Old School Value Nugget Fest (Oct 24th Edition)

Scott Galloway had a post on Growth and Margins this week. One of the charts in the piece shows how Netflix’s public-facing story is changing from being one about “growth” to being one about “profit”:

That’ll be an interesting one to watch, since its content acquisitions continue to make Netflix a crazy cash burner.

Speaking of high-growth, high-margin businesses, check out Bloomberg’s summary of the problems in Tesla’s latest earnings report. Tesla’s revenue shrank and its profits were, if not manipulated, engineered. Usually you think of growing, profitable companies as commanding the highest valuations, but not this one.

The piece also reminded me of an insightful observation about SNAP I heard this week. (I can’t remember where it came from.)

The point was that SNAP’s Cost of Revenue is primarily tied to the size of its user base, whereas its Revenue is tied to the ads on its platform. It’s pretty interesting to realize that not many businesses have revenue mostly decoupled from COGS.

Like other advertising businesses we know (Google, FB), this can really make for amazing gross margins at scale, and just insanely profitable businesses overall.

With its revenue growing at 50% in the last quarter and users growing at 13%, we might be starting to see SNAP come into its own here.

Or, maybe the parallel is more with Twitter, which is starting to turn into a nice cash-generating business and has grown into its valuation but is not getting to the scale of FB or GOOG.

I also have never used Snapchat nor have I studied the company in any depth, so take this with a grain of salt. It’s still burning a lot of cash, but maybe less than it used to.

If you’ve studied SNAP, let me know what you think.

Enjoy the rest of the articles!



On Howard Mark’s Memos (PDF)

Howard Marks’ memos reiterate his core values and principles. He wrote “The Most Important Thing” to synthesize all this, but another guy took a stab at distilling them all, too. This is shorter and easier to skim.

Marks also released a new memo entitled “Myserious” that looks at negative interest rates, which can be summarized with:

“In a world like the one described above, perhaps the most reliable solution lies in buying things with durable cash flows. Bonds, loans, stocks, properties and companies with the likelihood of producing steady (or hopefully growing) earnings or distributions that reflect a substantial yield on cost all seem like reasonable responses in times of negative yields.”

5 Reasons Why Warren Buffet is Investing in Banks (GuruFocus)

Some of the reasons are:

  • Financial services sector stocks are the cheapest in the market
  • The total yield is over 7%
  • Buffett is not concerned about an imminent U.S. recession
  • The resilience of U.S. banks
  • Banks are in much better shape than they were before the financial crisis

Peter Lynch: Secrets to Success Interview (Fidelity)

Read more about why Lynch thinks:

1. The stomach is the most important organ in investing.
2. Market predictions are not productive.
3. The stock market is a 10, 30, or 100 years thing. If you want money in 1 or 2 years go into money market fund instead.
4. Emerging markets is a good place to research.
5. Behind every stock is a company. Look at the company. That’s what you research.

Markets & Investing

O’Shaughnessy Quarterly Investor Letter Q3 2019 [OSAM]

Patrick O’Shaughnessy makes some great points with data/charts. Highly recommended read, but here are the take-aways:

  • Several ratios suggest forward 10-year equity returns will be in the range of 4% annually—well below long term norms.
  • However, the spread between cheap and expensive stocks is at its widest point in two decades.
  • Value has underperformed against a backdrop of improving earnings growth for the cheapest stocks — really setting things up for improvement.
  • Similar story for small cap stocks, but you really have to watch out for small stocks with negative earnings and large and increasing amounts of debt. Screen those out.

Quant Strategists Say Now’s the Time to Tilt Toward ‘Value’ [Institutional Investor]

“The strategists said that ‘value’ is neglected and cheap, while the ‘momentum’ factor is crowded and expensive. The ‘unusually low’ correlations between the two factors indicates ‘undue stress,’ according to their research.”

Company & Strategy

Amazon Almost Killed Target. Then, Target Did the Impossible [INC]

Brick and mortar is dying but Target is fighting not just to stay alive but to thrive in a world swallowed up by Amazon. How?

  • Remodeling existing stores (and opening smaller ones in urban areas);
  • Introducing new, private label brands; and,
  • Enhancing its digital shopping experience.

Reading this made me think, “if only I had a time machine to go back to when Target’s stock dropped so much after all these turnaround announcements and I could spend more time thinking about the strategy.”

Podcast of the Week

Investing in Stocks: How to Read and Interpret a 10k​

From the same guys that brought us the examples of calculating FCF using real financial statements last week, here are some tips on reading 10-Ks.

Pick Winning Stocks and Fatten Your Portfolio