Fortnightly Review January 7, 2018

Fornightly Review January 7, 2018

I hope you all had a wonderful holiday season.  Going forward this review will be every two weeks.


Interesting Links & Tweet

In September 2016, Michael Mauboussin and his team at Credit Suisse put out a base rate book with base rates aggregated on a number of levels. The book is a useful tool as the inability to forecast the future means investing is probabilistic. Understanding what the market is pricing in through reverse engineering a DCF with a focus on a key value drivers (sales growth, operating margin, investment requirements) will allow you compare to base rates.  If the market is pricing in high growth rate, persistence of margins, and low capital requirements, the stock is likely to be overvalued.  There are always a few outliers that beat the odds but placing money on a company with the hope it is an outlier is probably more speculation than investing. (link)


Aswath Damodaran released his annual data. A number of variables are aggregated at a number of levels including at the Emerging Market level. (link) The table below illustrates some key metrics for EM.


JAB Holdings recently offered RM3.18 per share. Oldtown (OTB:MK) manufactures and sells coffee in stores and through a 232 strong chain of cafes, mostly based in Malaysia with outlets also in Indonesia and Singapore. The key stats associated with the acquisition are below.


The transaction multiple provides a benchmark for valuation of similar companies. The main assumption is the private market acquirers are knowledgeable industry insiders that have done extensive analysis and wouldn’t have completed the acquisition without the acquirer achieving an acceptable return. What is an acceptable return is another discussion and different for everyone. Private market valuations also take into account a control premium. The table below illustrates the transaction multiples over the past five years for food and beverage mergers and acquisitions from Peakstone Group. (link)


Stout Advisory has an excellent overview of F&B M&A transaction multiples broken down by sector within the industry. (link)


German firm Star Capital produced a very well research article discussing the pitfalls of Short-term forecasts, market timing and EPS estimations often used by investors, particularly institutional investors. (link) H/T Hurricane Capital


In March 2016, Stalwart Advisors provided insight into its 3 Wave Framework to determine long term sales growth potential of a industry/company, which is well worth the time. (link)


“When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority.” Peter Lynch H/T @MikeDDKing
Fritz Capital wrote a blog post discussing what to look for in a CEO and what to avoid. (link) A summary of the blog post is below. Fritz Capital’s twitter handle is @Fritz844 and is well worth a follow.


The best CEOs:

  • Have a strong customer focus
  • Identify strongly with the company they run
  • Are motivated by a deeper meaning rather than making money
  • Are patient
  • Are frugal
  • Think individual responsibility is more important than processes.



The worst CEOs:

  • Trust expert advice rather than think for themselves
  • Focus on size and profitability
  • Want to win against competitors rather than do what’s best for customers
  • Feel appearance is important
  • Impatient
  • Well-connected
  • Feel misunderstood and want to prove sceptics wrong
  • Driven by making money



This analysis is relevant for stock picking. The quality of the CEO can have a huge impact on R&D-intensive businesses such as in the technology and pharmaceutical industries, but also for commoditised businesses that typically operate on razor-thin margins. At any rate, good CEOs tend to have a strong focus on adding value to customers rather than on beating competitors. They also seem to identify strongly with the company – to have an emotional connection to the ups-and-downs of the business. They seem to be driven by a long-term mission rather than just trying to make a quick buck. And lastly, they seem to have patience to invest for long-term results.


Successful CEOs appear to be optimistic and believe that their work can have a major impact on the company and the lives of others. In contrast, worse-quality CEOs appear to feel that they are victims of circumstances out of their control, feel that they are entitled to fame and fortune regardless of their performance and are quick to blame others for outcomes relating to the business.



The short selling checklist of Feshbach brothers circulated around twitter sometime ago. (link) H/T @Wexboy_Value


Wall Street Converstations put together some links on the Feshbach brothers, which provides some background. (link)


The Cut recently profiled Oscar Olsson, an executive at H&M. (link) After a 50% fall, H&M looks interesting. We may do some research and write something on the name even though it is outside our typical universe due to the quality of the company and the general lack of opportunities.


The Intrinsic Investing blog of Ensemble Capital discusses pricing power. (link) The Intrinsic Investing blog is one of the best around and is a must read. I suggest going back through previous posts if you have not followed the blog. My favorite posts include The Death of (Many) Brands and How Moats Make a Difference.


FT wrote an article on the increase in Chinese share pledging. (link)


Columbia Business School put out its quarterly investment newsletter Graham & Doddsville (link).


Stratechery posted an annual review (link). The author Ben Thompson always has interesting ideas on business models and themes in tech and media that often transfers to other industries. wrote a good description of Dairy Farm (link), an Asian Retailer with four divisions:


  • Food (Hypermarkets and Supermarkets, 36% of 2016 net profit),
  • Health and Beauty (27% of 2016 net profit).
  • Home Furnishings (Ikea, 11% of 2016 net profit) and
  • Restaurants (14% of 2016 net profit)
  • The majority of the company’s locations are in Hong Kong and China.


H/T value and opportunity


Michael Mauboussin’s latest on How Well Do You Compare? (link)


Stalwart Advisors shares their insight on the importance of management. (link)


Bill Nygren discusses his investment approach during a recent talk at Google. (link)


The Federal Reserve Bank of San Francisco released a working paper titled The Rate of Return on Everything, 1870–2015. (link) H/T Hurricane Capital


Morningstar provided their best ideas in each sector. The focus is primarily the US. (link)


Todd Wenning joined Ensemble Capital and wrote about his investment process. (link)


Research Affiliates discuss the effectiveness of the CAPE ratio in the US and International markets. (link)


Jim Chanos and Kyle Bass discuss China in October 2016. (link)


JD’s CEO Richard Liu discusses the Chinese consumer and e-commerce. (link) H/T Craig Bujnowski


South Korean cosmetics company Amorepacific aims to expand in Europe. (link)


December 2017 issue of Value Investor Insight includes a few Emerging Market ideas. (link)


Jeremy Grantham of GMO shares his view of the market. (link)


Tom Fahy tweeted an interesting chart of Offshore Drilling Utilization (link).



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