Sunday, December 27, 2020

Books #11: The Starbucks Experience

The Starbucks Experience is an interesting quick read that served to remind us what it takes to be the best. We have to think bigger and broader than our competitors and be the best that we can be. Here's two lessons:

1. Great companies (or great individuals for that matter) are always at 100%. Everything matters and no details can be overlooked. We all have our up and down days but to be truly great, we strive to be the best all the time. Great sportsmen, great companies are constantly doing that. That is what it takes to be at the top of the game.

2. Embrace resistance. Nothing in nature grows without facing limiting forces. To work with resistane effectively, one must distinguish between good and bad criticism. We take heed of good criticism while ignoring those that are not true. It is also essential to correct misinformation swiftly. By taking these steps well, we can then grow.

There are only very few retail food chains that has grown so big and sustained for so long. After reading the book, I gained a better understanding why Starbucks is one of them, always trading at very high PER and is currently a USD 120bn company despite its business being brick-and-mortar and being hit badly by the coronavirus.

This is a stock that I would love to own someday. Happy holidays and wising everyone a huat 2021 ahead!

Sunday, December 13, 2020

The Fall and Rise of Disney

In March 2020, when the coronavirus hit the US and everyone panicked and bought all the toilet paper off supermarkets, Disney's share price was flushed into the sewers as well. Its theme parks suffered with catastrophic fall in revenue as visitors number collapsed. Its movie business was similarly hit as people stopped going to the cinemas. Share price fell from USD 150 to USD 85. This stock was labelled as the covid-hit name. Avoid it like the plague!

Fast forward to December 2020, its share price hit USD 175, an all time high. Its market cap at USD 318bn is almost 50% bigger than Netflix and also Comcast, owner of Universal Studios. It has beaten Netflix at its own game with the spectacular success of Disney Plus, its newly launch streaming service. Disney now boasts c.100m subscribers across its various streaming services (Disney, ESPN and Hulu). While this is still smaller than Netflix's 195m subs, Disney has far superior content and should catch up in time. 

The Walt Disney Company (its official name) has always been a unique company. Its larger-than-life eponymous founder/creator built the company by creating a mouse, an animated rehash of a fairy tale about a maiden and a poison apple and then dreamed about theme parks where stars are born. They became huge successes and Walt Disney captured people's hearts and minds as one of the most intriguing rag-to-riches stories in modern times.

About 15 years ago, the company made a few spectacular acquisitions under the watch of Bob Iger, a visionary CEO. In 2005, Disney bought Pixar, the hottest 3D animation studio in town from Steve Jobs. Then in 2009, it bought Marvel Studios for USD 4bn. It was lauded as a crazy move because nobody was reading comics and just a few years ago, Sony paid just USD 10m for Spiderman. Back then (and here's the punchline), the most famous superhero wore underpants on the outside and he wasn't even a Marvel character.

Well, as they say, the rest is history. On hindsight, its success was almost inevitable.

To crown it all, in 2012, Disney bought out George Lucas and acquired all the rights to the Star Wars franchise (again for c.USD 4bn). It then launched the last trilogy in the original Skywalker storyline with a disastrous ending. But fans didn't care, they just couldn't get enough of Star Wars. So Disney created all these spinoffs on the various characters (pic above). The current hit, The Mandalorian propelled the franchise back into people's mind during COVID-19 and Disney racked it all in. This is Disney's way.

As the story unfolds, COVID-19 hit its Park, Experience and Products as well as its Studio Entertainment businesses bad, but its Media Network and Direct-to-Consumer (where Disney Plus and other streaming services are housed) will be picking up the slack and bringing the company's profits back (see table below). In terms of cashflow, the company has also shown its operational prowess by diligently cutting cost and preserving cash. It managed to generated USD 3.5bn of free cashflow in the year ending Oct 2020. 

With its current all time high stock price, this is probably not the time to buy the stock. Today's valuation put Disney at 4.5x 2019 price-to-sales which is based on its pre-COVID historical high revenue and 25x 2018 PER. Again, this was the year it has its highest EPS at c.USD 7. In 2018, it also generated its highest ever annual FCF at c.USD 10bn. Off this high FCF base (who knows when it can do FCF of USD 10bn again, it could be 2022 or 2023 or beyond), it is trading at c.3% FCF yield today. It is not crazy internet valuation but it's just not cheap. We value investors need our margin of safety.

COVID-19 however did present the opportunity to better understand Disney. This is a solid compounder like 3M, Starbucks and Diageo. Compounders just bounce back much faster than mediocre, crappy firms. Disney has the best content and the best platforms: theme parks, stores and now streaming networks leveraging on its valuable first-class franchises, creating value simply by telling stories. Like the heroes in its stories, Disney is also bold, innovative and most importantly resilient. Disney doesn't need vaccine, it has immunity!

In future posts, we hope to dissect its various businesses and better understand this solid compounder. 

This is the way!

Wednesday, November 25, 2020

Charts #36: Tesla

Another day, another enigma.

Tesla, a company that hasn't made profits cumulatively over the last 10 years, makes a mere 300,000 cars, is bigger than Toyota, Volkswagen, BMW, General Motors, Ford, Fiat Chrysler and Honda combined!

The automakers listed above make more than 30 million cars annually. 100x more than Tesla. 

It also dwarf the recent inclusions into the famed S&P500 by a mile!

Well, maybe bcos it did finally generate USD1bn of FCF after burning USD10bn since its inception. Remember the market only looks forward, not backwards.

Or, we can attribute it to the Power of QE Infinity. 

To Infinity and Beyond!

Sunday, November 15, 2020

Covid, Consumerism and Diageo

2020 will go down in history as one of the craziest year ever. A microscopic organism wreaked havoc causing millions of deaths. A US President who refuse to concede defeat and handover after losing the election. Meanwhile, in the midst of all these, Chinese spend USD74bn on a single day buying stuff, almost doubling what they bought last year on the same day. That's also 10x more than what's sold in the similar event in the world's largest economy - US Black Friday sales in 2019. 

Intuitively, Covid and consumerism should not go together. We are still in the midst of a pandemic and millions of people are suffering from the loss of jobs and deaths of loved ones. But Covid has shown that we are so used to consumerism and our way of lives that we cannot help it. E-commerce sales went through the roof. Where tourism is again possible in parts of the world like China, people travel and spend. In fact, they spent more than usual. There is even a term for it - revenge tourism.

As such, a stock like Diageo is strangely, doing well despite less on-premise drinking in pubs, restaurants and events. Alongside other alcohol names like Moutai and Heineken but doing less well versus LVMH, the world's most powerful marketing machine. Diageo means day (dia) and the world (geo) in Latin, referencing to its global footprint (it operates in 180 countries) and encouraging people all over the planet to seize the day. Unsurprisingly, its company slogan is "Celebrating Lives, Every Day, Everywhere." 

There is a lot of history with this company which is fascinating and insightful but for our purposes let's stick to what is important for investors. Diageo is the world's second largest distiller after Moutai and owns a portfolio of high quality liquor brands including Johnnie Walker, Smirnoff and Guinness. Its full suite of brands are listed above.

Its investment thesis is as follows: Diageo is a global leading spirits company that has compounded growth steadily since its inception in 1997. Its strong brands, coupled with good marketing, high market share and strong global distribution has enabled the firm to generate consistent, steady free cashflow (FCF) and high ROIC. Covid presents an opportunity to be able to buy it at a slight discount. At market cap of GBP67bn and projecting a strong recovery in FCF to GBP3bn in the future, its FCF yield is c.4.5%.

Diageo is also laser focused on shareholders. In its annual report, it listed its top three financial targets: free cashflow, return on invested capital and total shareholder return (see below). Diageo has done pretty well in all three and importantly, these are the exact metrics that investors are now looking at. Price earnings ratio (PER) and Return on Equity (ROE) are still important but they no longer tell the full story as well. 

PER has been the preferred metric for decades but as companies learnt to manipulate earnings and manage this number, it became less and less reliable. As for ROE, it can be artificially inflated simply by raising debt and as such ROIC became a better return metric over time. PER and ROE has also become less meaningful with global QE. Cheap money means lower cost of equity demanded by investors and cheap debt. The former is the reason why we can no longer buy good companies at teens PER.

As we can see from Diageo's numbers above. It has consistently generated both strong FCF and high ROIC. What is impressive is that is has managed 12.4% ROIC despite Covid's negative impact. This goes back to the conundrum we presented earlier. Why are people spending and drinking during Covid? Are we just so consumed by consumerism that not even a pandemic can change our behaviors? Perhaps so. Single's Day crazy buying and Diageo's performance have validated this theory.

Diageo is a  also superb marketing company. One of the first slides on its investor presentation deck showcases its efforts during Covid to help disrupted lives. It sent out 10m bottles of hand sanitizers and spent $100m to help poorer communities. This is both noble and smart. The company is also acutely aware of global issues. Inspired by the #MeToo campaign perhaps, it launched a Jane Walker campaign in 2018 to support the fairer sex. Geez, just looking at it makes one want to buy a set of two! One for John and one for Jane.

In the following posts on Diageo, we shall delve deeper into the business, its positives and risks! Keep walking. 

Huat ah!

Monday, October 26, 2020

Thoughts #22: The Curious Impact on COVID Sectors

COVID-19 has impacted various sectors in dramatic ways and yet benefitting totally different sectors altogether. This post tries to connect the dots and to crystallize some of these thoughts. Hope this helps!

1. Business and long distance travel. This will be impacted for a long time. Some say air traffic will not return to 2019 level even in 2024. As such, airlines are in a lot of trouble. Related to that, inflight meals (SATS), aircraft servicing (ST Engineering and SIA Engineering), hotels, tourism goods, luxury products, demand for gasoline, the whole aerospace industry, in short, the better half of Singapore's listed companies and even business travel solutions - SAP is down 20% in one day!

2. Social distancing. This has impacted restaurants, cinemas, live events, spectator sports, small businesses like massage parlors, pubs and related to that on-premise beer demand, liquor sales, soft drinks and the likes. Auto sales as well bcos you cannot buy a car without touching, feeling, test driving and sitting and talking with the dealer. That said though, Tesla is flying!

3. COVID winners. Conversely, the TMT^ sectors benefited big time. ZOOM, SAAS and remote work solutions took off. Amazon and Netflix benefited from shopping at home and more binge watching. Online learning boomed, together with ZOOM (decimating Pearson, the world's largest textbook seller along the way). Gaming is another big beneficiary and needless to say, vaccine related plays are also commanding sky high valuations.

So what to bet now? I will tend to focus on the beaten down ones to find the gems. Maybe JCNC can be an interesting recovery play when things settle down. People will need to buy their cars, bikes and finance such purchases for their livelihoods post COVID-19. There will be a lot of pent up demand for sure!

Looking back in history many years from now, this would be one of the most unique crisis that people will analyze for years. Let's try can still make some money despite some indices back to all time high! Might have room for STI to chiong. Huat Ah!

^ TMT stands for telco, media and tech. This was a buzz acronym in 2000 during the tech bubble.

Friday, October 09, 2020

Charts #35: Cybersecurity

This is one big growth area for the next five years.

Breaches have increased. Old chart - only until 2017. But should have kept going up.

Spending has increased and will continue to do so.

2019 was big. Well, 2020, with COVID, should have exacerbated the need for more security.

Buy HACK US - cybersecurity ETF. But do your own due diligence. Or check for my update here when I get down to do it.

Huat Ah!

Tuesday, September 29, 2020

Trump vs Biden Debate and Lessons for Us

Healthy debate is crucial in investing. This is because we all have blind spots and we need to bang our heads together to check what is wrong with our investment thesis. Did we miss anything? Did we have enough margin of safety? Did we overlook a big risk? I looked at my worst performing names over the years. They were usually stocks that I didn't debate with anyone. I just analyzed on my own and bought it, thinking it was cheap, had a good story and I knew all the risks. I have learnt my lesson. To invest well, engage in healthy debates.

But importantly, the debate has to be healthy. 

Unhealthy debate, which we just saw with Trump and Biden, open a new can of worms or just opened worms that can debate unhealthily amongst themselves. I don't even know which is worse. Maybe watching Trump is worse than a can of worms. If I had to debate with someone like that on stock ideas, maybe I would have lost all my money and my pants hahaha.

Well, back to debate and lessons learnt.

Debate has always intrigued me. We grew up watching debate matches and politicians on TV and it's not about seeking the truth. It is about who can talk well, who can stage a good rebuttal, which may or may not be logical. Sometimes it sounds logical, but if we think deeper, it's just rubbish. Yes, sometimes, it's just outright lies, not just with Trump. There are usually no solutions and no insights. Just a lot of cheap talk. Trump vs Biden was worse. We didn't learn any truths, we didn't even have cheap talk. It was just pasa malam (wet market) rattling and Trump cutting other people off.

So here's the lesson: don't debate with rubbish people. Walk away. 

Joe Biden would have walk away if he could. But he has to fight on. At 78, he certainly still has the grit to keep putting up with shit. If that is what it takes to do the job. Kudos to that. Debating on stocks is also about grit. The desire to seek the truth, to understand the reality, to find out the true range of intrinsic values and then buy at a margin of safety and make money. It's hard work and grit.

Good debating about stocks has to be built on trust. We want to tear down each other's arguments to seek truths. It is not about ego and it is not about arguing who is right or wrong. It is about really seeing what are the scenarios, how they will play out and how to bet such that we can make money. When ego gets in the way, all is lost. 

Questions will be pointing and some with big egos may not take them well, here's a few examples below:

1. You are telling me what the markets know, what everyone knows. Is there a differentiated angle here? What makes you think the market has not thought about this?

2.  What if the stock falls through your worst case scenario? Have you modelled a second and third wave and its negative impact? What will be the risk vs reward then? Can you still say the rewards outweigh the risks?

3. If this is the case, why hasn't the company done what you have just described? Surely the company has thought about it. They live and breathe their business. You just do desktop analysis. What are the chances that you are wrong and the company is right?

4. There are reasons why the stock is cheap and has not rerated. What is different today vs one year ago or two years ago? The market is not stupid. What have you overlooked?

5. You are saying growth will be much higher and hence current valuation is justified. What makes you think you are smarter than all the analysts out there projecting growth numbers? 

The lesson here is to be like Biden. Take it in strides. It is not about me and never mind the tone of the questions. Never mind getting cut off. The quest is to win and make constructive changes to benefit the country. That's Biden. For investing, the quest is to get to the truth. If it means making money, then it's worth it. The struggle makes the analysis better and makes us sharper, better investors. 

Happy Children's Day, Huat Ah!    

Wednesday, September 16, 2020

Charts #34: COVID Economy Pulse Check

 Two interesting charts to share from FT.

Is it just a matter of time for economies to come back or will the world really change and we take many many years to go back to 2019 levels?

Human beings want to go out. Can we really stay at home and WFH forever? We may not see it now, but the world should normalize again and we go back to our old ways with some incremental changes - use ZOOM a bit more, wear masks outside etc.

Friday, August 28, 2020

2020 Dividend List

This year's dividend list is out! Dividend related topics have consistently been popular and this year we would like to introduce Poems screening tool to generate your own list. Poems have been one of the strongest Singapore brokers over all these years, despite it not being part of a bigger conglomerate. Perhaps, it's precisely because it's not part of any conglomerate that it understands what the small investors need.

Here's how the screener looks like (below). There are only a couple of factors to choose from, but it's good enough. For this year's list of Singapore stocks, I have chosen just a few criterias:

1. Market cap of more than a billion

2. ROA and ROE of more than 4% and 12% respectively.

3. Dividend yield of 3%.

Poems stock screener for SGX

This year's list is interesting given the backdrop of the global pandemic. While some global markets have recovered, Singapore has not. Many of our large caps are directly affected by COVID, like our beloved national carrier, and related to that, our aerospace names like ST Engineering and SIA Engineering (both shown here). Next, our oil and gas names are affected. With nobody flying and moving around, oil demand collapsed. Oil prices went negative in March! 

So, Keppel, Sembcorp and Sembmarine were impacted badly. They in turn hit our banks. With these names making up the majority of the STI, this could be why global investors shunned Singapore's stock market. Given our dependency on the big global players for export and trade and tourism, our economy and businesses are also impacted badly. But fear not, QE Infinity will save the day!

With or without QE, there are always interesting individual stock names. 

Jardine Cycle and Carriage is a stock discussed before. There could be an opportunity to buy here given it's now below its rights issue price in 2015! It went all the way to $47 and then collapsed during COVID, since no one's in the mood to buy new cars. The lesson to be learnt here is that Singapore, because of our environment, will have very few long term buy-and-hold stocks. I thought JCNC could be one,  unfortunately, it did not turn out that way. I am glad I took profit when it was doing very well. So, one has to truly stick to Ben Graham's philosophy of selling when these stocks are near its intrinsic values. 

Most of our Singapore names are not compounders, i.e. their intrinsic values do not go up exponentially. In fact, some of them do not go up. So we must sell when they trade near their intrinsic values and we buy only when there is a huge margin of safety to stocks' intrinsic values. Some of the names today might have that margin of safety today: Singapore Exchange, Thai Beverage. These companies have good business models and rarely trades cheaply. So at teens PE and 3% dividend yields, it's worth looking at more closely. 

Poems stock screener for NYSE

For the next list, we have our NYSE stocks. Poems allow for screening for a few exchanges and it is worth going through exchange by exchange. For the purpose of this post, I am doing just for NYSE. Using almost the same criterias, the screen churned out an interesting long list of names. Just to name a few: 3M (discussed here as well), Blackstone, Coca Cola and Kellogg. All of these give at least 3% dividend yield. 

So while markets are near all time high, there are still cheap interesting names. We are seeing the very similar dichotomy seen during the dotcom bubble. IT and tech names populated people's mindshare and old economy names were forgotten. Today, the FANGs stocks make up more than 20% of the US indices and Nasdaq is at all time high. Tesla, making 300,000 cars is bigger than Toyota making 10m cars. Meanwhile, interesting old economy names like 3M and Coke continue to generate 30-40% ROEs but are trading at significant discount to loss-making companies. 

Markets are as such. While they are efficient, they reflect the thoughts of all its participants and sometimes, these thoughts do not make sense. That said, we must always remember wisdom from the greats - John Maynard Keynes quote comes to mind:

"The market can remain irrational longer than you can stay solvent."

Don't bet the house on buying this list of names or go shorting FANGs or Tesla. Be prudent and do due diligence before betting. An investment operation is one, through analysis, provides capital protection and promises a satisfactory return. Anything else is speculation. Cheers!  

Huat Ah!

Sunday, August 16, 2020

Charts #33: Global REITs

 Found a good chart depicting the global REIT space.

The world has changed since COVID-19, but I don't think retail and office will collapse 30-40% over the long run. Humans are creatures of habits and we eventually revert back to our old ways.

Although, travel will take a much longer time to comeback, so hotels need to have sufficient cashflow to tide over the next 1-2 years. Hope this helps!