Weekend Reading

23 March 2019 | by Mike Navone

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

Beware of the Dividend Cult (Vitaliy Katsenelson, @vitaliyk, Advisor Perspectives)

Like many investors we love a good paying dividend stock. But what we really look for is companies with high and sustainable cash flow production, run by management teams that allocate that cash in the most productive way possible. In this piece Vitaliy Katsenelson pushes back on some investors’ myopic focus on dividends in an argument we strongly support.  Ensemble President and CIO, Sean Stannard-Stockton wrote about his thoughts on stock valuations in this article: The Risk of Low Growth Stocks.

New York Times CEO Warns Publishers Ahead of Apple News Launch (Reuters, The New York Times)

Apple is expected to launch an ambitious new entertainment and paid news digital service next Monday as they push back against streaming video leader Netflix.  This has Mark Thompson, CEO of the New York Times feeling uneasy as he has warned that relying on a third party for distribution can have dangerous consequences for publishers as they may lose control over their own content.

Airlines Review Plans as Boeing Phases First Cancellation of 737 MAX Order (Robert Wall, @R_Wall, The Wall Street Journal)

Boeing is one of two major commercial aircraft producers and with the recent problems of the 737 MAX, they’re having to adapt quickly as passengers are losing confidence in this aircraft.  Following the two accidents, regulators idled the global fleet of more than 370 MAX planes and Vietnam’s VetJet are considering halting all future purchases.  Although the aircraft represents only a fraction of Boeing’s global fleet, the company is having to adapt fast to avoid negative customer sentiment.

 

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 clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. 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. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

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

‘We Know Them. We Trust Them.’ Uber and Airbnb Alumni Fuel Tech’s Next Wave. (Erin Griffith, @eringriffith, The New York Times)

Riley Newman, a former head of data science at Airbnb, created a venture capital fund named Wave Capital to invest specifically in Airbnb employees who were planning to leave to start their own companies.  “It’s part of Silicon Valley’s often-incestuous circle of life. The start-up world projects a meritocratic image, but in reality, it is a small, tightknit club where success typically hinges on whom you know.”  Silicon Valley Mafias are nothing new: Fairchild Semiconductor, one of Silicon Valley’s earliest successes, was created by former Shockley Semiconductor employees, and the Paypal Mafia has included some of the most successful entrepreneurs of the last century including Peter Thiel, Elon Musk, and the creators of YouTube, Yelp and LinkedIn.  What makes this round of mafias different is that they are part of the “gig economy” and have dealt with real-world policy issues in cities, as opposed to primarily dealing with the digital world.

Inside the Dystopian Reality of China’s Livestreaming Craze (Matthew Walsh, @matthewwalsh91, Sixth Tone)

“People’s Republic of Desire” is a dystopian documentary that highlights the people behind China’s craze for online livestreaming, a market that could be worth close to $16.7 billion by 2020.  The film’s director, Hao Wu, has worked in Silicon Valley as well as for Alibaba and Yahoo China.  “The characters in “People’s Republic” so thoroughly blur the line between their offline and online selves that the viewer struggles to see where real life ends and performance begins.”  The film has received many awards including the Grand Jury Award for best documentary feature at the 2018 SXSW Film Festival.

Boeing 737 Max 8 crashes stand out at a time of unprecedented airline safety (Christopher Ingraham, @_cingraham, The Washington Post)

Despite the two recent fatal accidents involving Boeing’s 737 Max 8 jet, flight safety has increased dramatically over the last few decades.  “When you take off on a commercial flight anywhere in the world, there’s less than a 1 in 1 million chance that the flight will end in a fatal crash. Back in the early 1970s, the odds of that happening were about 1 in 160,000.”  The increase in safety is due to technological advancements (such as collision avoidance systems) as well as increased regulation.

What is Amazon? (Zack Kanter, @zackkanter, Zack’s Notes)

What started as an algorithm for finding the best physical products globally became a platform for creating any customer-centric experience that the company came across.  The future of Amazon could go either way: either it will find a way to keep incentive structures intact and dominate the global economy for many years to come, or it will become another company that was successful until it wasn’t.

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 clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. 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. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

Weekend Reading

9 March 2019 | by Mike Navone

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

Next Money ‘Crop’ For Farmers? Solar Panels (Genevieve Bookwalter, @GenevieveBook, The Washington Post)

Illinois has passed a state law requiring that renewable resources provide 25% of the state’s power by the year 2025 and hundreds of farmers there have been applying for the opportunity to host solar panels on their land.  There is uncertainty in the economics of the farming business and factors such as weather as well as supply and demand are catalysts for price movements.  Because of this, some farmers are finding themselves drawn to the consistency of the option of solar panels.  However, this doesn’t come without controversy as taking some of the most fertile soil in the world out of production could have serious consequences when it comes to supplying food for a growing population.

Thousands of New Millionaires are About to Eat San Francisco Alive (Nellie Bowles, @NellieBowles, The New York Times)

The thought of Silicon Valley and big paydays often go hand in hand given how many successful IPO’s that have been seen over the years and there’s more to come.  This year alone Uber, Lyft, Slack, Postmates, Pintrest, and Airbnb are all slated to go public; and they’re all in the bay area.  Following a successful launch they will mint another class of multi millionaires that has financial planners, real estate agents, and even the tech buses that move them scrambling to prepare.  One thought that comes to mind is what impact will this have on the already expensive real estate market throughout the bay area.

Sportswear-Maker Puma to Open New York Flagship on Fifth Avenue (Keiko Morris @KeikoMorris, The Wall Street Journal)

Sportswear maker Puma is looking to expand their presence with a new storefront on one of the most prestigious streets in the world.  They’ve leased a 24,000 square foot space on Fifth Avenue in New York City.  The brand will be joining others along the corridor including Nike Inc., Under Armour Inc. and Adidas AG who have all experienced the impact of online retail growth.  Senior Analyst, Todd Wenning, CFA with Ensemble wrote about his thoughts on brands in the article Delivering on What Customers Really Need. 

Ray Dalio, Manager of the World’s Biggest Hedge Fund, Lowers His Odds of a Recession (John Melloy, @johnmelloy, CNBC)

The Fed hasn’t always been known for being fully transparent on the direction in which rates will move and we saw plenty of volatility in the markets throughout the fourth quarter of 2018.  During that volatility, many investors were worried that the US was on the brink of a recession and since then the markets have continued to rally.  Given the upward trend in the stock market paired with comments from the Fed about taking a “patient” approach to rates this year has the world’s largest hedge fund manager Ray Dalio lowering his odds for a recession.  Ensemble President and Chief Investment Officer Sean Stannard-Stockton, CFA wrote about this topic and Why We Might Not Have a Recession for a Long Time.  Sean also wrote another relevant article titled Strong Evidence of Rare Events: False Positives in a Sea of Noise.

China Lowers Growth Target and Cuts Taxes as Economy Slows (Bloomberg)

With a slowing Chinese economy struggling to keep up with GDP targets, China has now lowered their goal for economic growth and is implementing major tax cuts in hopes to reach the newly revised goals.  “The lower bound of the GDP target would be the slowest pace of economic growth in almost three decades, a consequence of China’s long deceleration as policy makers prioritize reining in debt risks, cleaning up the environment and alleviating poverty.”

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 clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. 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. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

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

The New Retirement Plan: Save Almost Everything, Spend Virtually Nothing (Anne Tergesen @annetergesen, and Veronica Dagher, @VeronicaDagher, Wall Street Journal)

With an increased desire to retire early, many individuals are choosing to live with an exceptionally frugal self-imposed mandate to save as much as possible before hitting their desired retirement date.  Some individuals, such as Sylvia Hall, are able to save as much as 70% of their after-tax income, setting firm limits in every part of their daily spending.

Facebook boasted of buying Instagram to kill the competition: sources (Josh Koman, @joshkoman, New York Post)

The Federal Trade Commission launched a new task force this week to investigate Facebook’s acquisition of Instagram six years ago.  The move highlights the Federal Trade Commission’s power to undo tech deals previously approved.  The center of the investigation includes a document from a high-ranking Facebook executive that claimed that the purpose of the acquisition of Instagram was primarily to eliminate Facebook’s competition.  Facebook could face hefty fines as a result of the investigation.  The Federal Trade Commission has issued fines of up to $5 billion in previous cases.

Making Moisturizer for Men – And Then Creating A Market For It (PYMNTS, @pymnts)

After getting married to what she described as “very much a guy’s guy”, Mia Duchnowski started to notice that her skin care products began to disappear. Her husband had been using them for himself.  So with friend and Co-Founder Laura Cox she started Oars + Alps, a line of skincare and grooming products geared towards men.  The line has been incredibly successful thus far, hitting shelves at Target and beyond.  “We do really well with this guy who is on the arc of adulting. He is getting rid of his Ikea furniture. He’s upgrading his life, and so he’s also upgrading his skin,” Duchnowski told The Chicago Tribune.

Starbucks’ new 32,000-square-foot store in Tokyo is its biggest in the world (Danielle Wiener-Bronner, @dwbronner, CNN Business)

Starbucks opened its biggest Roastery to date in Tokyo this week.  Starbucks’ Roasteries are large, lavish stores that feature specialty coffees and an experience for customers that they want to return to.  “In Tokyo, customers who visit the Roastery will be able to order elaborate drinks like black tea lattes garnished with turmeric cotton candy and jasmine teas topped with popsicles. They’ll be able to gaze at cherry blossoms through glass walls, and sip beverages on an outdoor terrace.”  Starbucks isn’t just selling coffee, they are selling an experience and a feeling for their customers.  Todd Wenning recently wrote a blog post on companies Delivering on What Customers Really Need.

Is Wage Growth Higher Than We Think? (Michael Morris, Robert Rich and Joseph Tracy, Federal Reserve Bank of Dallas)

Employers, employees and investors alike are all concerned with the degree to which the U.S. labor market generates higher pay for workers.  A standard measure for calculating wage growth suggests that this expansion is not improving the lives of workers, but a new analysis by the Federal Reserve Bank of Dallas shows that actual wage growth may be quite a bit higher.

The Hidden Cost of Stressed-Out Workers (Jeffrey Pfeffer, @JeffreyPfeffer, Wall Street Journal)

Stress is the leading workplace health problem.  It’s not just employees that are hurt – employers bottom lines can be dramatically affected by the negative consequences of stress and unhealthy work places.  Companies often don’t realize the cost of unhealthy work environments on their revenue and profits.

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 clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. 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. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

In a November podcast interview with Tim Ferriss, marketing guru Seth Godin expanded on one of the most famous marketing aphorisms:

Ted Levitt was the godfather of marketing in the early 1960s. He wrote a paper called Marketing Myopia that changed the game for a lot of people. In that paper in Harvard Business Review, he wrote, “No one buys a quarter-inch drill bit because they need a quarter-inch drill bit. What they need is a quarter-inch hole. That’s what you should sell them.”…What would you possibly need a quarter-inch hole for? What you need is a place to put the expansion bolt so you can put a screw in the wall.  

But actually, you don’t need that. What you need is to put the shelf on the wall. But you don’t really need that.

What you need is a place to put the books that are cluttering your bedroom. But you don’t even really need that. What you need is the way you will feel when your spouse thanks you for cleaning things up. What you really need are safety and security and a feeling that you did something that was important. 

There’s an investing lesson here.

If all Nike was doing was selling shoes, it would have faded into obscurity years ago. Instead, Nike sells an identity – in this case, an athletic identity. You don’t just buy running shoes, what you really need is to feel healthy, active, and accomplished. Nike has connected these things with its brand through decades of smart marketing and endorsements. Growing up in the 1980s, I totally believed that if I could only buy a pair of Air Jordans, I could dunk like Mike. Subconsciously, I probably still do!

As another example, if all First Republic Bank was doing was offering commodity bank services, it wouldn’t have higher net promoter scores than some of the most beloved consumer products in the U.S.

So, what is First Republic really selling? What its high-net worth customers really need is time. The last thing a busy person wants to do is spend an hour with multiple customer service representatives to fix a minor problem. At First Republic, you have one point of contact for holistic financial solutions. Simple.

Finally, aftermarket airplane part supplier Transdigm’s states that they sell “reliable, well-engineered products, and deliver them on time,” but what its customers really need is on-time departures and happy airline passengers. A missing or broken part can ground a passenger jet, costing the airline and its passengers many multiples of the part’s cost in lost time, missed connections and frustration. On-time flights and happy passengers help airlines maximize their return on invested capital.

Knowing what a company is really selling also helps you understand if management is widening the moat or mortgaging the moat. It’s time to get nervous, for example, if you see a high-end luxury brand with an exclusive brand image going into the mass market to boost short-term growth. This strategy impairs the core customer value proposition.

If all a company is doing is selling the best ¼” drill bit, or even promising the best ¼” holes, that’s not enough to build and sustain a moat. Eventually, someone else will figure out how to do it better and – poof! – there goes the moat. Indeed, this is what’s hurting some blue chip consumer staples companies. The type of companies we want to own are those that understand what its customers really need and relentlessly delivery on that one thing.

As of the date of the post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Nike (NKE), Transdigm (TDG), and First Republic Bank (FRC). These companies represent only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.

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 clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. 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. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.