Weekend Reading

12 May 2017 | by Paul Perrino, CFA

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).


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