A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

In Urban China, Cash Is Rapidly Becoming Obsolete (Paul Mozur, @paulmozur, NYT)

China is stepping up and leading the world in mobile payments. Adoption has been staggering. $5.5 trillion payments were made via mobile devices in 2016, compared to $112 billion in the US.”Enterprising musicians playing on the streets of a number of Chinese cities have put up boards with QR codes so that passers-by can simply transfer them tips directly.” This shift doesn’t come without problems. Foreigners (tourists and businesses) may find it more difficult to transact.

Visa Takes War on Cash to Restaurants (AnnaMaria Andriotis, @AAndriotis, WSJ)

The US isn’t stagnant in the cashless endeavor. Visa is helping small businesses purchase the technology to process payments of debit cards, credit cards, and mobile phones. “Visa has long considered cash one of its biggest competitors and has been taking steps to chip away at it. Getting rid of cash is a priority for Visa.” One benefit in the favor is millennials, who often prefer cashless payments.

Why the Post Office Gives Amazon Special Delivery (Josh Sandbulte, WSJ)

“In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products. A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace. First-class mail effectively subsidizes the national network, and the packages get a free ride”

Buffett’s Bet on Store Capital Shows Not All Retail Real Estate Is Equal (Sarah Mulholland and Noah Buhayar, @SMulholland_ and @NBuhayar, Bloomberg News)

The rise in Amazon (AMZN) has lead to the downfall of many retail companies and their landlords. During these broad sell-offs good business become attractive for investment. For Buffett, it was Store Capital. Their properties focus on “internet resistant” businesses, such as “preschool facilities, health clubs, dine-in movie theaters and pet-care sites.”

Sign of the Bottom? New ETFs Will Bet Against Beaten-Down Retail Stocks (Chris Dieterich, @chrisdieterich, WSJ)

New ETFs can be the signs of a market top. By the time a fund company takes notice of a trend (or hot trade) and builds an ETF product to participate in that trade, it’s usually too late.  REMX and YLCO are both examples of the launch of the ETF is followed by the peak in their respective market. ProShares has ” filed plans with securities regulators last week for new double- and triple-levered ETFs designed to rise on days that retail stocks fall. Also coming is an ETF that goes “long” online retailers while “shorting” traditional ones.”

 

 

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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The post below is an excerpt from the recent ENSEMBLE CAPITAL QUARTERLY CONFERENCE CALL. You can read the full transcript HERE.

Ferrari (RACE), manufactures super cars that are specifically made to cater for the pleasure of drivers and collectors at the top end of the automotive food chain, those in the top 0.1%.  Its cars are luxury goods that are inspired and derived directly from the Formula 1 racecars the company designs, builds and races through its Scuderia Ferrari racing team.

Ferrari’s cars are anything but practical cars – they are race-inspired expressions of something about their owners, who are among the elite few that are able to possess and experience one of their machines.  It is a purely luxury item that is either the fulfillment of a dream, a statement that you have arrived, are a passionate auto aficionado, or that you are free.

Ferraris are more about the emotion, the passion, and the experience than they are about transportation. The sound, the speed, the F1 racing legacy, and the conspicuous shapes are all part of the experience that come with owning and driving a Ferrari.

Ferraris are an entirely discretionary purchase, akin to other luxury good items like high-end handbags, watches, jewelry or art.  All of these serve a more abstract purpose outside of the semblance of utility their exact form may indicate.

Its brand and reputation was born of F1 car racing when its founder and race car driver turned businessman Enzo Ferrari founded his own racing team and race cars in 1945 then later decided to sell a few of his race inspired cars to help fund his racing ambitions.  That DNA and reputation has helped carry the brand to its place today, as an expression of the limits of what a car can achieve with a distinctively Italian design flair.  From the core of its performance capabilities, to the way it looks, and sounds, and ultimately how it makes its driver feel about himself or herself, the cars that Ferrari builds are an experience built on a long legacy and culture of racing, passion, and winning.

Of course, we haven’t mentioned a very important aspect of owning a Ferrari — that is being part of an exclusive club. There have only been 7-8K Ferraris sold globally in each of the last 5 years. In order to buy the latest high-demand Ferrari or a limited edition supercar, you have to own one or more Ferraris first.  In other worse, being able to afford one does not entitle one to actually buy one. 2/3 of new Ferrari buyers are repeat buyers, at an average price of $250K-$1MM+. These are incredible statistics that bode well for the makings of a highly profitable and defensible business.

To get a sense of how limited Ferrari’s cars are, in 2016, there were 1.3 million individuals in the US with a net worth over $5 million and only 2700 Ferraris allocated to the US. So only 2 out of every 1000 of these individuals could actually buy a new Ferrari. Of course, many of these folks couldn’t care less about a Ferrari, but it goes to show the relative scale of potential buyers to available cars. The company actively cultivates a supply-demand imbalance in order to preserve the value of both new and used Ferraris thereby creating scarcity value.  This is a tactic that many other luxury brands employ as well, including luxury hand bag brands like Hermes (RMS FP) and swiss watch makers to create both an aura of exclusivity among their customers and preserve the value of their products.

All of these examples comprise a category of goods referred to as Veblen Goods. These are products whose attractiveness to their consumers actually increases as their price premiums increase, in contrast with the economic principle that applies to most goods that demand increases as price decreases.  This increasing price tactic is offset by the ability of numbers of consumers who can actually afford to buy their goods despite their increasing desire to buy them. And that is where the supply/demand and pricing balancing act comes in.

In fact, when it comes to its very limited edition supercars like the LaFerrari, Ferrari’s million dollar plus sale prices still leave a lot of money on the table for its elite cadre of customers who see the resale value of their cars rise to multiples of their purchase price.  The LaFerrari went into production in 2013 with the limited run 499 vehicles that sold for over a million dollars each.  Resale values were in the $3MM range immediately after they went into production and more recent sales indicate a value of $5-7MM just a couple of years after production ended.  It’s no surprise that the two most expensive cars ever sold at auction are both Ferraris as are 7 of the top 10 and 15 of the top 20! This phenomenon is a huge contrast to the price of 99% of cars, whose value declines the minute you drive it off the lot and continues to do so every year thereafter.

The strong brand and experience is at the heart of Ferrari’s moat and drives the underlying economics of its very profitable business.  It is also what points to our analogy of comparing Ferrari collectors to art collectors with price appreciation dynamics that accompany the limited run pieces.

As a result, Ferrari shows an exceptional return on invested capital of ~100% with very little incremental capital required for it to grow its business at the rates it targets, in the 5-10% range. The low capital intensity results in strong free cash flow generation, which is at the heart of any company’s long term value. Finally, its 12-18 month waiting list and its deliberate strategy of undersupplying its market demand makes it highly resistant to declines during recessions, adding predictability and resiliency to its business model.

By comparison, the average S&P 500 company has about a 10% return on invested capital. Incredibly, Ferrari’s return on invested capital is in the same league as high IP content, asset light companies such an Apple (AAPL), Alphabet (GOOGL) or MasterCard (MA). Most analyst compare it to high margin, highly valued consumer luxury goods companies like Hermes (RMS FP), Richemont (CFR VX), and LVMH (MC FP) instead of the traditional capital intensive, cyclical, low P/E automakers for the same reason.

Just like Paychex (PAYX), a company we’ve discussed in a past conference call, we believe the high sustainable return on invested capital coupled with strong free cash flow generation entitles Ferrari to a much higher than average P/E multiple in the high 20’s, despite the fact that it is not a super-fast growing company.   If you are interested to learn more about Ferrari and how we view its valuation, we invite you to read our blog post published in May on the Intrinsic Investing website titled “Tesla vs. Ferrari – What RACE and TSLA Tell Us About The Winning Formula For Stocks”.

Ensemble Capital’s clients own shares of Alphabet (GOOGL), Apple (AAPLE), Ferrari (RACE), Mastercard (MA) and Paychex (PAYX).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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The post below is an excerpt from the recent ENSEMBLE CAPITAL QUARTERLY CONFERENCE CALL. You can read the full transcript HERE.

I’d like to provide a brief update on Advisory Board Company, whose stock has doubled since March of this year. As we described in our blog post about the company written at that time, Advisory Board provides software and consulting services to help hospitals reduce the cost of health care while improving patient outcomes.

The US health care system is fundamentally inefficient to a degree far out of step with the rest of the world. While Americans pay 50% more per capita for health care than the best in class health care system provided in Switzerland, the life expectancy here is as low as that seen in Chile and the Czech Republic, who spend 75% less per capita than we do. As you can see in the chart we published in our post on the company, health care systems around the world fall on a curve that neatly describes the relationship between per capita spending and life expectancy. The US is the only country where this relationship between spending and outcomes is fundamentally broken.

Earlier this year, market participants sold Advisory Board stock down to its cheapest valuation in history outside of the 2008-2009 financial crisis. Investors were concerned by the slowdown in Advisory Board’s revenue growth and worried that the company’s significant push into providing services to higher education institutions was a mistake, despite education suffering from similar issues around weak student outcomes in relation to runaway costs.

As with all of our assessments of a company’s fair value, we focus on cash generation. Both of Advisory Board’s businesses generate outstanding levels of distributable cash flow even while offering long-term growth potential.

Earlier this year, the activist investment firm Elliot Associates, run by famed hedge fund manager Paul Singer, recognized the disconnect between Advisory Board’s public market price and the actual intrinsic value of the business. After taking an 8% position in the company, Elliot Associates pushed the company to sell themselves, likely splitting up the education and health care business to two separate buyers. The stock has been rapidly appreciating ever since, rallying over 10% in early July as Bloomberg reported that United Health was emerging as the leading bidder for health care while private equity firm Vista was the mostly likely bidder for the education business. With earlier reports suggesting over 20 bids had been submitted for the company, it seems clear that no matter what price the company ends up selling for, or even if a deal falls through, Advisory Board is a company with significant intrinsic value that the market has underappreciated.

We sometimes use the phrase that we bring a “private equity approach to public market investing.” This simply means that we make investment decisions not as stock analysts seeking to guess which way the stock will move, but as business analysts seeking to understand the economic value of the companies we analyze. We believe that over time, public markets value stocks on the same basis as private markets do. In this way, markets are efficient over the longer term.

But in the short term, public markets often misprice stocks relative to pro rata ownership in the company they represent. This is what Benjamin Graham meant when he said that “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Ensemble Capital’s clients own shares of Advisory Board Company (ABCO).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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The post below is an excerpt from the recent Ensemble Capital quarterly conference call. You can read the full transcript here.

As I mentioned at the beginning of the call, the economic data that was released in the last quarter generally supported the idea that the economic conditions that have been in place for number of years continue to persist. However, what has changed is a broad increase in the market valuation of US stocks. While the S&P 500 has increased in price by 18% since the end of 2014, the earnings of the companies that make up the index are essentially flat. This has led the PE ratio to go from 18 times to over 21 times and has caused many people to worry that the market is overvalued.

At Ensemble, we do not believe that there is an effective methodology for investors to accurately determine if the market as a whole if over or under valued in a way that allows them to act on this information to generate superior returns. Those who think the market is overvalued tend to point out that the current PE of 21 times is more than 30% higher than the average PE of 16 to 17 times that has been observed for the past 60 years. However, valuation is not a static concept. There is no law that says that the average valuation of the past 60 years will be the average valuation over the next 60 years. The fair value PE ratio is a reflection of how much growth potential a company has, how much cash flow a company generates per dollar of earnings and the company’s cost of capital.

While many people believe that growth in the years ahead will be lower than it has been in the past, we can also observe that cash per dollar of earnings has increased over the years for S&P 500 companies as returns on capital have increased, while the cost of capital has fallen with lower interest rates. Since the S&P 500 is made up of a changing mix of companies, it is possible that the companies that make up the S&P 500 today deserve higher PE ratios than the average company that made up the S&P 500 over the past 60 years.

Indeed, while the average PE ratio of the S&P 500 over the past 60 years has been 16 to 17, the average PE over the past 30 years has been 19. So an important question for investors to answer who seek to cite the PE ratio of the market as evidence of that it is over valued is whether it is appropriate to assign as much weight to the average PE ratio of 14 that persisted from the mid 1950s to the mid 1980s as they do to the average PE ratio of 19 that has persisted from the mid 1980s to today.

If the last 30 years is a more valid assessment of the fair valuation of the market than the previous 30 years, then today’s PE of 21 is still slightly above average, but close enough to the average that it is not statistically meaningful. Indeed, the market has traded at PE ratios above 21 in almost half of the past 30 years.

Why might this be the case? Well one large difference between the S&P 500 of today and the index of over 30 years ago is the shift in the largest companies within the index from energy and financial companies, which rightly trade at moderate or even low PE ratios, to technology companies which rightly trade at higher than average PE ratios.

By “rightly” we mean that the leading technology companies of today are growing faster and generate higher returns on capital than did the financial and energy companies of many years ago, and basic valuation math shows that these characteristics confer higher fair value PE ratios.

Now the idea that tech companies deserve high PEs as a way to justify high market level PEs will remind investors with any sense of history of the Dot Com bubble. But the valuation of tech stocks today bears no resemblance to the bubble.

Today, technology stocks trade well below both the average and median PE ratio for tech stocks over the last 30 years and in fact the S&P 500 technology sector trades at a more than 10% discount to the market as a whole.

Instead of high PE ratios for individual tech stocks driving up the market PE ratio, the market cap of technology stocks has become a much bigger component of the market than it was in the past and since technology stocks deservedly trade at higher PE ratios than other sectors, this shift has deservedly increased the average PE of the market as a whole.

No less a value conscious investor than Warren Buffett commented on this shift at the most recent Berkshire Hathaway annual meeting, where he pointed to the fact that the largest companies in the S&P 500; Apple, Microsoft, Amazon, Facebook and Google generate far more cash per dollar of earnings than companies of the past. Buffett even went so far as to say that he’d like the holdings of his portfolio to look more like these companies, a sentiment he certainly never expressed during the Dot Com bubble.

Now none of this means that we think the market is not overvalued. Maybe it is. It just means that there are plausible arguments to be made that the market is fairly valued or even cheap. But at Ensemble Capital, we don’t think that making this determination is possible or necessary. We believe that many companies face so much uncertainty about their future that it is not possible to make a reasonable assessment of what they are worth. So we simply don’t own those companies.

Instead, we limit our holdings to just 15 to 25 companies that we feel we can make a reasonable assessment of their fair value and which currently trade at a discount to that valuation. In any market, even during bubbles, there are always stocks trading at a discount. So long as we only focus on owning those stocks, we don’t think we need to spend much time contemplating whether the market as a whole is over or under valued.

That being said, we do note that today we are finding it more difficult to find high quality, competitively advantaged companies that trade at a discount than we have for a number of years. While portfolios under our management are still relatively fully invested, we rate a larger than average number of positions as Holds rather than Buys. This means that as cash enters our portfolios, either through new deposits or us trimming existing holdings, we are not fully investing the proceeds and so cash levels have begun to build in some cases. But far from being a call on the market, this cash is simply the residual of our decisions on individual stocks. Rather than waiting for a pullback in the market, this cash will be put to work when we complete research identifying new stocks with investment potential or when stocks in our portfolio in which we do not currently have a full position decline to more attractive levels.

While we don’t make investment decisions based on how the market as a whole is trading or even the underlying sectors, we do think it is notable that today approximately 80% of our portfolio holdings are members of the Technology, Industrials and Consumer Discretionary sectors and that each of these sectors are currently trading below their average PE ratios over the past 30 years. While this fact is not the reason why we own these stocks, it does show that the companies in our portfolio are members sectors that are trading at historically cheap valuations, even while the market as a whole is trading at a level above its historical average.

Ensemble Capital’s clients own shares of Apple (AAPL) and Alphabet (GOOGL).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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“He who sees the past as surprise-free is bound to have a future full of surprises.” – Amos Tversky

We’ve written a lot about how we focus on analyzing individual companies and spend a lot less time thinking about economic forecasts. There’s a certain type of investor who takes an odd sort of pride in seeming to be oblivious about economics. That’s not us. While we don’t work hard trying to forecast the economy, we spend a lot of time trying to understand the current condition of the economy and the range of ways the economy might evolve in the future.

Understanding how the economy works and the economic context in which you’re making investments is important. For instance, investing in a capital equipment company after many years of strong economic growth is very different from investing in the same company in the midst of a recession. While you might not be able to predict next year’s GDP growth, understanding where the economy has been, where it is, and the range of possible futures that might unfold are an important part of our investment process.

But why don’t we seek to accurately forecast the economy? Wouldn’t it be great if we could guess how GDP would grow, what the rate of unemployment will be, whether inflation will pick up or where the Federal Reserve will set interest rates? Well, yes. That would be kind of great. But the fact is, it isn’t possible.

The Federal Reserve gets a lot of grief from investors. A lot of people disagree with their policies. But regardless of your opinion of the Fed, the fact is the Fed is made up of some of the most highly educated economists, has massive resources to study the economy, and even has access to highly valuable data and information that is simply not available to private investors. Yet by the Fed’s own admission, they are simply terribly at making economic forecasts. It isn’t just that they’ve overestimated the rate of economic growth since the financial crisis, its that for the last 20 years they’ve made large, systematic forecast errors.

Below is a chart showing the Fed’s forecasts as of September 2016 along with bands that show the “typical range of possible outcomes based on accuracy of forecasts over the past 20 years”.


Source

The shaded bands are meant to capture the range of outcomes that will occur 70% of the time based on the Fed’s forecasting accuracy and their current projections. Fully 30% of the time, the actual economic outcomes will land outside of these already wide bands.

So the Fed’s forecasts for real GDP growth over the next couple of years is about 2%. But based on their historical accuracy, we know that this forecast simply means that real GDP growth has a 70% chance of being between 0% and 4%. There’s a 30% chance it will actually be worse than 0% or better than 4%. In other words, the Fed is telling you that based on their incredibly exhaustive research on economic conditions, they expect the economy to produce results somewhere between a recession and an economic boom, but there’s about a 1 in 3 chance that things will end up even better or worse than that already huge range of outcomes.

It isn’t just GDP that’s hard to predict. The Fed expects the unemployment rate to end up between 2.5% and 6.5%, and inflation to be between 1.0% and 3.0% (with a 30% chance that each indicator will fall outside that range). The Fed can’t even predict what the Federal Funds rate will be, despite the fact they set the Fed Funds rate themselves! While they forecast it to be about 2.75% in 2019, their historical forecasting accuracy suggests that means it will end up at some rate between 0% and 5% (again, with a 30% chance it ends up even outside of that wide range).

This by no means meant to criticize the Fed. In fact, I find it rather charming that they report on the size of their forecasting error. The Fed might be bad at forecasting the economy, but its not because they’re bad economists. Its because even the smartest economists in the room can’t forecast the economy.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Amazon to Buy Whole Foods for $13.7 Billion  (Austen Hufford, Annie Gasparro, and Laura Stevens; @austenhufford, @Annie_Gasparro, @LauraStevensWSJ; WSJ)

The acquisition of Whole Foods will bring grocery operational experience into Amazon. Earlier this year, Amazon tested a brick-and-mortar store with a new experience for shoppers. There were no check-out clerks. Shoppers check-in with their phone and items are automatically added to their bill when they put something in their cart, so when they’re done shopping they can walk out. In addition to normal grocery items, the store offered a number of prepared food. This acquisition would allow Amazon to leverage Whole Food’s food prep service.

Homeowners Are Again Pocketing Cash as They Refinance Properties (Christina Rexrode; @chris_rexrode; WSJ)

As the Federal Reserve raises short-term rates, long-term mortgage rates remain low. This combined with rising home prices is causing some homeowners to exhibit behavior reminiscent of before the financial crisis. “Nearly half of borrowers who refinanced their homes in the first quarter chose the cash-out option.” This could provide a tailwind to the US economy because it gives consumers higher spending power and it shows that consumers are more optimistic about the US economy.

Hospitals Are Dramatically Overpaying for Their Technology (Peter Pronovost, Sezin Palmer, Alan Ravitz; @PeterPronovost, Harvard Business Review)

Healthcare is a large, complex part of our economy. Over the past few decades, there have been large technological advances in patient treatment, but there are still many inefficiencies. Many of these systems aren’t communicating with each other. This causes healthcare workers to spend time translating information from one system to another. There is a great opportunity for a company to take the lead to develop the platform for interconnected devices.

Why expansions die (Cardiff Garcia, @CardiffGarcia, FT)

Deutsche Bank identified three reasons why expansions end. Domestic imbalances (overinvestment), international shocks (oil), and Fed tightening (rising rates).

The Dot-Com Bubble Vs. Today: A Comparison (Ben Eisen, @BenEisen, WSJ)

Over the last year, FAANG stocks have collectively increased 41%. “Those stocks are responsible for more than a quarter of the year-over-year increase in the $20.95 trillion market capitalization of the S&P 500.” For some, this has “evoked memories (nightmares?)” from the Dot-Com bubble. However, profitability and cash flow generation are much higher today, than it was over 15 years ago.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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Source: Bloomberg

Tesla (TSLA) has garnered a huge amount of attention from the media, consumers and investors over the past four years and continues to do so today. Its stock valuation is the subject of lots of debate but the bull case is predominantly hinged on the strong growth the company has shown in shipments of its first two production cars, the Model S and Model X, with great anticipation ahead of the production launch of its more mass market oriented Model 3 series later this year.

While investors tend to get enamored with high growth companies, we thought it was interesting that a low growth company, Ferrari (RACE), has outperformed Tesla, the hyper growth company, since it went public in October 2015. As the Bloomberg graph illustrates, Ferrari stock has returned 64% while Tesla has returned 46% during that time period despite the fact that Tesla’s revenue growth is expected to average 10x Ferrari’s over then next 4 years. Many would probably scratch their heads at this phenomenon and ask, “How could that possibly make sense?”! We believe the answer lies not in the relative growth numbers but the Return on Invested Capital (ROIC) prospects of the businesses, the more powerful economic metric when it comes to long-term returns for shareholders of businesses.

As passionate as I am about stocks, my passion for cars is not far behind. And no car company has been as exciting to track as Tesla since it debuted its first volume production car, the Model S in 2012, blowing away auto journalists’ and customers’ expectations of the 100 year old concept of what a car is supposed to be. Moreover, its brilliant CEO Elon Musk has done what was considered impossible to do — bring to market clean electric vehicles that customers would not only find alluring (cars have always been a mix of passion and utility) but would also be willing to pay a premium for given their early stage in scaling technologies like the battery and manufacturing volumes. Within 3 years, the Model S became the best selling vehicle in its category in the US and the world with nearly 25% and 20% market share, respectively. Further, US market share had risen over 30% by 3Q16.

 

Given how discerning these luxury buyers are when they can choose any $100K vehicle they desire for the amenities, performance and status, Tesla’s quick rise to market share dominance in the category is a strong testament to its strategic execution in design, marketing, engineering, and capital acquisition and deployment in a category that relies on technical and manufacturing expertise, brand power, distribution, and large capital deployments. Starting a new car company that could succeed by trouncing its high end competitors, especially an electric car company at that, was probably one of the challenging feats to pull off in the modern world. And yet, Tesla has done it and set its sights on getting to the next order of magnitude in volume with the upcoming production ramp in the midsize luxury vehicle market with the Model 3, which already has over 400K preorders with accompanying $1000 deposits for each… sight unseen let alone test-driven.

Bleeding Edge Performance….

Style+Utility….

©Tesla

Unmatched Hardware+Software Technology….

©Tesla

Zero Emissions….

Clearly Tesla has done a lot of things right involving big bets in technology, positioning, distribution, and investment that others had failed to make (high end performance/luxury positioning, vertical integration of key bottlenecks – building supercharger networks and battery Gigafactory, focus on superior safety, direct distribution/no dealer network, low maintenance model, software-driven/autonomy focus with iterative/licensing model vs traditional hardware based 7 year cycles, etc). In fact its success has driven almost every major car manufacturer to invest in EV and autonomy platforms to compete. Government regulation has been a huge impetus with increasingly stringent emissions standards and incentives, but clearly Tesla’s business positioning, engineering, and business model has blazed a path that conventional automakers were not really considering viable. Now nearly every major automaker is investing full steam ahead to prevent their own future diminution or demise. Check out the market share Tesla has achieved in the Model S segment again… 20% in 3 years!

And the midsize workhorse market is next… its not just the luxury segment, but also the non-luxury mid size segment that will also be available for the Model 3 to compete against given the range of likely price points, experience with Model S buyers, and the highest customer satisfaction/loyalty ratings Consumer Reports has ever measured. In this segment, the declining battery costs and lower operating costs will make the Model S (as well as other EVs) more and more compelling financial competitors as well.

Tesla had been the most exciting public car company… until Ferrari went public in October 2015.

©Ferrari

Of course Ferrari has been many a 15-year-old’s dream car and a very few (read exclusive) successful 45-year-old’s trophy car. It is much more about emotion, passion, and experience than transportation and an entirely discretionary purchase. The sound, the speed, the F1 racing legacy (400MM global fans), and the shapes are all part of the experience that come with a Ferrari.

©Ferrari

Of course we haven’t mentioned a very important aspect — being part of an elite club. There have only been 7-8K Ferraris sold annually for the last 5 years (fewer in prior years) and estimates put the number of millionaires and billionaires at 15-35MM globally (depending on methodology), the target buyers. In order to buy the latest high-demand Ferrari or a limited edition supercar, you have to own one first — being able to front the cash is not enough. 2/3 of new Ferrari buyers are repeat buyers. An ASP of $250K-$1MM+. These are incredible statistics that bode well for the makings of a highly profitable defensible business.

In fact, when it comes to its very limited edition supercars like the LaFerrari, Ferrari’s million dollar sale prices still leave a lot of money on the table for its elite cadre of customers who see the resale value of their cars rise multiples of their purchase price.  For example, LaFerrari went into production in 2013-15 with 499 vehicles sold for over a million dollars.  Resale values were in the $3MM range immediately after they went into production and more recent sales indicate a value of $5-7MM just a couple of years later.  It’s no surprise that the two most expensive cars ever sold at auction are both Ferraris as are 7 of the top 10 and 15 of the top 20!

Whereas Tesla aims to bring its stylish, high tech, everyday highly utilitarian, green-clean cars to the masses, Ferrari aims to keep its race inspired cars exclusive and exclusively for driving pleasure.

©Ferrari

Tesla started from the top of the pricing and volume pyramid and is working its way down while Ferrari is happy to stay at the top. The result is a huge disparity in expected growth rates, with Tesla aiming to grow its production volume from 80K cars in 2016 to 1MM by 2020 or 88% CAGR, while Ferrari is looking to get to about 9K cars by 2019 from 8K in 2016, or a 4% CAGR, and targeting a number over 10K units over time. Both currently sell cars with ASPs in the 6 figures, though Tesla’s ASP will likely fall to about 50K as it scales its higher volume Model 3 towards the 1MM unit goal.

Given the disparate growth goals, with Tesla targeting 22x Ferarri’s goal, the stock performance of the companies is astounding, with Ferrari up 64% since it went public in October 2015 and Tesla up 46% during that same time frame.

While Tesla’s $142K Model S P100D production car can match Ferrari’s exclusive $1MM+ LaFerrari 0-60, its stock has not been able to keep up. Which begs the question, why? We posit that the difference lies in the return on invested capital expectations of the two companies.

As the reader can probably tell, we are big admirers and believers in Tesla’s achievements and capabilities. However, as investors, it is hard to value the company given its nascent business model. We can get some idea of what it could look like, but given the very different business model Tesla has relative to traditional automakers (direct distribution, supercharging infrastructure, battery plants, high software content, EV powertrain, etc.) and the onslaught of competition on the horizon from the major automakers, including historically successful and scaled brands, its hard to have much confidence on the ultimate economics that will accrue to Tesla. There are strong signs that the auto market will be disrupted and valuations across the auto industry certainly seem to point to it, but its hard to know what a super successfully scaled Tesla will look like economically 10 years out.

These are not issues for Ferrari. It is an entirely discretionary luxury good, with a strong brand and experience. This is the heart of its moat and drives the underlying economics of its business. There is very little guess work involved in understanding the nature of its business and how it is likely to evolve, especially with a management team focused on preserving its moat and economic characteristics. As a result, Ferrari shows an exceptional ROIC of ~100% with very little incremental capital required for it to grow its business at the rates it targets. The low capital intensity results in strong free cash flow generation, which is at the heart of any company’s long term value. By comparison, the average S&P 500 company has about a 10% ROIC. Incredibly, Ferrari’s ROIC is in the same league as high IP content, asset light companies such an Apple (AAPL), Google (GOOGL) or MasterCard (MA). Most analyst compare it to high margin, highly valued consumer luxury goods companies like Hermes (RMS FP), Richemont (CFR VX), and LVMH (MC FP) instead of the traditional capital intensive automakers for the same reason.

Tesla, on the other hand, has a business whose ROIC is undeterminable at this point given the rapid growth it has exhibited and the very capital intensive nature of its growth going forward. It is scaling out from the high end, low volume to the mass market, which necessarily appears to have structurally lower ROIC. Will it have the ROIC of Ford at ~8-10%** or BMW at 17-20%** or Porsche’s at 30-40%**? We can get some idea by comparing the volumes and ASP ranges for each of these manufacturer’s to get at potential return structure (see source notes in table below).

Certainly there appears to be a pattern here that indicates an inverse relationship between ROIC and volume. ASP is of course a strong determinant of volume since lower prices open up sales to larger numbers of consumers, while lower volume desirable cars command higher ASPs and margins.

One caveat is that an electric powertrain has an inherently lower level of complexity (electric motor vs internal combustion engine, single speed vs 5-8 speed gearbox, significantly fewer parts) and a cost heavily driven by the the battery costs. However battery costs are expected to fall rapidly over the next 5-10 years with scale and improving technology. In addition, Tesla has a high software component to its cars that deliver tangible value to the customer such as its Autopilot semi-autonomous driving software for which it charges 5-10% of base car ASP, which drops directly to the bottom line. As volumes scale, software driven features such as a fully autonomous upgrade, Uber like service features, or even supercharging/battery swap fees may bring in incremental high margin revenue to a fixed asset/cost base. On the other hand, the economics of battery plants and solar panels/roofs (without any value-added proprietary technology, integration, or user interface driven excess profits) may be profit/ROIC dilutive.

Getting back to the stock performance we’ve seen so far, we’ve had many conversations with investors about Ferrari and Tesla and why we own Ferrari but not Tesla despite our positive views on the latter. By far, most see Tesla as a high growth company accompanied by a high return (albeit also very volatile) stock. From our perspective, Tesla could very well end up owning a significant share of the very large auto/transportation market, but how much it will end up winning and importantly what those economics will look like are unclear. This makes it hard to know how to value the business with any level of certainty or margin of safety. Instead, it is a much more straightforward bet that Ferrari will continue to inhabit the dreams of many a 15-year-old and collection of a few 45-year-old enthusiast looking for the particular experience it delivers, with predictably fantastic economics inherent to its business model. At the end of the day, we as shareholders of a business care about the stream of free cash flows a business we own will generate, for which a determinately high ROIC is a much stronger driver than high revenue growth and an indeterminate future ROIC. Of course for a given level of ROIC, higher growth is more valuable than lower growth. And there is certainly a trade off between the value incremental growth adds vs incremental ROIC.

So far though, the market appears to have come to our view that Ferrari’s slower growing highly profitable business has been the more undervalued, higher prospective return company than the faster growing, world changing Tesla.

Clients of Ensemble Capital own shares of Ferrari (RACE), Apple (AAPL), Alphabet (GOOGL), and MasterCard (MA).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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Ensemble Capital chief investment officer Sean Stannard-Stockton recently sat down with John Rotonti of The Motley Fool to discuss our investment philosophy. A couple excerpts are below. You can read the full interview here.

John Rotonti: How do you define a high-quality business?

Sean Stannard-Stockton: The most important indicator of quality is the strength and sustainability of a company’s moat. A moat is a set of competitive advantages that protect a company from competitors. The fact is that most businesses do not possess much of a moat, and so while they may experience good results – or even great results for periods of time – if their business prospects are compelling, they will attract aggressive competition.

High-quality companies, with significant and sustainable moats, are much more in control of their own destiny. While they will face unpredictable challenges, their moat protects them and provides them with the room to adjust to changing conditions and maintain long-term profitability

JR: Please explain how you narrow down your investable universe and how large that universe is.

SSS: Our investable universe is all U.S.-listed companies with a market cap in excess of our equity assets under management (currently about $450 million). Because we run a concentrated portfolio of 15 to 25 companies, we generally would not invest in a company with a market cap less than our AUM, because doing so would require us to own a large enough portion of the business that liquidity would become an issue and we would feel a need to actively engage with the board, which is something we have not done historically.

However, while this investable universe is very large, we only invest in companies that pass our rigorous requirements that they have a strong and sustainable moat, have a management team focused on generating strong returns on invested capital and maximizing shareholder value, and operate an understandable and forecastable business.

While these requirements are not complicated, they eliminate the large majority of companies. One way to estimate the percentage of companies that we might deem investable after completing our full due diligence process is to note that Morningstar, the only sell-side research organization that rates companies based on their moat, assigns their “wide moat” rating to just 10% of the over 1,500 companies they cover.

JR: How do you approach valuation?

SSS: We think that for the sort of companies we target, the only reasonable way to think about valuation is as the present value of future distributable cash flow. As shareholders, this is really the only claim you have that makes your shares valuable.

Of course, discounted cash-flow analysis is sensitive to a range of factors that allow people to abuse this tool to generate whatever fair value they have in mind. At Ensemble, we have a disciplined framework for generating these inputs that protects us from backing into the valuation we want and instead keeps us focused on the true intrinsic value of a business.

But at the end of the day, our valuation process results in an implied P/E ratio, which provides us with a sanity check. If the implied P/E ratio doesn’t make sense to us, we’ll stress-test our valuation model to understand what assumptions are driving the unexpected output.

In general, because our portfolio is full of “capital-light compounders” that can distribute cash to shareholders even while they grow, the fair-value P/E ratio of our holdings is higher than the P/E ratio of the market as a whole, since the market is made up primarily of companies with mediocre returns on invested capital and average growth potential.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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Warren Buffett is generally credited as the most successful investor of all time. But those seeking to learn from him must recognize that there have been distinct phases in his investing career. And we are seeing his next evolution play out right now.

Buffett is famous as a value investor, for paying cheap prices for stocks. This image comes from Buffett’s initial investment philosophy built around the teachings of Ben Graham. Graham had become an investor during the Great Depression and he recognized that some stocks were so cheap that no matter how badly the companies performed fundamentally, the stocks could still do well. These sorts of opportunities became far more rare in the years after World War II, when Buffett was a young investor and so his thinking evolved to incorporate the philosophies of growth investor Phil Fisher. Buffett was also strongly influenced by his partner Charlie Munger’s thinking that some growth companies could be bought at “fair” rather than cheap prices.

“It’s far better to buy a wonderful company at a fair price than a fair  company at a wonderful price. Charlie understood this early; I  was a slow learner.” Warren Buffett, Berkshire Hathaway 1989 annual letter

This evolution from a Ben Graham value investor to a Fisher/Munger quality focused investor is fundamental to understanding Buffett’s legacy. It highlights that Buffett’s advice is not about a formula or set of rules that are set in stone. Instead, they are context specific. In the wake of the Great Depression, you could buy stocks for less than the net cash on the company’s balance sheet and a valuation-first philosophy made sense. But over the last 50 years, a quality-first approach (with a continued appreciation for not overpaying for quality) has been a much better fit for the economic and market environment.

One of the key things that Buffett has looked at during this phase of his investment career has been companies that have an opportunity to re-invest a lot of capital at attractive rates of return.

“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns.” -Warren Buffett, 2003 Berkshire Hathaway Annual Meeting

But now, Buffett has pointed to something new. Something so important that even though it was reported on in real time, he thinks people didn’t appreciate enough the importance of his comments.

“I believe that probably the five largest American companies by market cap…they have a market value of over two-and-a-half trillion dollars…and if you take those five companies, essentially you could run them with no equity capital at all. None.” -Warren Buffett, 2017 annual meeting.

Buffett went on to call these “ideal businesses”, the same phrase he used in the past to refer to companies that reinvested massive amounts of capital at high returns.

Then, the next day in a CNBC interview with Becky Quick, Buffett referenced these comments again saying “I did mention one thing at the meeting, which I don’t think people appreciated at all… So you have close to 10% of the market value perhaps of the United States in five extremely good businesses that essentially take no capital. Now that was not the case in the past.”

The “five extremely good businesses” that Buffett is talking about are Apple, Microsoft, Amazon, Google and Facebook (Buffett is quick to remind the interviewer to include Facebook in the list when she leaves it out initially). Then, when Quick asks him “Would you like Berkshire’s businesses to be more reflective of that sort of new paradigm?” Buffett says “I’d love it.”

Apple, Microsoft, Amazon, Google and Facebook. That’s Warren Buffett’s idea of what he’d like to see Berkshire Hathaway’s portfolio look like going forward. These are the new “ideal” businesses in his view.

If that statement doesn’t reflect a new phase in Buffett’s investing career, I don’t know what would.

But it is important to note this isn’t a rejection of the past, it is an evolution in his thinking that is entirely philosophically consistent. In fact, one good way to understand the evolution is using Connor Leonard’s moat framework that we discussed in a recent post. Buffett is just moving his focus from “reinvestment moat” businesses to “capital light compounders”.

Buffett’s genius doesn’t rest on some key insight he discovered long ago. Buffett’s genius is that he is a life long learner. He recognizes his mistakes and learns. One of those mistakes was not investing in Google, which Charlie Munger declared at the meeting should have been “easy” and that they “screwed up” not investing in the company. But then Munger, teasing Buffett, says the key thing that has made Buffett great:

“I think it’s a very good sign that you bought the Apple stock,” Munger told Buffett. “It shows either one of two things: Either you’ve gone crazy or you’re learning. I prefer the learning explanation.”

Ensemble Capital’s clients own shares of Apple (AAPL) and Alphabet (GOOGL).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

It’s not Armageddon for all malls, some are turning store closures into higher rents (Krystina Gustafson, @KrystinaGustafs, CNBC)

It appears that the brick-and-mortar retail space is changing. Large department stores were the primary driver of mall foot traffic. Landlords needed to entice big box stores to lease in their mall. Consumers tastes have now shifted from department stores to specialty shops. A great example of a specialty retailer is L Brands (LB) or Apple (AAPL). During our last quarterly call, Arif reviewed the retail landscape and LB. You can see the excerpt from the transcript here.

The death of retail is greatly exaggerated (John Biggs, @johnbiggs, TechCrunch)

The change the book industry experienced a decade ago is a good example of what’s happening in retail now. The book industry didn’t die. It just changed. It redefined the book buying experience. Consumers that previously bought at large, chain bookstores (like Macy’s in retail) are now buying from Amazon.com. They didn’t go to those stores for the experience. They went there to buy a (typically widely published) book. Amazon is able to provide the same service at a cheaper price. “So again, as in the world of books, the long tail is eating the old and decrepit body. But the long tail again does something clever. The key, then, is for the startup to fill that niche with cool stuff that people want and that is available down the street and not around the world.”

Quantitative Investing: A Crisis Waiting to Happen (Jason Zweig, @jasonzweigwsj, WSJ)

There is an underlying assumption in quantitative investing that cause them to be “fatally flawed.” The assumption that what’s happened in the past will persist into the future. Quantitative investing looks at the previous behavior of various factors and assumes they’ll continue in the future. Mr. Brookstaber reminds us that “A crowd isn’t the simple sum of its parts. Individuals, acting as a group, behave differently than in isolation. As a crowd becomes ever-so-slightly larger or smaller, its behavior can change in big, and unpredictable, ways.”

Rent or Buy? More Young People Are Choosing Homeownership (Laura Kusisto, @LauraKusisto, WSJ)

Homeownership peaked before the financial crises, then declined to hit a 50-year low in 2016. It has since reversed. This is also the first time since the peak that “new homeowners outstripped that of new renters.” Millenials have been slower than previous generations to purchase their first home. The burden of high student loan balances and rising rents have contributed to this delay. A continuation of this new homeownership trend could be positive for the US economy.

Cable cowboy John Malone views a new landscape (Matthew Garrahan, @MattGarrahan, FT)

US pay-TV has been shrinking “762,000 subscribers across the industry cancelled their subscriptions in the first quarter, a fivefold increase on last year.” John Malone “says he is not worried: after all, these days cable is about much more than piping television into people’s homes. Now it is also a gateway to the internet and streaming services, from Netflix to Amazon.” Similar to the changing retail industry, the media landscape is changing. Consumers are opting to go directly to the content creator, but as John said, they’re still using Cable services for the gateway to those content providers.

Clients of Ensemble Capital own shares of L Brands (LB), Apple (AAPL) and Netflix (NFLX).

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by Ensemble Capital or one or more of its clients you will find a disclosure regarding the security held above. Should Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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