Welcome back. Everyone.
We're finally add a new year. We're finally in 2023 and I'm
excited about the future. Like I said, I had a lot of New
Year's resolutions for main things that I highlighted and
one of my main goals for 2020, 3 was to strengthen my portfolio.
I called high grading my portfolio which just means I
raise the quality of it and part of that is selling off lower
quality lower conviction Holdings and concentrating
further into higher quality Holdings and I've done that in
my Portfolio. I've sold off three different
companies. In my portfolio will be going
through all three of the sales and seeing why I sold those
companies and where I'm putting that money.
And I actually bought into a brand-new company and in the
process of doing analysis on my Holdings and looking over the
past year, I have to come clean and admit a mistake.
I made I made a mistake in my analysis, A year ago, I want to
go through how I made this mistake and what I plan on doing
in the future. So we'll be talking about that
as well. Now, we also have some breaking
news, Bed Bath & Beyond is going bankrupt.
This should really surprised, no one.
But the problem that I want to highlight with this company that
will go into, I want to highlight one of the biggest
abuse has one of the biggest misuses of BuyBacks that I've
ever seen in a publicly traded company.
And it's right here with the example of Bed Bath and Beyond.
And then finally we're going to take a look at this new detailed
report on Apple's mixed reality headset.
They're coming out with it hopefully by the end of this
year is the Prediction. But we have a lot more details
on what this actually is. And as someone that's a
shareholder of Apple, It's a larger position of mine.
I have some opinions on this new product, so we'll be looking at
that as well. So, obviously, we have a lot to
jump into in this episode a lot to go over.
And let's start off with the portfolio update, and where I
got things wrong, I made a mistake like I said, in my
analysis will get to that as well.
The first one that I want to go over is in the financial
category. I sold out of JPMorgan, my
entire stake in the company I used to have Dollars left in
this investment and around six thousand dollars in gains.
So JP Morgan has been a big winner for me.
Basically what I did with this company is I just bought it
really cheap during the pandemic lows when everybody was afraid
that the economy was going to go in the gutter banks are going to
go bankrupt. There's lots of talk about
crypto, taking over and somehow beating out JPMorgan and none of
that stuff happened Banks were completely fine.
JPMorgan recovered, the price went up the price to book right
now is 1.5, which I think is a fair value.
Ation a reasonable valuation for JP Morgan.
So I don't necessarily think this is a bad holding.
In fact, I think Jay P Morgan does have a wide moat, but I
also think this company is highly cyclical and I don't
really consider a compounder in the same way that I do other
companies. It uses a ton of Leverage.
It doesn't really consistently grow earnings because it's very
cyclical. It's very sensitive to the
economy and those are all characteristics that I'm trying
to move away from. So, I took my gains in this
company, and I redeployed it into other companies.
That I'll go over in a minute but JP Morgan was the first sale
and one thing I think is worth mentioning the companies that I
sell and my portfolio are incredibly good companies
because it companies that I buy are usually really, really good
companies. So even the ones that I'm
dumping even the stocks that I'm selling are probably going to do
really. Well in fact, I think a lot of
them will probably still outperform the market.
So I would not be concerned if you're still invested in j.p.
Morgan but that is one that I've chosen to exit because I Like
other positions more. The next company that I chose to
sell is in the consumer category.
This one is Church & Dwight, a company that I recently bought
into a year ago. It's gone down just slightly,
it's held up a little bit better based on my bio and points.
But I've decided to sell this company basically because of the
same analysis I've done with my other Holdings.
I've looked over every holding and I've tried to assess both
the moat and the brand strength, the network effects, and the
pricing power, and simply put, when I put Church, Right next to
other companies. I own like, Nike Pepsi Estee
Lauder even Starbucks. I considered those companies to
have stronger brand value and pricing power than Church &.
Dwight Starbucks is Raising prices while growing sales and
growing customer volume. Texas Roadhouse is Raising
prices while growing the amount of customers that visit their
store, that is pricing power. The ability to raise prices
without losing customers, but Church & Dwight doesn't seem to
have that too. Quite the same extent this year,
they've chosen to raise prices but their overall revenue is
declining. And they've had other
competitors that I think have a little bit more pricing power
like Procter & Gamble. And I think the problem with
Church & Dwight for me, is a lot of their brands are secondary
there. The second biggest in the
market, share, not the first. So even though this company, I
think is fine. I don't see any huge problems.
I just don't think it's quite as powerful as some other
companies, my portfolio. So, I decided to cut this
position. Take the small loss on it.
Five hundred dollar loss and move on to other Holdings.
And then finally, the last one that you'll notice missing in
the consumer category is Target. This is a company that I've been
saying for a very long period of time that I'm going to sell.
It's not going to be my portfolio forever.
When I do analysis on retailers, there's only a couple that I
really want to own Costco is one of them.
Amazon is the other. Those are the two retailers that
I really like, I sold Target with a 671 dollar gain.
I had very little invested in this stock so that Is a pretty
sizeable gain. Given the amount of money that I
had invested in the company. Now, Target I think is a great
company. I actually think it's one of the
better retailers. It'll probably do well over the
next ten years, but when I again, assess the moat of
companies, the goal here was to high-grade, the portfolio,
increased the strength, and durability of it.
And when I assess Target and the motive, it, I don't think it has
any significant moat compared to other retailers like Dollar
General or Walmart. In fact, I think I think
value-oriented retailers, like, Wal-Mart Dollar General and
Costco, have a stronger value proposition and a stronger, moat
than a company, like Target, Target's a company that you can
get some unique items there. But a lot of, it just depends on
the shopping experience because really, you can buy most things
at Target at Walmart or Costco or Amazon.
So I think that Target lacks the considerable value proposition.
Moat that a company like Costco has.
So those are the three sales JPMorgan church and white and
Target. And I just want to point out.
Out that overall you can look at the gains and losses.
I'm taking gains here. I've made money with these
companies over the past two years, which has been kind of
difficult to do. There's been a lot of people,
you can look up online that have been losing money over the past
two years. So I'm happy to be locking and
gains and actually made trades in different buys into companies
that have done well, over the past couple of years.
But just as importantly as selling, we have to have a place
to put the money. That's hopefully better than the
place, we took it out of. So hopefully the buys that I'm
doing are a better. Place for this money to be than
the companies. I just recently sold and I've
bought a number of different companies with this money.
I further concentrated into Microsoft as this company is
sold off. I put 1,000 additional dollars
into Microsoft, I realized the companies in the red, I realize
it's going down and it looks scary right now, in my opinion,
I think that Microsoft is undervalued.
And I think right now, basically, all of big Tech is
undervalued sighs. I'm not concerned about this
seven thousand dollars in the red.
I think this is temporary and I Leave that I'll make this money
back. You'll be able to follow and see
over the upcoming years. I'll track it either way, but in
my opinion it's just a matter of time until the buys I'm doing
today. Pay off.
I bought a little bit more Vici. That's right.
The company has come down in price, its trading around 32
dollars, a share. I don't think it's a complete
still right now, but I think it's a better value than it's
been over a long period of time and this company I think we'll
continue to kick out. Massive dividends.
I think we'll see this number grow over time, it'll Zig and
zag and it will wobble around from time.
A time. But overall the gains are going
to stack up. VG is a company that owns a lot
of Vegas. Real estate Vegas is all about
odds. And in this case, the odds are
highly in your favor that this company will collect 100% of
rents for the foreseeable future.
And those rents are going to end up in my bank account.
I bumped up, my Holdings and Union, Pacific, and Canadian
Pacific, a little bit. These are going down.
I'm never going to catch the falling price of a stock, right
at the bottom. So I'm not going to be able to
time it that way. I expect these to fall down a
little bit more, but I'm gradually building my In in
these companies. Because again, I think they're
duopolies monopolistic companies with Incredible pricing power.
Lots of efficiency going forward and the merger with Canadian
Pacific. I think will be very good for
this company in the long term. Those are the companies that
I've been adding to, but I also introduced a new holding to the
portfolio and this is where I can happily admit.
That I was wrong about something.
I was wrong about MasterCard and visa and ivory purchased an old
holding with MasterCard. I was wrong about this company a
year ago. In fact, I made a video called
Just sold two stocks completely those two stocks.
As you can see, blurred out right, there is Visa and
MasterCard but the reason that I was concerned about MasterCard
and Visa is there. So many new companies entering
into the payments fear a year ago.
If you recall the whole fin Tech, boom was just incredible.
Every single company was coming out with different fintech
products and it may be a little bit concerned.
I thought, what if there's other companies building out these big
networks that are going to upend the moat and this big duopoly
that MasterCard and Visa Has an on top of all those new fintech
companies. We also had reports at the exact
same time that Amazon was dropping Visa as a partner
saying that they're going to use PayPal and different concerning
reports like this. And then while that was
happening, there is also news that apple and big Tech.
We're getting into payments as well.
Apple pay was taking off like a rocket.
So again, all these things swirling around of this fintech
explosion. It just may be concerned.
I really got scared with MasterCard and visa and getting
scared with. Holding is never a good thing.
This is one of the difficulties in investing is not getting
scared out of good companies. In fact, Peter Lynch, once
famously said, the real key to making money in stocks is to not
get scared out of them and that is exactly what I did.
I got scared out of these two companies.
Now what's happened over the past year with this fintech
explosion and all the crypto and everything that was supposed to
upend the entire US Financial system, put to rest these
companies of MasterCard and Visa that hold this duopoly while we
can see what happened. And all of these disruptive
companies we can name. PayPal for example, this company
is completely crushed, its down 66 percent from its high.
The user ship has slowed for it and it hasn't threatened Visa or
Mastercard really at all Amazon quickly, sorted things out and
still continues to work with MasterCard and visa.
And it's true that big Tech is moving into fintech, and they're
building out. Things, like, Apple pay, but
Apple pay uses MasterCard, and Visa as part of their Network.
In fact, most of the transactions rely on their
existing networks Bitcoin, That was supposed to Bend the US
Financial system is down, 61%. There's continually people
moving out of exchanges and moving the cold storage and
selling out of crypto. And meanwhile, we can look at
what's happening with MasterCard and Visa over the past year
visas down 3%, a little volatility with the stock but
nothing concerning the transactions.
For the business have hit record highs.
The revenue has hit record highs of seven point eight billion in
a single quarter and we can say the same thing about MasterCard
their duopoly and share the market.
MasterCard is down. Or percent nearly identical
performance to visa and likewise the revenues have hit record
highs as more and more people are using their Network every
single day than a year ago. So I concluded that my initial
concerns for Visa Mastercard were largely unfounded and
unless I see some real compelling data show up in the
numbers, I plan on buying back into these companies and really
owning them as larger positions because outside of these
troubling predictions of their duopoly being broken up.
If you actually look at the numbers for these companies,
they are clearly a Compounder, so I decided to buy back in the
reason that I chose MasterCard over Visa was basically the flip
of a coin. I had to choose one.
It's kind of like choosing one railroad over another.
I think they're all good options.
I had a slight Nuance preference for MasterCard because I like
some of the deals they're doing with companies like apple but
really I would be just as fine owning visa and I may have Visa
back into the portfolio someday. And in terms of buying back in,
I'm glad that in this case, my mistake on MasterCard was not a
costly. Mistake because a company's
down, a couple percentages from where I sold it.
So, I was able to buy back in, without this company racing
away. That's all the trades that I
did. I basically sold out a three
companies and brought back, MasterCard, and I've up my steak
and concentration and to what I consider to be the higher
quality, Compounders in my portfolio.
One thing that I'll mention is even though this seems like a
lot of Trades, it's not a lot of capital compared to my
portfolio. The total turnover from this.
This trade going on here is around 6% of the Leo.
So this isn't any huge massive difference.
I've moved around 6% of my portfolio positions.
Out of those three companies into some different ones and
hopefully my portfolio will be stronger as a result.
Now, moving on, I want to jump into this Bed Bath and Beyond
news because I think it's relevant to investors to be
aware of both the good uses of capital allocation and the bad
uses of capital allocation basically.
An executive sits in the role of being an investor on your
behalf. If I invest money in a company
like Amazon, for instance, let's bring up Amazon here.
We can look at it on qual trim, and we can see that this company
makes a lot of different Investments when I invest in
Amazon, I'm handing over capital of mine and I'm saying, hey,
Andy, jassy, and the executive team at Amazon, you make
investments with capital on my behalf, I'm giving you
Investments, and you can now invest on my behalf.
So you have to have confidence in the executive team to make
good. Investments on your behalf that
are going to have a high return on investment.
And that's a little bit of your judgment that makes it so that
you have a little bit of risk with any investment that is
called the agency risk of the executives.
Now, some businesses are less risky than others because they
do very minimal reinvestment. They basically just run their
Core Business and do nothing else.
And those ends are very predictable, both companies like
Amazon, it's a little bit more risky, they're making a lot of
different Investments and you have to have some level of Faith
or some level of research. That the management is going to
make smart Investments with your money.
Now we bring up a counter example here, the company Bed
Bath and Beyond. And this is a company that I
think has made dramatic Miss A locations with their
Investments. And this is a huge risk for
investors beyond the fact that the retail business is
difficult. And I think it's highly
competitive and I would avoid investing in a lot of these
companies. I think there's going to be
swaths of them going bankrupt. I think Macy's will, I think
Dillard's will. I think some of the Companies
like Staples, will I think a lot of retailers that we know about
are gonna go bankrupt over the next 10 years and it was only
really a matter of time with Bed Bath and Beyond.
But the actions that these Executives took, I think are not
only bad Capital, allocation, I would consider it Financial
malpractice. Now, let me go over the
illustration of why I think this company was so egregiously
mismanaged and how investors can avoid this in the future.
First of all, we have the businesses Top Line.
It's been going down for well over six years now and it's
going down at an aggressive clip.
So this is a company that is getting desperate.
It doesn't really know what to do.
They're having to come up with all these different strategies
to try to stabilize their revenue because they're losing
market share quickly. That's not their only problem,
though. They have problems with cash
flows. It should have been apparent to
this company Bed Bath and Beyond that.
Their cash flows were declining over the past five years and
especially in 2019. That's what it really.
Came apparent that they're having cash flow issues.
Now we look at the balance sheet of the company.
What is this company doing there?
Minimizing their cash? Balance cash balance?
Since 2020 has gone down dramatically to just a hundred
million dollars from 1.4 billion so they're very low on cash.
Their debt has spiked back up as they're taking out emergency
debt. This debt is getting more
expensive as SP Global has recently.
Just labeled it as lower credit. So Now their cost of capital is
increasing and meanwhile, they still have these price you
Capital leases because they are retail business.
So they're a heavily indebted company that has far more
long-term debt than cash. On top of that they have the
ongoing operating expense of capital leases and what is
management doing during this dire desperate time in their
business. Well, what they're doing is
BuyBacks. That's what this company's been
doing for the past decade without any hiccup.
Since 2013, they knew that their business was in Decline instead
of really working to fix the business instead of bolstering a
huge cash pile for rainy day ahead, they reduced the shares
outstanding. In fact, they reduced it at an
aggressive clip, buying back 21% of their shares outstanding in
just the past year in 2019. When it became clear that their
free cash. Flows were going down
dramatically. They halted the buyback program
for a couple of quarters and then they resumed it buying back
shares all through. 2020 and in 2021 they're buying back their
own stock using their precious cash balance.
That could save them from bankruptcy to buy back their own
shares and hopes to boost the stock price their efforts to
boost the stock price. Didn't even work.
It's down 24%, just today. So all that money that they
bought back was completely wasted and the investors got
burned on that as well. And again I just wanted to go
over this because I think it highlights a key risk for the
stocks are invested in. That is the capital allocators
of the Which are the executives they're in control of doing
sound Investments. And if you see a company doing
BuyBacks while taking on massive amounts of debts, while the
company's fundamentals are eroding, that is a clear sign
that the company is very much focused on the short term and
not on the long-term strength of the company.
Now, the next piece of news that I thought was very interesting
and relevant is Apple's new mixed reality headset.
We've heard rumors of this for a long period of time, but it
seems like it's getting closer and closer as we know Apple,
rigorously tests all Of its devices before releasing, I
won't name any names, but there's a lot of other tech
companies that throw products out in the market and they use
their customers as the test dummies for it.
This is not the case with Apple. So before they release
something, they have to have a good idea that it's very
rigorously tested and it's going to have a very good outcome for
the general audience. Now, we do have some details
about Apple's, mixed reality. Headsets first of all, the looks
of it, they say the headset resembles a pair of ski goggles
and we'll use an array of cameras to allow people to
Variants both augmented and virtual reality so you can do it
both ways, it's going to look like ski goggles.
That doesn't really give us a lot of information there but we
do get more specifics into how this works.
They say the headset will use motors that automatically adjust
its lenses ensuring that the where has the best possible
viewing experience a physical dial on the headset will allow
users to quickly toggle between complete immersion and VR and
the ability to see their surroundings.
And Apple has quietly included technology in the latest version
of its Ear Pod pros. And Tended to make them work
better with the headset and there it is.
There's the motive Apple, always looking to integrate their
existing technology and their existing ecosystem into every
new product. They're not just going to
integrate it with the are pods. It'll be integrated with the
iPhone. It'll be integrated with the
iPad and with Apple TV plus with everything.
All of this is going to work seamlessly together.
That's the way Apple does everything they say as of last
year the headset used an extended battery pack tethered
by a cable. Well, as opposed to a battery
integrated into the headband. The design Choice has been
controversial among apples Engineers, given the company's
preference for cable free designs.
This is something that I can see.
Apple getting made fun of having a cord, go down from the headset
to your waist and then having a battery pack.
There is basically like a fanny pack.
So you have a fanny pack battery which is not the most flattering
or seamless design and apple being known for the design.
I think this could cause a A little bit of a stir, but you
have to consider the options here.
Batteries are heavy, having them sit on your head for an extended
period of time, causes fatigue on your shoulders and your neck.
So they're making judgment calls here.
And at some point there has to be a little bit of give and
take, you have to sacrifice some Design Elements to make the
product. Actually work, can be feasible
in this case. I think, if you have a heavy
battery, I rather have that sitting on my waist, then
sitting on my head, they say, apple appears to be Getting
closer to the launch of the product as of early last year.
Taiwanese manufacturer pegatron has assembled a headset outside
of Shanghai, it passed multiple prototype stages and entered
production, Milestone known as the engineering validation test.
This is where they make thousands of the product to see
if it's suitable for mass production.
Now, despite reaching that stage, Apple could still scrap
elements of the design and the headset all together.
Again, they're going to want to come out with a good product.
Apple doesn't want to. Sacrifice its reputation by pre
releasing a product before it's ready for prime time, this thing
is going to be expensive, all the estimates, I've seen and
even the most current estimates are that it's going to be around
three thousand dollars or more, and it just seems like, there's
no other way to price it lower with the technology, it has the
sensors, it has the cost of making.
This is going to be much higher than an iPhone or much higher
than their other devices, and that price range does price out
most people, but it will still be a nice range for Or people
that really are interested in VR and mixed our headset.
And I think the route this will take is it will simply get
cheaper over time, it will start off super premium and they'll
come out with cheaper models over time.
The display in Optics of this device, I think are the most
compelling part of it. And I think is what's going to
set this above and beyond what metas doing I fully believe.
When I look at the differences between Apples, accompany a
meta, I think that Apple has a much better engineering design
and Hardware team than meta. Mehta has a better social
engineering team. Apple has a better Hardware
engineering team, so when I look at the differences between their
designs and what they're talking about here, this one seems like
a massive step ahead of the Oculus.
They say display for each eye has a resolution of 4K combine,
they form an 8K image. That's four times, the pixels of
an ultra high-definition TV. The displays which are
manufactured by Sony will be among the first to use
technology known as Micron OLED. That means the displays are
fabricated directly on a silicon wafer.
Instead of, on glass, allowing it to be extra tiny and thin.
But still contain a high density of pixels.
Sounds pretty impressive. When the user puts on the
headset will automatically adjust the lenses using small
motors so that they match the users interpupillary distance,
the space between the users pupils which varies from person
to person. That's important because your
eyes need to be perfectly aligned with the small displays
inside the headset to give you the largest observable area and
filled a view. You, I also think something that
they don't mention here as I think the fact that many
headsets are not perfectly aligned with your face and eyes,
I think that's what causes people to have nausea and people
to get dizzy when they use headsets and that's a constant
complaint for people using VR headsets.
So if they can solve that problem where people don't get
dizzy or don't get nauseous using these, I think it
dramatically broadens, the use case and apples headset will
also allow people who wear glasses Magnetically clip in
custom prescription lenses. So they've solved that issue as
well. It uses a number of processors,
but the most notable one is called Statin.
It's the brains of the headset, it's more powerful than the M2
Chip, and it's custom-made for this headset.
They say in terms of design, it's going to be composed of
aluminum and glass. While also using carbon fiber to
reduce the size and weight, making it lighter and thinner
than the meta Quest Pro. So it'll be more powerful, have
better lenses and be lighter and Thinner, as an apple
shareholder. I like what I'm reading so far.
And then finally, in terms of content, apple has a significant
Advantage here over competitors, like a met as well because they
have 30 million developers actively building apps on the
Apple App Store. Apple is a money-making machine
for these developers. They make a fortune even with
the Apple tax included in that. So they're going to be happy to
develop on a new Apple device and try to be first to Market,
get that first mover's advantage on the new apps.
Apple may also be Adding virtual or mixed reality experiences
around live sports they've been buying up a lot of sports
rights. They say the New York Times also
reported in June that apple is working with Hollywood producers
to make content for the headset that will tie into its Apple TV
Plus shows so they're they're tying in their ecosystem with
Apple TV. Plus it's going to somehow
connect with the headset as well.
This is where everything ties together with this headset.
It's going to tie into Apple TV, plus it'll tie into their app
store, it'll tie into even the The earpods, that's what they're
using for audio for the headset. Probably, the earpod pros,
everything ties back into the Apple ecosystem.
Now, I've said this many times before I'm an apple Fanboy I
like basically every product this company comes out with.
Sometimes they do come out with flops though.
I'll admit it and I think the mixed reality headset is it's a
risky one. I don't think this one is like
the next iPhone that just has some small iterations and has
very low risk of execution, I consider this to be a very Hi
execution, risk release for Apple.
Probably one of the more risky ones over the past decade,
because there's just so much Tech and so much to consider
with a VR headset. I don't think it's been going
quite as well, for meta, I think they've had struggles, we've had
VR headset, slow down and sales over the past year.
So Apple really needs to nail this and I think they only get
one shot to make a first impression.
So there is some execution risk, but in my opinion, Even though
the stock is trading down a little bit right now, this VR
headset is not part of my investment thesis for Apple this
company generates. So much cash flow even without
this headset that I think it would be completely fine.
So, if they are able to have another success, another big
premium item to add to their apple ecosystem of products.
I think that's all the better. So we'll see what happens.
I'm personally excited about it. I think Apple has good odds of
making this work, but it's not something core to my thesis.
Now, that's all for this update. I hope you enjoyed the show.
Show, and I'll see you in the next one.