In early July, Ensemble Capital analyst Todd Wenning presented our thesis on Masimo at MOI Global’s Wide-Moat Investing Summit 2020.

Among other topics, the presentation explored why we believe Masimo has a wide economic moat anchored by its core Signal Extraction Technology (SET) non-invasive medical sensors that are far more reliable and effective than its closest competitor. Todd also discusses why we think there’s massive optionality at Masimo around connected healthcare that may be underappreciated by the market.

For additional thoughts on Masimo, please see the following blog posts: Masimo: Doing Well by Doing Good and Webinar Transcript: Masimo Update.

 

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

Ensemble Capital’s CIO Sean Stannard-Stockton was interviewed recently by the CFA Institute. The interviewer, Lauren Foster, was Sean’s editor at the Financial Times when he wrote a monthly column for the paper from 2007 to 2009. In the interview, Sean discusses:

  • The history of Ensemble Capital and the firm’s long time focus on working with philanthropic clients.
  • Why we think “this time is different” despite those being the four most dangerous words in investing.
  • How we think about conviction, both in our portfolio holdings as well as the conviction that our clients have in our strategy, and why conviction plays such a larger role in both strategy returns as well as the returns actually earned by clients.


(Click here to watch video if you’re reading this in an email)

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE

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

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

We recently hosted our quarterly client webinar. You can watch the reply HERE and read a full transcript HERE.

Below is an excerpt from the webinar discussing our investment in Netflix, Inc (NFLX).

Excerpt (Arif Karim speaking):

Today, we want to highlight the competitive and financial strengths that Netflix has demonstrated since we last discussed the business a couple of years ago, especially in light of the expected competition that’s finally arrived from traditional media companies launching their own streaming services led by Disney. In addition, the emergence of the COVID-19 pandemic around the world has led to accelerating benefits for digital entertainment and global production.

Two years ago, we shared that Netflix was reaping the benefits of its unique business model, where a generational shift in video services over the Internet enabled Netflix to dream big and bet big – to become the first global scale direct to consumer subscription media company.

Unlike traditional media companies, its growth opportunity was not limited by regional relationships with cable and satellite companies, who had built and owned physical connections to the customers. It was one that was open in reaching anyone with the more pervasive virtual connection, the Internet, wired or wireless, anywhere in the world at the click of a button. The traditional link between reaching a customer as a media provider and the physical infrastructure build was no longer a limit to growth and economics.

Netflix’s success in realizing this opportunity has everything to do with the company’s culture born of its history as an internet-based, innovation-driven business, which drove it to build capabilities that have underpinned its execution.

We list these capabilities that comprise the moat Netflix built, including the scale of its content catalog, its phenomenal subscriber acquisition engine which drives a rapidly growing budget for fresh content, and a global intelligent delivery network. It is now one of the largest entertainment content buyers amongst media companies anywhere and one the largest distribution “networks”.

As HBO’s top rival at the Emmys, the historical king of quality content, we know Netflix has that quality curation skill down. But it also caters to the Rom com, pop drama, mystery, sci fi and Adam Sandler fans too. And versions of such genres created by local producers for their local cultures around the world. Award winning documentaries, kids’ animation, stand-up comedy, and a plethora of cooking, travel, romantic, and even cleaning reality shows are part of its bag too.

With Netflix you get a whole mix of content from creatives around the world for all viewer interests, unbound by the limits of time slots, channel capacity, and advertising loads. The range has proven to increase Netflix’s audience, engagement, and addressable market. Netflix has not just achieved its goal of “becoming HBO before HBO becomes Netflix”, as its chief content officer Ted Sarandos used to quip, but it’s now substituting for the traditional cable bundle. Only better, significantly cheaper, and at your convenience anywhere.

Management’s focus on building and scaling this service out has been a huge creator of value for customers, content creators, and shareholders. It adroitly utilized cheap and plentiful debt capital, to accelerate the build out beyond its contemporaneous funding capacity, a clearly smart strategy in retrospect given its wide lead today.

The results of Netflix’s urgency coupled with the decade long inertia of media incumbents are evident — Netflix has driven adoption of the streaming video market globally and become the de facto leader with a global subscriber count that is quickly approaching 200 million.

Total paid subscribers (the red line) have grown by nearly 100 million since 2016, the year we took our initial position in the company, from 89 million to 183 million subs in 1Q2020. While the international segment of the business (the green line) now accounts for the majority of subscribers and revenue, the growth opportunity there is still nascent and provides years of runway.

Streaming revenue is estimated to triple from $8 billion in 2016 to almost $25 dollars in 2020. Operating margins are expected to increase from 4% to 16%. And we believe that margin can continue to grow for several years as the international markets mature, just as we’ve seen them do in the US market.

Content spending more than doubled from $7 billion in 2016 to an estimated $16 billion in 2020. The widening gap between the black revenue line on the graph from the blue content spending line demonstrates the leverage in the business while the green dashed line is indicative of the operating margin growth. Given the fixed cost nature of content and production infrastructure spending at scale, we expect free cash flow generation should follow, as incremental revenues continue to disproportionately favor profit growth.

Though adoption of video over the internet had already been strong, we believe the COVID-19 era is accelerating the shift from traditional Pay TV to streaming, while also favoring Netflix’s unique, globally distributed production model. Netflix has stated its 2020 and most of its 2021 new content schedule will generally be unaffected, while legacy media companies are reported to be stuck in action even for the fall 2020 lineup. We expect that should drive incremental subscribers seeking alternative sources of fresh content.

While we’ve long expected one or more of the technology leaders such as Amazon, Google, or Apple to emerge as one of the three to five long term global streaming platforms alongside Netflix, the only traditional media company we believed would be able to make a credible run for a position among them is Disney.

Disney arguably has the strongest content catalog and IP of any traditional media company, including Disney Animation, Pixar, the Star Wars and Marvel franchises, The Simpsons, and all the television content from ABC, Disney, and twenty first Century Fox Studios, while its globally recognized brand and cross-platform marketing capabilities make it formidable. Bob Iger, its chairman and highly regarded former CEO, made it clear at launch that streaming is the future of Disney and all of the company’s strategic focus was on making that transition successfully.

Disney took a smart and humble step in copying almost exactly the playbook Netflix developed in building its service. This included bringing in house the technical capabilities by acquiring a majority stake in BAM Tech for $2.6 billion, scaling its content catalog via its acquisition of twenty first Century Fox for $71 billion, committing to invest about $5 billion from foregone licensing revenue and expenses to build out the platform, and pricing its “premier” content service aggressively to drive accelerated subscriber growth globally. That’s $79 billion by our count.

In comparison, Netflix’s accumulated cash burn, or investment, of $11 billion since 2012 to build the market and become its leader looks like a phenomenally productive allocation of capital, which has resulted in the incremental two hundred billion dollars in market cap investors have awarded it since.

The Disney Plus streaming service was launched in November 2019 first in the U.S. with an incredible 10 million subscribers signed up on day one. The surge actually crashed its network! By the end of the quarter Disney had added 26 million subscribers, while Netflix as the U.S.’ biggest incumbent streaming service managed to add, not lose, nearly half a million new U.S. subscribers. Netflix exited the fourth quarter with 61 million U.S. subs while its global base grew by 8 million to end the quarter at 167 million subs.

With COVID-19 accelerating sign ups, the March 2020 quarter saw Netflix adding nearly 16 million new global subs to end the quarter at 183 million. Disney Plus, benefitting from its launch in the E.U., added about 16 million users, excluding the 8 million subs in India where the service was added as a free supplement to its existing HotStar service. Disney reported a total of 50 million subs including HotStar.

The market’s worries were put to rest about any sort of competitive threat Disney posed for Netflix in those first two quarters since launch. What’s clear is that the great majority of existing Netflix users added Disney Plus instead of substituting it, while Netflix’s cadence of fresh content sets a high bar for any competitor to keep up with the subscriber expectations it has set longer term. Even Disney needs time to build this level of production capability (also aided by the acquisition of 21st Century Fox Studios).

And if Disney can’t slow Netflix’s subscriber growth, we don’t think any other traditional media company can either.

The bigger picture take away is that the huge global numbers of new streaming subscribers added in the U.S. and globally are demonstrating that instead of a war among streaming services, the more important dynamic is the accelerating decline of the high priced traditional cable bundle, at least here in the U.S., as consumer engagement and dollars are being redirected towards more modern paid and free online services. In other words, the traditional bundle’s relevance is quickly declining.

It probably won’t be long before economics will dictate that Disney offer its ESPN sports content via streaming, and that indeed will be the final nail in cable’s demise while the handful of global leaders in streaming content flourish.

You can watch the reply HERE and read a full transcript HERE.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE

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

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

We recently hosted our quarterly client webinar. You can watch the reply HERE and read a full transcript HERE.

Below is an excerpt from the webinar discussing our investment in Masimo Corp (MASI).

Excerpt (Todd Wenning speaking):

When we first invested in medical technology company Masimo in 2018, our focus was on the core Signal Extraction Technology sensor business. We saw – and still see – a tremendous runway there.

From the start, we’ve had a high opinion of management and the corporate culture. We think Masimo is a technology company tackling healthcare problems, not a healthcare company that uses technology to maintain status quo.

In that sense, Masimo is what we call an idiosyncratic business. It doesn’t fit neatly into one sector or another.

As generalist investors, we love idiosyncratic businesses as they are often misunderstood by sector specialists. Our opinion of Masimo has grown even stronger in recent months as COVID shook the healthcare system. The company responded aggressively and thoughtfully to the outbreak by caring for its stakeholders and introducing new products that can help medical professionals and patients achieve better outcomes. Masimo’s actions in recent weeks illustrated to us the business’s optionality.

Any time you have a company with valuable intangible assets and a vibrant culture that’s focused on serving customers, there’s increased likelihood of what we call unpredictable value creation. As we’ve seen with SafetyNet in recent months, Masimo can quickly create useful and scalable non-invasive sensor products. We think they a potential blockbuster in Masimo SafetyNet.

SafetyNet allows medical professionals to remotely monitor patient vital signs from a central nurse’s station. Stable patients can rest, while those with declining vitals get immediate attention. And because Masimo’s sensor false alarm rate is miles ahead of competing products, medical professionals can put faith in its output and not have to worry about running back and forth between false alarms, wasting time, energy, and money.

While SafetyNet is superior to the manual spot-checks typical of general floors, it had slow adoption due to the slow hospital product cycle and the incremental cost of implementing continuous monitoring. Initially, we thought SafetyNet would be limited to hospital use.  However, we now believe the addressable market is much larger. To date, sensors have been tied to monitor boxes, but now they can also be tied to smart phones.

After working with 2 pilot hospitals 24/7 for a few weeks in March, Masimo received FDA approval to launch the Masimo SafetyNet product to combat COVID. Similar to its Opioid product, Masimo SafetyNet uses a tetherless device that links to a smartphone and allows nurses to remotely monitor between fifty to seventy patients at a time. Research has shown that a low pulse ox reading with COVID is a sign of bad things to come. A reading below 93 is cause for concern and if a patient falls below that level, a nurse can tell them to come straight in for evaluation.

Masimo SafetyNet is useful to hospitals because they can send less critical patients either to a field location or back home while beds are reserved for the most in need.

With fewer patients in the building, there’s also less risk of virus spreading and infections. Patients who do not need immediate care can go home and quarantine themselves knowing that they are still being closely monitored by medical professionals.

As of May 5th – just a few weeks after launch – Masimo had 81 hospitals using SafetyNet and another 785 in the pipeline. Again, Masimo’s reputation for having highly accurate sensors is what makes their at-home monitoring product possible. If hospitals use a system with a high false alarm rate, the whole thing collapses. To put this in some perspective, the leading competing sensor has a false alarm rate of about 1 in 4. Masimo’s latest sensors are about 1 in 67. That’s a big difference and a major reason why we think Masimo will be a leader in connected care.

Importantly, as hospitals get used to the SafetyNet formfactor, we believe they will use the Masimo SafetyNet product for other uses beyond COVID. For instance, there are millions of cases in the US each year where people diagnosed with COPD or congestive heart failure go to the emergency room because of concerning symptoms, but upon examination are not sick enough to be admitted. Doctors can give these patients a Masimo SafetyNet to be monitored at home for a few days and give the patient some peace of mind.

Remarkably, Masimo SafetyNet only costs $150 for 8 days of continuous monitoring. Additional sensors can be purchased for $20. Compared with the cost of a night in the hospital, this is a massive cost-savings. All of it ties back to Masimo’s mission statement to improve patient outcomes and reduce the cost of care.

You can watch the reply HERE and read a full transcript HERE.

All image sources: Masimo

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE

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

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.

Below is the Q2 2020 quarterly letter for the ENSEMBLE FUND (ENSBX). You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!

 

The performance of the Ensemble Fund (“the Fund”) this quarter was up dramatically along with the market. After performing about in-line with the market in the first quarter, the Fund performed strongly during the rebound, in part reflecting the outcomes of trades we placed in the thick of the selloff during March. The Fund was up 22.66% vs the S&P 500 up 20.54%. On a year to date basis, this brings the Fund to down 0.21% percent versus the S & P 500 down 3.08%.

As of June 30, 2020

2Q20 1 Year 3 Year Since Inception*
Ensemble Fund 22.66% 11.27% 13.76% 12.86%
S&P 500 20.54% 7.51% 10.72% 10.93%

*Inception Date: November 2, 2015

Performance data represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. Performance data current to the most recent month end are available on our website at www.EnsembleFund.com.

Fund Fees: No loads; 1% gross expense ratio.

We will start the letter by addressing the state of the economy, then we’ll attempt to answer the number one question we have been getting which is, “Why in the world is the market nearly fully recovered even while the Coronavirus outbreak is ongoing and millions of Americans are unemployed?”

Ensemble Capital, advisor to the Fund, held a call on March 20th, the day before the market bottomed. During that call we said:

“This will be a recession and recovery unlike any other. We cannot know how it will go or what unique features it will have. If our economy takes enormous damage in the coming months but then is able to rebound swiftly with the help of the unprecedented fiscal and monetary stimulus that is already starting, then we may see the stock market behave somewhat similarly to the Chinese market. Which hit bottom the day after the Wuhan shutdown was declared, fully recovered all of its Coronavirus related decline, and hit a new fifty-two week high on March fifth. To us a recovery in the US stock market that quickly seems extremely unlikely, we are just making note of what actually did play out in the one country that has gone through this before us.”

It seemed “extremely unlikely” at the time, but what has indeed played out is that the “unprecedented fiscal and monetary stimulus” that we wrote about last quarter, along with a faster than expected initial economic recovery, has indeed caused the market to recover quickly.

While we believe that we have a superior ability to do company analysis and select stocks that will outperform the market over the long term, we also know that we do not have any special ability to guess where the market will go in the near term.

This is one of the most frustrating realizations that we think all investors need to come to terms with. If in fact there was a way to systematically predict short-term movements in the market, we would be happy to adopt this approach. But in the absence of this ability, we know that attempts to guess where the market will go next, is one of the surest ways to ruin your long-term investment returns.

We revisit this theme now not just as a retrospective review of the past, but because today we see widespread skepticism of the rally from many investors, confident that another pullback is around the corner. The fact is, they might be right.

Markets decline quite regularly, even in the absence of pandemics and economic turmoil. But it also might not. While we all want as smooth a ride as possible on the way to long-term superior returns, the fact is that the only ride to superior long-term returns is a bumpy one.

The fact is, the Coronavirus recession has likely already ended. While you might have heard that a recession is two consecutive quarters of declining GDP, that’s just kind of a rule of thumb. Rather a recession begins when there is a widespread and significant contraction in economic activity and the recession ends once economic activity begins to expand again.

From late February to early April, the US economy experienced the largest decline in economic activity in a century, on the order of 15%. This decline was about 2.5 times the depth of the economic contraction experienced during the Financial Crisis and about 60% of the depth of the contraction experienced during the Depression. Rather than playing out over four years as it did during the 1930s, this economic contraction played out over just two months.

Beginning in early to mid-April, economic activity stabilized and began to recover.

For example:

In early April, the number of mortgage applications to purchase a home were running at about 35% below last year, while by the end of June, home purchase mortgage applications had rebounded to 15 to 20% above levels from a year ago. This is a nearly 80% expansion in activity since the economic contraction ended.

Mastercard (6.8% weight in the Fund) reported that the amount of money spent on their cards in early April was down as much as 26% versus last year, while by the end of June, spending had recovered to 5% above the same time period in 2019. This is more than a 40% expansion in activity.

CLICK HERE TO READ THE FULL LETTER

 

DISCLOSURES

Investors should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus at www.EnsembleFund.com or by calling the transfer agent at 1-800-785-8165. The prospectus should be read carefully before investing.

An investment in the Fund is subject to investment risks, including the possible loss of the principal amount invested. There can be no assurance that the Fund will be successful in meeting its objectives. The Fund invests in common stocks which subjects investors to market risk. The Fund invests in small and mid-cap companies, which involve additional risks such as limited liquidity and greater volatility. The Fund invests in undervalued securities. Undervalued securities are, by definition, out of favor with investors, and there is no way to predict when, if ever, the securities may return to favor. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. More information about these risks and other risks can be found in the Fund’s prospectus. The Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment.

Distributed by Rafferty Capital Markets, LLC Garden City, NY 11530.

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

Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. The opinions expressed within this blog post are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Nothing contained herein should be construed as a comprehensive statement of the matters discussed, considered investment, financial, legal, or tax advice, or a recommendation to buy or sell any securities, and no investment decision should be made based solely on any information provided herein. Links to third party content are included for convenience only, we do not endorse, sponsor, or recommend any of the third parties or their websites and do not guarantee the adequacy of information contained within their websites. Please follow the link above for additional disclosure information.