Newsletter XIII - How to Get Rich, $ANET, & Bad Earnings
Recapping a Week in the Markets: Oct.16 - Oct.20
I owe my success to having listened respectfully to the very best advice, and then going away and doing the exact opposite.
– G.K. Chesterton
Microsoft Acquires Activision - MSFT 0.00%↑, ATVI 0.00%↑
At. Long. Last.
I have to admit, I’ve been rather sick of hearing about this one. This has been about two years in the making now.
Honestly, I’m a little surprised that this one was able to go through - I’ll own up to not expecting this deal to get approved. Poor Meta gets dinged for a $350m acquisition of a useless GIF company, but Microsoft is able to pull through a $69bn acquisition of one of the largest and most established video game companies, with some of the best known IP, in the entire world?
As a Microsoft shareholder, I’m not upset. But as a Meta shareholder, I’m upset. Nevertheless, I’m happy that the Activision saga can be put behind us for now.
Lululemon Joins S&P 500 - LULU 0.00%↑
Lululemon officially joined the S&P 500 early this week, a pretty huge moment for a company with humble beginnings as a small Canadian clothing company. On the heels of Microsoft’s acquisition of Activision, Lululemon was able to replace it as one of the 500 most promising and profitable companies in the world.
Shares took a more than 10% bump to reach a new 52-week high after the announcement, though have leveled out somewhat since. Joining the S&P can be great for a company - not only does it speak volumes about how the S&P views the company’s potential, but it also provides the stock with a significant amount of institutional support as broad-based index funds tracking the S&P 500 begin to pour money into the company.
So long as Lululemon is able to maintain their S&P 500 inclusion, things should be looking rosy for shareholders. And with this announcement, Lululemon places the cherry on top of an incredible growth story for investors that got in early on the small Canadian fashion stock and rode it to a nearly 3000% return (>23% CAGR) since IPO.
Tesla Feels the Impact of Price Cuts - TSLA 0.00%↑
Tesla reported Q3 results this week - to say it wasn’t a great one would be an understatement. The company implemented price cuts earlier this year to try and offset muffled demand, but they weren’t enough. The company recorded reduced sales volume regardless, and gross margins were hit significantly by the impact of price cuts. A 44% drop in net income did nothing to lessen the blow, nor did heightened operating costs from the ramp-up of the cybertruck and investments into AI integration for Tesla’s workflows.
Shares took a 13% tumble as a result.
Musk reported, like many other businesses will over the new few weeks of earnings season, that a tough macro-economic environment on the consumer was primarily to blame for reduced demand. As most consumers take out financing for new vehicle purchases, the rising rate on these loans is too much for everyday spenders, especially in addition to the other bajillion things that are stupidly expensive right now.
Tesla may be a victim of a tougher climate for consumers over the coming months. If you believe in the long-term thesis for the company, though, and are alright with what may be a few rough quarters, then a DCA approach may be a fair entry on the stock. Personally, there’s far too much about the company and the stock that I dislike, but that’s just me.
David Soloman Puts His Dreams on Hold - GS 0.00%↑
Poor David. As the head and CEO of Goldman Sachs, one of the premier financial institutions in the world, you’d think Mr. Solomon would have earned the right to kick it every once in a while and follow his dreams to become a DJ.
Well, you’d think wrong. Apparently, that sort of frivolity is frowned upon in the world of institutional banking?
After a fair bit of muttering among his already-divided staff, external criticism began to ramp up on Soloman’s questionable record-spinning interests when Goldman Sach’s reported its eighth consecutive quarter of declining profits. Reportedly, he’s scratching (haha) his hobby for a while to focus on banking, a move widely lauded by Goldman Sachs investors and music listeners alike…
I Will Teach You to be Rich - Ramit Sethi
You get a double whammy for this week’s recommended read, because if you don’t have the time to start reading a new book, you can also plop down on your couch and watch a Netflix special by the same author and of the same general theme, How to Get Rich. I was given this book as a gift, but it took me a long time to actually pick it up as I despised the clickbait-y title of the book. But the front page betray the contents, which are actually useful and well-written.
This builds on the Investing Tidbit from last week’s newsletter, in which I discussed personal finance and its role in investing. Ramit Sethi has written a book, countless blog posts, and more recently starred in the Netflix show on personal finance topics. What I like about Sethi’s work is he really focuses on making personal finance insights available to everyone, regardless of their financial background.
On top of this, he is not a personal finance guru that recommends you simply pinch pennies for 40+ years so you can be rich when you’re withered and old. He focuses on enabling people to spend their money on the things that make them happy and save their money on the mundane, useless, and unfulfilling things in life.
He also recommends automated investing, mostly into ETFs, which is something I believe 96.4% of investors should be doing rather than individual stock picking. Now, Sethi is not a CFP and he does recommend the odd things that I raised my eyebrows at, but he still provides a great overview of everyday personal finance topics that are great for laypeople and investors alike.
Savers Value Village: Cracking the Thrift Code - SVV 0.00%↑
Devin LaSarre - Invariant
Savers Value Village was a company I covered for a Weekly Watchlist Stock in one of my first ever newsletters, only a few weeks after it initially IPO’d. It’s always fun to look at a company’s stock if you drop lots of money there, as I do at Value Village.
Devin LaSarre at Invariant did a fantastic and succinct dive into SVV 0.00%↑ - including its business model, performance, and rough valuations. He also dove into analyst questions from the very first earnings call.
It’s a great article if you’re interested in a very attractive business model with lots of expansion potential in the United States, with around half of its current stores being up here in Canada, where it has a 90% brand awareness figure that management is looking to extend into the more lucrative markets south of the border.
I never touch IPOs, but this is one I’m watching very closely, particularly after reading this piece by Devin at Invariant. I highly recommend giving it a read, it’s a short and well-written article that’s great for getting a detailed sense of what Savers Value Village is.
**NOTE: I'm actively looking for recommendations for great investment writers to highlight for the investor spotlights! Please feel free to drop a comment recommending a writer/investment seriesin the comments for this newsletter!**
Finding a Balance Between Diversification & Concentration
This is one of those age-old investing debates that really has no correct answer. Like nearly everything else in investing, whether an investor should diversify or concentrate their portfolio comes down to personal preference and individual goals.
I’m not here to answer any questions about which is better. I’m only here to outline my thoughts on the benefits and risks to each strategy so that self-directed investors can have the facts.
Potentially greater returns - if you know what you’re doing.
Big winners = bigger impact. $1000 into a stock that goes up 100% means $2000. $100 into a stock that goes up 1000% means $1000 - doesn’t make a huge difference to portfolio despite the nice percentage gain.
Better for experienced investors who can be confident in “sure bets”.
Maximizes upside potential - better for investors that like gaining lots of money and are comfortable with risk.
Concentrated portfolio means concentrated risk.
Risky for beginner investors.
Market corrections can mean huge downswings in portfolio - not ideal if you need money from your portfolio in short-term.
Overconcentration is a thing - really great investors can get away with 3-5 stock portfolios. For many investors though, this level of risk would be inadvisable for their knowledge levels and day-to-day involvement in finance.
Need to monitor a smaller portfolio more closely to ensure no thesis change ruins returns.
Increased risk could keep investors awake at night - if so, this is not a suitable strategy.
Spreads risk out over a greater number of assets.
Better for most beginner investors as they get comfortable with stock analysis & market dynamics.
Easier to get exposure to wide array of industries, asset classes, markets, etc.
Minimizes downside - better for risk-averse investors.
Easy to overload yourself - 50-75+ stocks that are impossible to monitor for everyday investors.
Can introduce a lot of 0.5% position sizes - psychologically, this makes it easier for investors to throw a few hundred dollars at a stock they know nothing about.
At some point, diversified portfolios are big enough that investors may as well just buy a market ETF, call it a day, and save themselves the hassle.
Potentially diluted returns over long-haul when compared with well-managed concentrated portfolios.
In summary, each strategy has its place and its limitations. I believe investors can do well with either approach, but that there are also potential pitfalls. Concentration is the ultimate high-risk, high-reward situation. Winners win big, but losers lose big as well. For experienced investors, a portfolio of 3-5 stocks may be great, but for investors prone to stress or just learning the stock market, this level of risk is probably not a good idea. Concentration may also introduce overconfidence, a cardinal sin in investing.
Diversification follows a strategy similar to an ETF, allowing for steadier returns as winners mitigate the impact of losers. It’s a great strategy for beginner investors so that their early mistakes can be lessened. Overdiversification, on the other hand, may lead to dilutive returns and create an unmanageable workload for the average investor.
Concentration can create life-changing fortune. It can also destroy investors.
Diversification won’t change your life - but it may save you from getting screwed.
Weekly Watchlist Stock
Arista Networks - ANET 0.00%↑
What’s my obsession? Arista is one of very few stocks I check almost daily to see if there’s been any drop. I’ve consistently capitalized on nearly every drop since every drop to make Arista one of my larger positions.
It’s a capital returning, cash flow generating machine, founder-led with fantastic management, and very aligned with shareholders. The business been growing revenues and EPS at an incredible clip over the last several years, it has a fortress balance sheet and distinct competitive edge, and it stands to continue this trend as a picks-and-shovels beneficiary of AI, cloud, and data tailwinds.
Yes, it could be considered a pretty rich valuation at 36x earnings and nearly 11x sales. But when considering the P/E valuation as compared to the 5-yr growth in EPS, Arista is still sitting pretty at a PEG ratio well below 1.0, suggesting it could still be flying under the investing radar despite the fantastic quality of the business. However, its FCF yield of 1.5% may suggest exactly the opposite, so it still isn’t cheap.
I’ve added to my Arista position once again this week, so I thought it was appropriate to give it the spotlight (again). There’s almost nothing to dislike about the business.
What’s New at Hourglass
Schrödinger - Big Pharma’s Little Buddy
At the time, Schrödinger was trading in the mid-thirty range. Today, with the company getting absolutely hammered and trading in the low-twenties, I thought it would be a good time to revisit the company, some of my concerns with the business model, and some of the offense & defense that Schrödinger has at its disposal.
The episode stays pretty surface level as far as the investment opportunity goes - I don’t go into the stock’s valuation, some of the bigger risks to share performance, or the seasonality of the business and focus more on the company, the problem they’re working to solve, and the business model.
If the episode piques your interest though, definitely check out the deep dive article for a very deep dive into everything Schrödinger.
Upcoming - XPEL Deep Dive
Completely by coincidence, I started working on a deep dive into XPEL a few week ago. Over the last week though, as I covered above, the stock has been getting hammered, so the timing couldn’t be better.
As per usual for the deep dive article formats, I’ll be covering the company history, business model and revenue sources, management team, opportunities for expansion, valuation, and some back-of-the-napkin modeling for growth potential.
That’s going to get released next Thursday, so stay tuned for a thorough look into XPEL and whether the sell-off is warranted or, potentially, an attractive buying opportunity.
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Have a great weekend folks! Catch you back here next week.