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In the 52nd issue of Value Investor Digest we feature our interview with Petra Capital Management.
The issue also features other articles, videos and letters from Michael Mauboussin, Lindsell Train, Greenlight Capital, Gotham Capital, GMO, Oaktree Capital, Bronte Capital, Brown Advisory, Benedict Evans, Third Point, The Money Maze Podcast, Barron’s and plus a Telegraph interview with Neil Woodford announcing his return.
“Despite the pandemic Petra had its best year ever in 2020 in terms of fund performance [up more than 60%]. I think we did very well last year primarily because we owned many stocks in our portfolio whose businesses were very competitive and predisposed to benefit from the ongoing economic trends. In addition our portfolio companies had strong balance sheets which means they were less vulnerable to the economic downturn. But more importantly we had bought these stocks several years ago at a cheap prices…the Korean stock market had been exceptionally cheap for many years as it moved sideways for 5 years prior to 2020.”
We are delighted that Value Investor Insight has provided Digest readers privileged access to a recent issue with interviews with Yen Liow, James Callinan, William Costello and others. Plus there iso information about the CSIC Conference.
“We won’t be able to join each other in person this year, but I hope that many shareholders will join our annual meeting online.” Questions can be submitted to DailyJournalQuestions@yahoofinance.com by 8 p.m. ET on Feb. 15
“The interplay of two forces that drive valuations, the cost of capital and the volatility of markets, might explain some of that counterintuitive behaviour…The cost of capital and volatility are likely to converge as we pass through this episode. But the pandemic caused actions and reactions with remarkable implications for valuation.”
“As Durand warned over 60 years ago, ‘With growth stocks, the uncritical use of conventional discount formulas is particularly likely to be hazardous; for, as we have seen, growth stocks represent the ultimate in investments of long duration. Likewise, they seem to represent the ultimate in difficulty of evaluation. The very fact that the Petersburg Problem has not yielded a unique and generally acceptable solution to more than 200 years of attack by some of the world’s great intellects suggests, indeed, that the growth-stock problem offers no great hope of a satisfactory solution.’ The paradox has many putative ‘solutions’, but in essence each requires the problem to be reframed and hence rationally bounded in some way. Consequently, any realistic growth stock valuation attempt rests on some such compromise. The problem is that these necessary choices are often arbitrary yet dramatically affect the result. But whilst precise prices might elude us, it seems clear that genuinely long-duration high-growth stocks like Pepsi’s both exist and are worth considerably more than reckonable via traditional techniques. Hence, to resolve approximate valuations far above the conventionally correct market levels seems to me to be both plausible and entirely rational.”
“In 1929, to be a bear was to risk physical attack and guarantee character assassination. For us, 1999 was the only experience we have had of clients reacting as if we were deliberately and maliciously depriving them of gains. In comparison, 2008 was nothing. But in the last few months the hostile tone has been rapidly ratcheting up. The irony for bears though is that it’s exactly what we want to hear. It’s a classic precursor of the ultimate break; together with stocks rising, not for their fundamentals, but simply because they are rising.”
“In my most recent memo I did mention that never before has it been more acceptable to be unprofitable. When we started [in this business], the fact that a company lost money would pretty much put it off-limits and today it’s not a problem for anybody – and people are lined up to invest in companies that are unprofitable.” (These comments from 7.15)
“The two approaches – value and growth – have divided the investment world for the last 50 years. They’ve not only become schools of investing thought, but also labels to differentiate products, managers and organizations. Based on this distinction, a persistent scoreboard is maintained measuring the performance of one camp against the other. Today it shows that the performance of value investing lagged that of growth investing over the past decade-plus (and massively so in 2020), leading some to declare value investing permanently dead while others assert that its great resurgence is just around the corner. My belief, especially after some deep reflection over the past year – prompted by my conversations with Andrew – is that the two should never have been viewed as mutually exclusive to begin with.”
“If you’re invested in a collection of people that you think are absolutely at the world-class peak of what they’re doing in all of these different areas – but you sit on top of that and you look down through it – the signals you can get from that are really quite extraordinary…you can get the micro-trends that are coming up and add them up to a wonderful picture of actually that’s going on in the world and where things are overheating or not.”
“If you’re invested in a collection of people that you think are absolutely at the world-class peak of what they’re doing in all of these different areas – but you sit on top of that and you look down through it – the signals you can get from that are really quite extraordinary…you can get the micro-trends that are coming up and add them up to a wonderful picture of actually that’s going on in the world and where things are overheating or not.”
“The recent short squeeze in certain securities is nothing new. Indeed, as Jesse Livermore said in Reminiscences of a Stock Operator, (quoting Ecclesiastes), in investing, ‘there is nothing new under the sun.’ As targeted securities have started to come back to earth, wiping out fortunes on the way down as they did on the way up, we can see that this was a bubble no different than other manias over time, going back to the Dutch Tulip Bulb Mania in the 17th century. What is different today, however, is the rapidity of the rise and collapse of bubbles, fuelled by retail trading platforms and social media. Large short interests were also an accelerant in this conflagration.”
“If you piece it all together you’ve got a business [TUI] that on an EV basis doesn’t look like it should have any equity value. On a freecashflow to equity type analysis you struggle to understand how you could value it at much more than maybe 10x or so which would probably lead you to 60-70% downside from here – but that equity freecashflow you’re getting is a tiny slither with very little room for error. So to us it feels like something where you’re really walking a tightrope and anything that could potentially go wrong could tip you over.”
“The cryptocurrency’s embrace by Elon Musk and America’s oldest bank suggests it is starting to win institutional acceptance…’We are potentially at the birth of a new asset class,’ argues Duncan MacInnes, a fund manager at Ruffer, a
traditional, conservative UK investment group that raised eyebrows when it placed a $600m bet on bitcoin last year. ‘Bitcoin is emerging from the shadows, being co-opted by establishment institutions and becoming a legitimate alternative asset for investment portfolios.”
“As a way to shift wealth, it is equally useless. At some point, fundamentals-based valuations will reassert themselves and the many small investors left in the game will lose a terrifying amount of money. I have no idea what GameStop is worth but I know that, unless the share price is a hyperinflation canary, it most certainly isn’t $13.5bn. Pushing up the price can’t change the value.”
“It’s just semantics, it doesn’t matter—except that it does…because everyone is driving portfolio analysis along this divide…ValuAnalysis identified the long-term real return of equity as between 5% and 6%, and there is an inverse relationship between the price multiple and the cost of capital in a static model. So, all else being equal, that means that no-to-low-growth companies will converge at an earnings multiple of between 17x and 20x, which are the inverse of 5% and 6%.”
“Seth Klarman’s Baupost Group bought a $900 million stake in Intel Corp. in the fourth quarter as the chipmaker’s shares were tumbling.”
“Ryanair said on Monday that it had added orders for another 75 Boeing MAX aircraft, taking its total to 210 planes…Ryanair aims to take delivery of 24 new MAX planes before the peak summer travel season. The aircraft is a ‘gamechanger’ the airline said. Indeed, the economics look favorable. Ryanair CEO Michael O’Leary pointed out that the MAX has 4% more seating but burns 14% less fuel than comparable, older planes. That ‘will give us materially lower operating costs going forward for the next four or five years.’”
“Green energy Special Purpose Acquisition Vehicles (SPACs) are also a troubling sign. Green SPACs have raised $40 bn in 2020 alone with a mandate to acquire as-of-yet unidentified clean energy assets. Oil and gas exploration and production companies on the other hand raised only $5.2 bn in 2020 to develop their existing proven asset bases. Given how challenging clean energy product development can be, we fear the bulk of these green SPACs will likely end up being written off entirely.”
“In these months some fund managers we admire have had solid double-digit returns. Also, some fund managers we think are gunslingers destined to drop 80 percent or more have had double digit returns (with triple-digit returns a possibility). This – despite what the averages say – is an aggressive melt-up market.”
“Covid brought shock and a lot of broken habits to tech, but mostly, it accelerates everything that was already changing. 20 trillion dollars of retail, brands, TV and advertising is being overturned, and software is remaking everything from cars to pharma. Meanwhile, China has more smartphone users than Europe and the USA combined, and India is close behind – technology and innovation will be much more widely spread. For that and lots of other reasons, tech is becoming a regulated industry, but if we step over the slogans, what does that actually mean? Tech is entering its second 50 years.”
“As soon as you take the conversation from price to value now you’re selling something really powerful to people. So for us, every time we’re looking [at a company] we call it ‘superior customer outcome’ and we go about trying to work out how this works. The reason for that is that it leads to what we want as a shareholder. The shareholder is always the last person who gets paid – [if] you look down the cashflow statement or the P&L the last person who gets paid is always the equity holder: the employees get paid, the suppliers get paid, the taxman gets paid – we’re last. So if we want a high ROIC that’s going to compound over a long period of time we need that customer to be happy, to come back, to pay for value and to do it for an extended period of time.”
“We’re going to rebuild the Woodford investment operation under a new brand called WCM Partners [Woodford Capital Management]. We’re going to focus on the biotech sector, British biosciences and healthcare, doing the sorts of things that we’ve done before, doing the sorts of things that have developed into the likes of Immunocore, Kymab, Synairgen, Nanopore.”