As of yesterday, I sold my stake in Starbucks at a price of ~$100. This increases cash in my global folio to 44.5% (I am struggling to find new ideas, any help please!).
Starbucks has proven to be a very good business managing to grow sales at >10% over the last decade and they have a very long runway given their limited penetration in China and barely any presence in India (especially in tier 2 and 3 cities). Over a business cycle, in good times this business can generate profit margins of ~14%.
Given the very long runway and good management, I can pay upto 25x P/E translating into EV/sales of 3.5. I bought it during corona meltdown at share price of ~$60 (EV/sales on trailing numbers were ~3.5x).
I would like to sell at >40x P/E (EV/sales ~ 5.6) given the long ruway available for the company. With sharp re-rating, the trailing EV/sales now looks at ~6x. Now sales are a bit depressed because of corona lockdown. Lets do crystal ball gazing, assuming that corona stabilizes and quarterly sales runrate of $7bn comes back in CY22 which means I am selling at ~4.9x EV/sales (which is lower than my ideal sell price, I might be leaving a lot on the table). I will track how future turns out, I will be happy to buy it back if quarterly sales of $7bn comes back sooner.
I have been looking myself for decent investments in this market, now that valuations are full - thinking of biotech as a theme given after vaccine uptake, there may be an additional selloff in this space.
I am looking at AVROBIO (newly listed at $14-$15, i think it should be atleast $25 in the medium term), Akero Thereupatics, Alector Inc, Epizyme Inc.
As of yesterday, I created a 5% position in Markel Corporation. The updated portfolio is below
Companies
Weightage (cost basis)
AB InBev
3.50%
Berkshire Hathaway
10.00%
Disney
5.00%
Fairfax India Holdings
10.00%
Google
10.00%
Markel Corporation
5.00%
Philip morris
2.00%
UBS ETF CH-SMI
5.00%
Vanguard Emerging Markets Stock Index Fd
10.00%
Cash
39.50%
Markel is a specialty insurance company with a diversified investment book, both in listed and unlisted companies. They have a very rich track record of over 3 decades. I have captured the business essence in the thread below. My own expectation is growth in book value of 10% which is management’s stated goal. The figure below captures key metrics and how company has grown. My exit price will be ~1.8x P/B, the current number is ~1.2x P/B.
What’s your opinion on Spotify. It seems to be giving an interesting opportunity just like Netflix when it was not that big. My investment thesis here is that it might become the audio world of search in future and leader in podcasts and music (it already is). The subscription model is same as that of Netflix.
In the same way i feel at current levels FB is undervalued with both instagram and whatsapp dominance rising. Whatsapp pay and facebook shopping/marketplace are add on.
Hi Harsh. My question is why go global when one can keep invested in local or maybe in other developing countries? I mean if we think about US they are already rich where 1/20 th of world population holds 1/5th of world’s wealth and they just cannot keep going up and up that ladder. Their GDP grows at 2% or so and their population might grow at 0.9% or so… In all as per growth rate approximation they might grow at 1.1% CAGR for next 20 years in gdp per capita which might be about 21-22% percent in 20 years from current levels. Even though they have got innovative companies, those companies cannot grow globally at a phenomenal rate against the GDP growth rate of 2%. It also seems very insightful to see that USA GDP grows today exactly around the growth rate of world GDP. Even Mr. Munger warns of a “wretched excess” which is also relevant from the fact that their market cap to GDP is at record levels. In all, a follow up question is - What kind of a return are you expecting on your global folio?
I have not been able to be convinced about the competitive durability of Spotify, will it have more than 50% market share after 10 years? It’s valuations assumes that it will be the leading music platform over a long time period, I have not seen so many product based applications with a really long runway. Maybe my understanding is lacking, but this is not an obvious kind of bet for me, that’s why I don’t have any position in Spotify.
I have been playing the digital advertising story through alphabet, plus alphabet has a lot of other bets which can potentially be a large revenue driver in the future. I perceive alphabet to have a longer growth runway than Facebook, and more resilient cashflows.
These are narratives, international investing doesn’t mean US investing. I have a much larger bet on emerging markets (China, India). I haven’t had much time to learn more about other emerging markets like Vietnam, Bangladesh, and it’s also hard to get access to these markets.
Another point is that the country of listing has nothing to do with the business profile. An Indian IT company derives most of its revenues from US and Europe, similar thing happens with a generic pharma company or an auto ancillary. It doesn’t matter where a company is listed, what matters is how much cash can a business generate. And India doesn’t have a sole authority or a right on future cashflows.
As of today, I have sold my stake in Alphabet primarily because of rich valuations (~7x EV/sales). This raises cash level to 49.5%. Updated portfolio is below.
As of today, I have reduced my allocation in Disney from 5% to 2%. This increases cash to 52.5%. I am currently able to find a lot of value in global insurance companies, good ones with high ROEs are still trading at only a slight premium to their book values. I am currently studying Allstate corp, any feedback on this will be quite appreciated
Hey Harsh,
Really admire you sharing your portfolio and the knowledge sharing.
Have you looked at Brown Forman (Jack Daniels manufacturer)?
It is a highly profitable company with very good margins.
Valuation wise it is not too overpriced.
Plus some Chinese companies looks attractive. Many are in pressure due to various reasons - Trump order prohibiting Americans to invest in these, and sell off from recent margin calls by a company.
As of today, I increased my position in AB InBev from 3.5% to 5%. This is because of their good delivery on deleveraging, potential disposal of less profitable business leading to more deleveraging and reasonable valuations.
As of today, I added Dropbox as a new position (2% position size). Its a very good business with 80%+ gross margins trading at reasonable valuations (~4x EV/sales). Key risk is increased competitive intensity from peers like Microsoft and Google. The closer peer for them is Box and Dropbox always used to trade at a premium. However, recently they have started trading at a discount to Box. Lets see how future unfolds.
Hi @harsh.beria93, one more question…
What is the reason for you to have US equity exposure
Is it because rupee will lose its value faster than dollar🤔(eg: decade ago 1$ =50 rs, now same 1$=76rs)
Or the returns are much higher in US market or to have your portfolio diversified or any other reasons??
I don’t invest only in US market, I invest globally using Interactive brokers.
For knowing about a company, I mostly read filings from the company’s website. For quick data scan, I use tikr. I don’t use any specific filter, most of the company discovery is random in nature. I follow a few youtube channels which I have found useful for idea generation (mentioned at the end of this message)
I wrote about it previously, my expected returns from global markets is similar to Indian markets (adjusted for 3-4% INR depreciation). I like studying and investing in general, no reason to limit it to one geography. And I don’t have any problem with being diversified as long as my return expectations are met.
As of today, I added Netflix as a new position (5% position size). Following the last quarter results, stock has de-rated to valuations last seen in the 2010-15 cycle. Its a high operating leverage business which is prone to consumer trends (somewhat similar to fashion, but more resilient than typical fashion brands). Two big risks to this position are:
Increase in competitive intensity from peers like Disney which is more near term in nature
Running a constant treadmill to create new content adapted to people’s taste which is more long term in nature
At their current scale, business produces enough cash to self fund its new content requirement, so there is no real bankruptcy risk. In the coming quarters, growth will be affected as they tweak their business model.
The current downturn in technology businesses has now gone on for slighly over 1 year. Generally, these kinds of downturns last for 2-3 years before everyone loses hope and throws in the towel (e.g. 2000 tech bust which lasted from early 2000 to 2003). I am finding a lot more opportunities to deploy capital as valuations are becoming more reasonable. Some of the stocks which are approaching my buy limits are Starbucks and Suzuki. In the current set of businesses I own, Disney is reaching a level where I can increase my position size. I will keep the thread updated as and when I deploy more capital.
As of today, I have added Suzuki Motor Corporation (the Japanese one) as a new position (5% position size). Today’s price drop seems to be because of raids by German prosecutors for alleged use of devices to manipulate emission readings (link). This can be a serious risk if allegations are proven.
As a business, Suzuki is a cyclical and is currently facing business headwinds due to semi conductor crisis which is reflected in their margins (at cyclical lows). Additionally, they are trading at lower end of their valuation range. Company largely trades in the 10-20x P/E band and is currently trading at ~11x P/E. On a P/B metric, they trade b/w 1-2x P/B and current multiple is ~1x. So, I have valuation comfort + business is currently in downcycle, both are required for my cyclical investing framework.
Given my very good experience in cyclical investing in 2020 (see here), I am broadening my approach to global markets. The idea is to buy cyclicals which are trading at lower end of their valuations during a business downcycle. I then wait for a couple of years, let the business cycle turn and (hopefully) sell at a good profit. Lets see if it works out with Suzuki. Updated folio is below.
As of today, I added 5% position in Starbucks. This is the second time I am buying Starbucks, last time was during March 2020 (at around $60) which I subsequently sold in December 2020 (at around $100). The basic rationale for buying remains the same as I had mentioned in the first post of this thread.
Starbucks: This has been a great turnaround story post 2008. Their growth rates are close to 10% with most incremental growth coming from China. India is another market where they are growing quite fast through their partnership with Tata. They cater to the high end customer segment and have a long growth runway.
The current uncertainty is around labor union issues that company is facing along with margin contraction (cyclical phenomena). Lets see how this position does. Cash comes down to 32%.
