make a distinction between momentum versus structural differences in long lasting above average growth as well as steering away from bad investments (ie minimize mistake x impact)
the one I will probably come back to the most is the relationship between moat and growth where depending on the business you should be more sensitive to the one or the other: Trigg explains this by two examples:
Pernod Ricard: moat is well known — whether it will turn out to be a good investment will depend on the ability to execute on growth (otherwise risk of dead money in high quality)
Shopify: growth is known — the important question here is the competitive landscape ie you can wake up in 5 years and some other player has taken over number 1 position (and you risk significant Shopify impairment)
the type of culture depends on the firm (eg Google versus train company) but ultimately boils down to:
allignment (eg Tencent closed down search business because KPI on customer satisfaction)
adaptability (eg learning from mistakes)
In general I liked the down to earth tone. “This is a fun business when it is working, but it’s a really difficult one when it’s not” reflecting the not so easy beginning years of WCM.
Just before hitting the publish button, I came across (H/T BiasedRational for the retweet - original research piece from Goldman Sachs) this value chain analysis of payment processors.
Odd Lots had two excellent podcasts within the same week:
Mauboussin is talking about intangibles. He is the go to source on intangibles (eg recent Expectations and the role of intangible investments). Some highlights:
“All these ideas of capital light business. In a sense they are capital light because there is not a lot of stuff recorded on the balance sheet but it is not like they are not investing. Just where it shows up is different.
Free cash flow - the lifeblood of corporate valuation - is not influenced by all this.
In M&A the intangibles get reflected on the balance sheet (and get amortized over time). So they get acknowledged, but only in M&A.
Accountants are a conservative bunch, and I’m sympathetic to them being conservative.
The market understands these things. As an investor thinking about this issue gets you more in step in how the market is already operating.”
They also talk to Steve Clapham. I met Steve about a year ago (just before corona shut down everything the first time) and appreciate how he tries to push for paying more attention to accounting. He talks about some accounting anomalies from listed Chinese internet companies like Alibaba and Baidu. Among other things he mentioned related party transactions (eg Alibaba and Vision Fund) and valuation of non quoted investments. From a previous talk I remember his three elements to “avoid” a fraud:
working capital ratios such as a rise in inventory (ppl are not buying your stuff) and accounts receivables (clients are not paying you on time)
elevated profit margins historically and especially versus peers when it “doesn’t make sense” (eg Patisserie Valerie)
cashflows versus earnings
From his training seminar I remember the important but “simple” question to ask a company: “how do you make $1 profit”. In other words: how do you generate sales, what kinds of costs do you have (COGS and SG&A), financing costs,…
In October I retweeted Ensemble Capital which actually relates to both above talks:
This is why investors need to focus first on what a company does, then on how the financials will flow, and lastly what it is all worth. But investors often mistakenly work backwards, looking at valuation, then the financials, and only lastly seeking to understand the business.“You don’t go into business & say I want to create a company that grows at 15% a year, has a 22% ROE & never has a down year. You create a product or opportunity set that people need, and if you do a good job then the numbers & financial metrics flow from that.” Douglas Foreman
MastersInvest.com @mastersinvest
On Sunday, the Behind the Markets podcasts get released and I do like how Schwartz and Siegel run through the markets in about 10 minutes. Last week I heard a lot of people talking about the positive (or more specific) vaccin news that will be coming out the next weeks. Siegel talks about it, just like Gavin Baker for example:
Morningstar published a nice overview of vaccins (per end September):
The NYTimes vaccintracker also remains an excellent free resource.
And they also have a therapy/treatment tracker. I feel therapies get less press attention but also offer a “solution” to the virus imo. Remdesivir (Gilead) is currently the only FDA approved treatment.
The Pictet Green Energy team put together a numbers overview of the EU Green deal budget:
In terms of cars:
“Regulators are also playing their part. Europe, the second biggest EV market after China, now has tough new emissions standards. Every car manufacturer must cap emissions for its entire fleet to 95g of CO2/km on average by end-2020 – some 20 per cent below the average emission level in 2018. This cap will drop to 81g by 2025 and to 59g by 2030.
Those who fail to meet the standards will pay a heavy price: the fine is EUR95 for every g/km of excess emissions per vehicle. Car manufacturers that fail to improve their CO2 emissions compared with 2019 levels face possible fines of several billions of euros every year. “
By coincidence I stumbled upon the MSCI USA factsheet of 2012 (instead of the most recent one). It is an understatement that things changed quite a bit the last eight years:
And to finish, Belgium is currently in a lockdown 2.0. : shops/restaurants are closed, limited amount of people you can see in your house/outside and working-from-home strongly advised. It is a little bit less restrictive than the one in March in terms of non-essential movements (which are allowed this time).
I plotted Google mobility data (until 3 November) on the graph below. An important difference is that factories in Europe are open (with social distancing measures etc.). Doesn’t seem like in March where for example some car manufacturers closed their plants.
And that’s a wrap for this week!