During our second quarter portfolio update webinar, Ensemble Capital’s Chief Investment Officer Sean Stannard-Stockton and senior investment analysts Arif Karim and Todd Wenning discussed the current market and economic situation, as well as recent portfolio performance. There was also an extended Q&A session with the team where various topics were addressed, including interest rates, inflation, and individual holding commentary.

Below is a replay of the full webinar as well as a link to Ensemble Capital’s QUARTERLY LETTER.

(If you’re viewing this by email, CLICK HERE to watch the video.)

While our quarterly webinar is an unscripted, more casual discussion, we also produce a quarterly letter that covers the same topics but in written form and with more detail. You can find a copy of our second quarter letter HERE.

Each quarter, Ensemble Capital hosts a webinar to discuss the current market, economic conditions, and a few of our portfolio holdings.

Given the myriad topics on investors’ minds in the current market, the webinar will have a different format this quarter. Rather than have prepared remarks on two of our portfolio holdings, the team will open the floor to live Q&A earlier in the webinar to answer your questions.

This quarter’s webinar will be held on Monday, July 11 at 1:30 pm (PST)

We’d love for you to join us, which you can do by REGISTERING HERE.

If you’d like to listen to our previously-held quarterly updates, an archive can be FOUND HERE.

We hope to see you there!

At the recent 2022 Berkshire Hathaway annual meeting weekend in Omaha, senior analyst Todd Wenning presented our current thesis on Masimo at the MOI Best Ideas conference.

Among other topics, Todd discussed our thoughts on the controversial acquisition of Sound United, a consumer audio business. The $1.025 billion deal raised questions about Masimo’s future business model, which had previously been concentrated on its in-hospital operations.

You can listen to the 13-minute audio recording and view the slideshow presentation by clicking here.

For additional thoughts on Masimo, please see the following blog posts: MASIMO: DOING WELL BY DOING GOOD and WEBINAR TRANSCRIPT: MASIMO UPDATE.

The Business Brew podcast offers long form interviews with investors and business people by the insightful host Bill Brewster. Earlier this month, Ensemble Capital’s CIO Sean Stannard-Stockton sat down with Bill to discuss:

  • The state of financial markets and the economy, the risks at hand, and the extraordinary investment opportunities available today for long term investors.
  • How Ensemble’s research team works to manage emotions and decision making performance during conditions of high stress.
  • How we are thinking about the unexpectedly weak corporate performance of Netflix so far this year and why we view the decline in the stock price as extremely excessive even while fully recognizing the challenges at hand.
  • Why investors are poorly served by attempting to jump back and forth between different stocks or classes of business when economic conditions change, and are much better off focusing on owning resilient, strong companies at all times.
  • The unusual ways that COVID has scrambled the economic cycle such that parts of the economy are busting while other parts are booming at the same time.
  • The way that remote work presents a huge opportunity for investment firms to greatly improve the quality of their research and decision making processes, and why firms that resist this shift will face significant challenges in the years ahead.

In addition to the embedded audio above, you can find the interview on Spotify, Apple Podcast, or most other podcast players.

In early March we first started talking about a Stagflation Panic that we believe has gripped the market. Since then, we have observed an accelerating disconnect between the current economic reality of the vast majority of our portfolio companies’ reported corporate results, and the behavior of their stock prices.

Now that first quarter earnings season is mostly done, we would like to share a brief summary of what our portfolio companies are reporting about the state of their businesses and their current outlooks. This is not a complete list of our investments, but it covers every stock in our portfolio with over a 2% position size.

These brief highlights focus on just the metrics that illustrate the core aspects of each company’s current business conditions. Every quarterly report always includes details that are positive and negative. Our assessment of our investments is based on detailed analysis of their corporate results within the context of their operating environment. But given the huge disconnect between the share prices in our portfolio and the operating results of the businesses they represent, we felt that this brief review would be helpful.

Booking Holdings (online travel agent)

The company reported blowout revenue and earnings growth. The company said that after a very brief pause in hotel bookings in the week after the Russian invasion of Ukraine, business came roaring back. In April, demand went vertical with hotel bookings exceeding pre-pandemic levels. Gross bookings (the total value of travel reservations) jumped to 30% above 2019 levels.

Broadridge Financial Solutions (software and services for banks and brokers)

The company reported better than expected earnings and increased their full year guidance to the high end of the range they had offered previously. Broadridge’s business is so stable that it is the only company in our portfolio whose core results were barely impacted in 2020 and 2021 by the pandemic. This stability continues in 2022.

Charles Schwab & Co (brokerage and custody services)

The company reported revenue that was approximately equal to what they reported in the first quarter of 2021. A year ago, they had experienced a massive 80% surge in revenue as market values and trading boomed. The company is expected to return to double digit revenue growth this year as they move past the surging revenue of early 2021. One of the most powerful drivers of future earnings for the company would be higher interest rates which cause the company to generate much higher levels of earnings on the cash that clients hold in their brokerage accounts. Despite rising interest rates, the stock has fallen sharply this year causing the CEO to personally buy $10 million worth of stock in the days after the company updated investors on the state of their business, something we have not seen him do in years, indicating his enthusiasm for the outlook of the business.

Chipotle (fast food)

The company delivered first quarter revenue and earnings above expectations and guided for growth to accelerate as recent menu price increases have not slowed customer demand. Chipotle is accelerating the speed with which they open new locations as the shift to digital ordering has opened up opportunities for new store formats. They expect to increase store count by 8%-10% per year and believe they can more than double their total store base over the long term.

First American Financial. (title insurance)

While refinancing of home mortgages has fallen dramatically causing the volume of title policy orders to fall sharply, high levels of home price appreciation has driven up revenue from much more valuable home purchase title policies. Commercial real estate transactions and prices remain very strong driving continued growth in this segment as well. The stock now trades at its lowest earning multiple outside of the housing crash of a decade ago and the company bought back 3% of their shares in the first four months of the year saying if the stock stays at this level they see share buybacks as an excellent use of capital. The company reiterated their full year guidance.

Fastenal (manufacturing supplies)

This company serves a wide range of manufacturing businesses providing them parts and supplies. Revenue grew 20% and slightly exceeded expectations. The company said that demand strength was broad based across different customer types. They also said that they are seeing inflation slow in their industry and expect it to “drop fairly sharply” in the second half of this year.

First Republic Bank (banking for high net worth families)

San Francisco based First Republic reported their highest ever level of loan originations with revenue growing 23%. They maintained their 2022 guidance for mid-teens loan growth. When asked about the impact of higher mortgage rates on housing, the company said that housing supply is so far below demand that even if higher rates markedly reduces the number of buyers, there will still be multiple bidders on nearly every home for sale. This comment is supported by the fact that despite higher interest rates, a record high percentage of new home listings nationally are selling within just two weeks of going on the market. First Republic operates in some of the most supply constrained housing markets in the country such as San Francisco and New York, while also operating as one of the most conservative mortgage underwriters in the business.

Google (online advertising)

Despite having grown revenue at faster than typical 26% a year over 2020 and 2021, the company posted another quarter of elevated growth with first quarter revenue up 23% or 26% excluding the headwind from the strong US dollar. Looking only at their US revenue, the company grew revenue at a blistering 27%, even faster than their US growth rate across 2020-2021. While the company does not offer guidance, they were clear that they continue to invest heavily in the business in the face of significant growth opportunity. They are buying up real estate for new offices and told investors to expect their 20% annualized growth rate in hiring new employees to continue. The company has been buying back its stock at an accelerating rate and authorized a new buyback plan that implies this acceleration will continue in 2022.

Home Depot (home improvement)

Home Depot has not yet reported earnings, but the company and their competitor Lowe’s said at investor conferences a month ago that demand remained very strong, and they reiterated their full year outlook. Last week, home improvement company Floor & Décor reported better than expected revenue and earnings and reiterated their guidance for the year. The company noted repeatedly that they saw particularly strong growth with professional contractor customers, who make up half of Home Depot’s revenue base.

Illumina (genetic sequencing equipment)

The company reported better than expected first quarter earnings with as expected revenue growth of 12%. They reiterated their full year revenue growth guidance of 13% to 15% despite headwinds to international revenue from the strong US dollar and the COVID wave in China driving near term disruptions. In addition to strong growth in revenue, management also reported record backlog levels driven by strong adoption of gene sequencing in clinical applications like oncology and rare disease testing.

Landstar Systems (trucking)

The company reported 53% revenue growth and better[…]