Newsletter XI - Quantum, $IONQ, & Checklists
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Newsletter XI - Quantum, $IONQ, & Checklists
Recapping a Week in the Markets: Oct. 02 - Oct.06
Week Recap
Firstly, welcome to spooky season folks!
News
Nobel Prizes
The announcement of the winner of the Nobel prize in literature usually prompts one of three reactions. The first is “Who?”; the second is “Why?”; the third—and by far the rarest—is “Hurrah!”
-The Economist
Several Nobel prizes were handed out this week, including literature, physics, chemistry, and medicine. Many of these prizes were handed out for achievements made several years ago, but with more recent payoffs for the wider public. I always follow these prizes with keen interest, as they often reveal the interesting technologies and advancements in the scientific/technological communities that may not be on the forefront of markets - yet.
The award for medicine went, not wholly surprisingly, to the researchers that helped unlock some key research in making the COVID mRNA effective. The only surprise here was that it was not awarded last year, but better late than never.
The physics prize was a much more intriguing choice - it was awarded to researchers that were able to develop a technology for measuring and observing physical processes that take place over attoseconds - a period of time equal to one quintillionth of a second. *fun fact: there are more attoseconds in a second than there have been seconds since the Big bang, nearly 14bn years ago. Understanding physical processes that take place over attoseconds may contribute in the future to developing extreme speed & efficiency in our technologies, like semiconductors and fab facilities, so this will be a fun field to keep an eye on in the future.
And finally chemistry (I’m going to skip literature); this prize was awarded a hot minute after the initial scientific work - almost exactly three decades, to be precise.
But that is largely because the impacts of that initial work are only now beginning to be fully appreciated. The prize-winners developed a way to produce quantum dots at desired size and with desired properties (and check out the Weekly Watchlist Stock for more on quantum-related stuff!). Quantum dots are just nano-sized semiconducting particles with unique electronic characteristics; being able to harness these particles has led to advancements in solar technology, efficient lighting, and biomedical imaging.
Capitol Hill Adds Uncertainty to the Markets
Well, that’s a wrap on Kevin McCarthy’s tenure as House Speaker. RIP.
He went out like he came in - that is, not smoothly and a bit awkwardly.
Markets were a little tumultuous as McCarthy negotiated a deal to avoid a government shutdown. They settled a bit after the deal was negotiated, but McCarthy’s job security unfortunately did not follow a likewise trend. He was removed from his position as House Speaker, a move that marked the first ousting of this position in United States history, on Tuesday.
His ousting came on the heels of a small rebellion from his own party, the Republicans, after McCarthy negotiated with Democrat members to strike the deal that ultimately avoided the threatened government shutdown, if only in the short-term. This was seen as a stark contrast to Republican allyship, and now he’s gone. McCarthy’s successor will face a similar struggle in about 45 days time, so we’ll see how the markets respond to the renewed uncertainty at that time.
Birkenstock IPO
I religiously don’t touch IPOs. But, I am excited for this one anyways just because it’s Birkenstock, a German sandal maker and a business that I personally have contributed quite a bit of my own money towards. The company is reportedly aiming for a $10bn opening, which would value them more highly than iconic shoe brands like Crocs ($5bn), Doc Martens ($4bn), and Skechers ($7.5bn).
I will not be investing in this for at least a year, but I’m still excited to see how it does and will definitely be keeping an eye on it - the company has a level of brand loyalty, similar to Crocs, that gives it enormous staying power and potentially attractive returns for investors.
Weekly Read
The New Map: Energy, Climate, and the Clash of Nations
By Daniel Yergin
The New Map is the fresh read I’ve had in a while - I’m currently in the process of wrapping up my final semester of school while balancing weekly newsletters and podcast episodes for not one but two different series, as well as bi-weekly research articles around 10K words or more with corresponding research. So, as you might imagine, I don’t have a ton of time to do extra reading. This read was a few weeks of really slowly chipping away a chapter at a time, but I finished it the other day (at last), and thoroughly enjoyed it. It’s not specifically investing related, but definitely relevant if you’re interested in any renewables investments and the broader renewable landscape.
Daniel Yergin first goes through the history of energy usage and the rise of renewable energies before diving into some of the challenges and opportunities involved with adopting renewables, which isn’t as cut and dry as many think. The main opportunity, obviously, being better able to combat a warming climate, and the challenges being some of the economic and logistical complications behind mass installation of intermittent renewables.
Climate change is naturally a large part of the conversation behind this book, and Yergin spends a fair portion of the book focusing on some of the geopolitical conflict behind renewables adoption - international agreements, tensions between oil providers and purchasers (see: Russia v. Ukraine), slower phase-out of more GHG emissive resources in some developing countries, and who should be responsible for cleaning up the climate are just a few of the tricky conversations surrounding renewables.
Of particular interest to me, and hopefully other investors as well, was the section of the book wherein Yergin details some of the technological innovations that will transform the energy landscape and encourage further renewable investments, as well as some of the implications of each of these. All of this put together builds the “new map” of energy and its major players and producers across the world. For anyone interested in renewable investing, I’d recommend this book to get a thorough understanding of how complicated this landscape truly is, as there’s certainly a lot more to it than most investors might assume without a further dive.
Investing Tidbit
Checklists
It can be pretty easy as an investor to get overwhelmed. To let your emotions get the better of you; to make irrational choices based on market movements; to hop in on a stock at elevated prices after a great earnings call so you don’t “miss the action”, or conversely, selling after a terrible earnings call.
Investors can follow any number of approaches to improving on this irrationality. Understanding psychology and the governing nature of human behaviour can be immensely helpful for learning to monitor when you might be getting caught up in crowd mentality. But one of the easiest, quickest, and most direct ways is to set a checklist for your investing decisions, a series of hurdles that any investment decision you make must pass. Having a rigorous checklist can protect investors from themselves by anchoring all their decision to the central strategy of their portfolio and ensuring a consistent, methodical approach to investing that removes emotion from the equation.
Every investor’s checklist is going to be a little different, because each investor’s checklist should reflect their specific investment goals and the kind of companies, risk, margin of safety, etc. that they are looking for in an investment. Some people closer to or in retirement may set a hurdle on their checklist that ensures all their investments have a dividend growth >10%, a beta <1, and a cheaper/fair valuation relative to peers so as to ensure they don’t get caught holding the bag on riskier assets when they rely on it for their income.
My own checklist (which I’ll just describe briefly, rather than going into detail on the whole 20-pt checklist) is much more growth-oriented, but can vary slightly depending on what stage the business I’m analyzing is in; a very young growth company, for instance, must pass hurdles on the advantages of their offering vs. competitors (this can be a bit subjective), strong & consistent revenue growth >25%, a fast-growing market, and improving capital efficiency metrics (not positive, just improving) to demonstrate they are beginning to generate at least some small portion of a return on their investments.
For a more mature growth company, in contrast, I lower the hurdle for revenue growth to >15%, but raise the bar on other aspects of the balance sheet; I want to see positive and growing EBITDA figures, growing and positive EPS, a fair value on P/E to earnings growth, and positive capital efficiency metrics - namely an ROIC >5% and growing, though the specific metric I look at depends on the industry and operating model of the business I’m analyzing.
For a future newsletter I’ll try to detail my entire checklist, but this is a quick and dirty example of the kind of hurdles investors may find useful in crafting their own checklists, an exercise I’d recommend for all investors - personally, it has helped me to stay rational through some incredible market swings, and not having one concretely established and written out was one of the biggest mistakes I made early on as an investor.
So, make like Santa; create a list, and check it twice!
Investor Spotlight
Simple Investing & the ‘Outperforming the Market’ Service
Let me start off by saying that there are very few opportunities available to self-directed investors like the one that Simple Investing offers with his ‘Outperforming the Market’ service.
The author behind Simple Investing is an active buy-side portfolio manager with a proven track record of consistently outperforming the market - every single year for more than a decade. With experience at both value- and growth-focused funds, his approach is unique; the ‘Barbell Portfolio’ within the Outperforming the Market service gives investors a balanced approach to investing that blends his two realms of expertise into an outperforming beast.
And now he’s offering that portfolio, and full access to a personal portfolio manager, to you. That is a rare opportunity for a self-direct investor, and his service is incredible, incredible value - I can’t recommend his work enough. Within Outperforming the Market, you get access to the following:
The Barbell Portfolio - growth, value, and contrarian plays with accompanying company write-ups, intrinsic value and price targets, plus alerts on new buys/sells.
This includes the Price Target Report, which examines every company in the Barbell portfolio for valuation and 1- and 3-year price targets.
Weekly newsletters with market & company news.
Deep dives into new ideas every week (again, with accompanying intrinsic value & price targets).
Earnings analysis, including on companies not in the Barbell portfolio - great for monitoring and staying on top of your other stock ideas.
Access to chats with the Outperforming community and the author for questions & advice.
Valuation is central to the service and stocks are only added if they trade at a significant discount to the calculated intrinsic value, which helps to provide a margin of safety and considerable upside potential. And you can see the effects of this in the portfolio’s performance, which outperformed the market considerably since inception.
And on top of all this (if that wasn’t enough), you can rest assured that Simple Investing’s interests are aligned with your own - he is 100% invested in the Barbell Portfolio, and not peddling stocks he doesn’t believe in, like certain other services I could name (but won’t).
You can find Simple Investing on Twitter for some excellent Fintwit content, or go straight to the main course and find Outperforming the Market here. Again, I can’t emphasize the immense value you can get from this service by having a personal portfolio manager on your side.
Weekly Watchlist Stock
IONQ - Ticker: IONQ 0.00%↑
I could resist the urge no longer; I had to take a closer look at quantum computing, almost entirely because it sounds like it’s straight out of a sci-fi movie.
More specifically, I had to take a look at IonQ, the company taking quantum computing to the markets and the sole publicly-traded company available to investors interested in a pure-play quantum computing business.
So, besides sounding extremely cool, what is quantum computing? This method of computation is built off the principles of quantum mechanics, or nature at its smallest scale. Much the same way as the conventional rules of physics change when discussing the molecular state, the conventional rules of computing change when discussing quantum computing - rather than the conventional 0 and 1 bits used by our everyday computers, quantum computers are able to utilize qubits. Qubits can exist in a variety of states at the same time, meaning they can be 0, 1, or 0 and 1 simultaneously.
But what the hell does that mean? Imagine a library. While our computer of today are able to search through a library one book at a time using 0 and 1 bits, quantum computers are able to utilize qubits to analyze the entire library - instantly.
The potential efficiencies this unlocks for analyzing massive datasets across nearly every field, sector, and industry is ridiculous. And IonQ is the company heading this advancement of human technology.
Coming public almost exactly two years ago through a SPAC, IonQ has delivered a 29% return to shareholders with an estimated TAM of $65bn by 2030. Delivering solutions to chemical companies, trading firms, self-driving vehicle technology, and manufacturing plants with their quantum hardware systems, IonQ seems well posed as the leader in this nascent but fast-growing industry.
Unfortunately, that’s led to a valuation that’s hard to swallow for any pure-bred value investor; at today’s market cap of $3bn and TTM revenues of $16.1m, IonQ trades at 186x revenue figures. Growth investors more comfortable with volatility could make a very strong case for these lofty expectations, given that quantum is the seen as the successor to the Age of Information:
While IonQ definitely doesn’t fit the bill on my more recent proclivity towards boring businesses - this is about as cool & exciting as it gets - a recent pullback in some growth stocks and the enormous long-term potential in this play may be enough to warrant a closer look from me at this high flyer. IonQ, welcome to the watchlist.
What’s New at Hourglass
Episode XI - Aritzia
Following up on last week’s deep dive on Aritzia, I got into a briefer audio dive on the business model, growth opportunities & defensive characteristics of the company, as well as a very short overview of why the stock’s been getting hammered, the reasons behind the poor sentiment surrounding the stock, and lastly why I believe these are misguided. Tune in below or wherever you get your podcasts - I’d love to hear from you, too! Drop a comment on the podcast and let me know what you think about Artizia and the investment potential.
Upcoming - SupremeX Deep Dive
After IonQ, it’s time to get back to a boring and easy to understand biz - next week I’ll be releasing a deep dive into an incredibly boring small-cap company - SupremeX is one of North America’s leading envelope manufacturers with a growing eCommerce packaging segment, with a market cap of around $113m and TTM revenues of $309m. I’m going to release the SupremeX research next Thursday (Oct. 12), so keep an eye out for a thorough analysis of the company and why it’s trading at such a seemingly cheap valuation - pump your email in down below if you want to get that sent straight to your inbox!