We were right about the sell-off; now it’s time to bank some gains

It’s nice to be proven right, especially when you put your money where your mouth was. We called last year’s market sell-off as a temporary madness and a buying opportunity: we hope you took our advice and stayed invested, because our portfolio has gained 15% in six weeks! But investors can never sit on their laurels. With the market in general now 10% higher and confidence returning fast, the case for equities inevitably weakens. Although valuations still look reasonable, we think it’s time to safely bank some of our gains - in part because we want to be ready to buy the next dip when all the old worries resurface. This week’s report takes an in-depth look at current market valuations and the balance between risk & reward for those investing in equities. To help you know how the market is poised, and how to position your portfolio, we’re also introducing a new 7-point rating scale to better convey our view on the prospects for the stock market. Let’s jump in. Read more»

Strong earnings drive excellent returns for FB, MA, V, AMZN, GOOGL

This past week has seen the peak of the annual earnings season, and many of investee companies have delivered very strong results. Their share price performance has reflected these excellent results too, with our model portfolio now up 17% since the start of the year. Our Portfolio is now 20 percentage points ahead of the market since inception almost two years ago. These strong returns reflect earnings results that far exceeded the market’s expectations coming into 2019. Facebook’s results were the most prominent example, with FB stock up 18% since reporting and 26% year-to-date. Mastercard and Visa also executed well during the quarter, and their structural growth story driven by greater use of electronic transactions instead of cash remains very powerful. The market’s response to Amazon & Alphabet’s (Google’s) results has been more muted, even though they’re completely supportive of our investment thesis for each firm. We’re not concerned by this daily performance, however, and each stock has performed well since January 1st (+9% & +8% respectively) and have contributed to our portfolio’s gains. Ryanair’s results are the last ones from a busy week, and they were in line with our earlier comments that we posted after their profit warning for the quarter. We believe Ryanair will produce strong operational performances in this calendar year, and even better in 2020, so we remain constructive on this investment despite its relatively weaker performance over the past six months. Let’s jump in: Read more»

Earnings Wrap: NVR, TAL & Apple all performing well

Three companies we’re invested in released their quarterly earnings in the past week: homebuilder NVR, Chinese tutoring stock TAL Education, and Apple. Each delivered robust results in line with our investment thesis, and we continue to be very comfortable owning them in our portfolio. Homebuilder NVR’s headline numbers were extremely impressive, with 2018’s full year earnings per share rising 54% after the new lower corporate tax rate kicked in. NVR’s growth will slow in 2019, however, as the firm’s backlog of sold but unbuilt homes is down slightly YoY after higher mortgage rates curtailed pre-sales. But we expect NVR’s growth will pick up from mid-2019 as we lap higher mortgage rates, which should boost the stock further. TAL Education delivered excellent results, and these have further fueled the stock’s recovery from last year’s declines after Muddy Waters’ accusations (that have proven to be false). TAL’s revenue growth has slowed slightly as they adapt their business model to changing regulatory and competitive environments, but operating profit still grew 59% YoY. TAL is still a great firm that’s much cheaper than it was last year, and we’re happy owning it. Apple’s results were much better than some feared after the firm lowered their revenue guidance earlier this month. Apple is transitioning to a business that offers mixed hardware products and software services, but we believe their loyal customer base makes the firm much more like a subscription business than most analysts realize, and therefore it’s a very good investment. We’re happy holding our stock. In sum, these were three good sets of results, and our portfolio is doing well on the back of them. We’re patiently holding these investments as we expect more positive news like these results in future. Read more»

Amazon: Phenomenal businesses, but rich valuation means we’re taking some profits

Amazon has built two excellent businesses: the retail behemoth that everyone knows, and Amazon Web Services that is less well-known but more profitable. Each business has excellent prospects, and we explain them in detail in this newsletter. We expect Amazon to grow profits by 37% p.a. over 3+ years. But Amazon’s strengths are no secret, and the firm is priced at a very high valuation after strong returns recently. Amazon’s valuation is 4x Facebook’s and Apple’s and 3x Alphabet’s. We’ve decided to take advantage of Amazon’s high share price and trim our position in Amazon stock. We intend to re-deploy this capital into other ideas that have higher and more certain prospective returns within the next few weeks. Read more»

Managing the earnings cycle: Apple, TSMC & Ryanair

Most of the companies we own are “high-quality” companies – with defensible competitive advantages that allow them to generate high returns on their invested capital. We invest in these firms because they grow their earnings faster and with more certainty than most companies, and therefore create more value for their shareholders over time. But they’re not immune to challenges. We invested our savings in Apple, TSMC, and Ryanair (among our portfolio of 18 investments) because they fit our prescription for quality, and yet we’ve recently seen profit downgrades from all three of them. These downgrades raise the questions we address this week: are these companies losing their edge? And should we be selling them to make room for other firms with more positive news cycle? Our answer is a resounding “no” in all three cases. Each firm’s challenges are very real, but probably temporary and do not threaten their competitive advantages. Apple’s problems in China are due to increased geopolitical tensions that we believe will dissipate as both countries realize the current standoff is hurting their respective economies. TSMC’s lower revenue guidance has the same root cause, because Apple is its largest customer. And Ryanair’s tough year is largely due to reasons outside of their control that don’t often come in threes: widespread air traffic controller strikes, a volatile oil price, and a Brexit process whose outcome remains far from certain. While 20/20 hindsight suggests we should have sold these firms six months ago, it also ignores the false negatives that arise from selling high quality firms during what proves to be a short-term dip. We’ve learned the key is to focus on the company’s long-term prospects and hold onto the great firms while they still offer attractive returns. Each firm above remains the leading entity in its industry, and we expect they’ll bounce back within six months. We’re more inclined to add to our holdings, especially in Apple and Ryanair, rather than cut them, yet we’ve decided to hold off for now because we’ll get more clarity on each firm’s position during the upcoming results season. Read more»

Bausch’s Pivot Should See Rapid Returns

Bausch Health’s stock performed slightly better than the market in 2018, but this was far below the performance we believe was warranted. This creates a great set up for 2019, which is why Bausch Health is one of our top ideas. Operationally, Bausch had an excellent year in 2018: delivering rapid growth from its Salix division and returning to organic growth in Bausch & Lomb eyecare; settling litigation threats for immaterial amounts; refinancing debts ahead of schedule; and changing its name from Valeant to Bausch Health to firmly consign the firm’s prior challenges to the past. And yet the firm’s stock delivered a middling performance in 2018, as early concerns about 2018’s low earnings guidance (which has since been raised above original estimates), delays gaining the FDA’s approval for new products, and concerns about the debt markets all weighed on the stock. The company released a key document called ‘Pivoting to Offense’ in January 2019 spelling out upgraded growth forecasts, investment plans and a promise of significant operational efficiencies. The highly leveraged nature of Bausch, and its ongoing undervaluation compared to peers and the market, mean that these gains can be multiplied to shareholders and we believe returns of 15-30% p.a. should follow. Bausch is not for the faint-hearted and we caution that there are risks and likely volatility ahead; but on the other hand the CFO is known for highly conservative forecasting, and the company’s president has just bought shares with his own money. We rate Bausch a Conviction Buy. Read more»

Carnival’s cruising to 15% annual returns

As the world’s largest cruise ship operator, Carnival Corporation enjoys a dominant position in a growing industry, so it’s all the more surprising that shares have sunk 25% in the last three months. This contrasts with the excellent headway displayed in recent results and company guidance, creating a buying opportunity that recently saw the CEO himself add to his personal holding to the tune of $1m. We’ve decided to follow the captain and get on board while the shares sit low in the water, and not just because we believe fears over a global recession are unfounded and the recent sell-off overdone: we also expect Carnival will deliver solid growth and a healthy dividend while we own it. With a stable of household names such as Carnival, Costa, Cunard, Holland America, P&O and Seabourn, the company accounts for 44% of the global market and is more than twice as big as its nearest competitor. These advantages of scale and position make it a more stable and defensive investment than most in the tourism sector, while the fast-retiring baby boomer generation and plans to grow fleet capacity lead us to conclude that Carnival should generate returns of ~15% p.a. over three years. We’re adding Carnival Corporation (CCL) to our portfolio, and we suggest you consider doing the same. Read more»

2019 Equity Outlook: A tough end to 2018 boosts prospects for 2019 & beyond

2018 has ended as the toughest year for equity investors in a decade. But most of the year wasn’t that unusual – it was only December’s 15% market plunge that was out of the ordinary. This raised the question for today: does this plunge portend another recession of 2008’s magnitude? Because if not, it’s time to put on our contrarian hats and buy more equities. We’re bullish on the markets for 2019, because we don’t see any material signs of a major recession brewing. US economic growth remains strong (even if it will likely slow) and equities are now cheaper than their 20-year average (and even better value relative to bonds). We’re maintaining our moderately bullish allocation to equities, and we will look to raise it further if the equity market stabilizes in the coming weeks so long as none of our lingering concerns about the market’s prospects materialize. Read more»

Tencent Music Entertainment (TME): China’s Spotify that’s bigger, more profitable, and cheaper

At times the investment stars align to offer an excellent company with enormous growth potential at a very attractive price – and we believe Tencent Music Entertainment is such an opportunity. Tencent Music offers music streaming services. It is China’s answer to Spotify, except with many more users, and much higher profit margins. Tencent Music listed last week, and the weak markets and lack of analyst coverage means we have a limited opportunity to buy into this business at an excellent price. We expect Tencent to grow earnings at least 25% p.a. for at least three years, and yet we can buy the stock at only 25x 2019 earnings. We’re buying Tencent Music Entertainment (TME) now and believe you should consider doing the same. Read more»

Alphabet: still going strong, despite lackluster share price performance

Alphabet’s had a great year in 2018, with earnings growth above 15% yet again. But the firm’s share price tells a different story, as it’s down 1% in twelve months as Alphabet's valuation has fallen. We believe it presents much more of an opportunity for investors, than foretelling a risk to Alphabet’s profitability. Alphabet underlying businesses continue to prosper, especially the digital advertising juggernaut and Waymo, the world’s most advanced autonomous driving firm. Google has faced challenges with EU regulatory investigations and growing its Cloud business, but we believe these issues are relatively minor and shouldn’t stop investors from buying Alphabet at the same valuation level as the market. We’re holding our stock, and rate Alphabet as a Conviction Buy. Read more»

Performance To Date

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Foundations #1: 3 critical points to get you started

It’s important to start off on the right foot, and we realize the investment world can be daunting. So we’ve collected these three points that are incredibly important for all investors to understand. These points are well understood by most professional investors, but they appear to be not so well appreciated by the mainstream media. We hope you enjoy them. Read more»

Foundations #2: How We Select Stocks

We’ve developed our own approach to investing over the past twenty years. Our process has been influenced by many forces in that time: a grounding in the academic principles of finance, an appreciation for the importance of a firm’s strategic positioning, the scars on our back from investing through the financial crisis; and the eye-opening experiences of researching Asian & global investment ideas for a decade since then. We’ve been influenced by these various forces, but the investment process we’ve developed as a result is very much our own. We outline that process here, through five key points. The first covers why we focus on beating the market over three-year cycles; and then we explain why we believe we’ll continue to do well with our four-step investment process. We hope you enjoy this. Read more»

Foundations #3: How We Assess Market Cycles

We focus our work at Cogent Alpha on two questions: how much of your savings you should consider investing in equities, and what stocks to consider buying with those funds. This article explains how we approach that first question. Read more»

A Renewal of Vows

Cogent Alpha’s performance is 18ppt ahead of the market over the past 20 months (10% p.a.), but we’ve had a tough period in the past six months. We’ve reviewed our processes, and modified them slightly, such as including a short-term momentum assessment before we buy a stock. Our biggest insight was that we’re happy with the vast majority of what we do, however, and we expect this performance downturn is just a short-term blip. We’ve re-written our overall process, however, and published it here as a renewal of vows. Read more»

Foundations #4: Deciding how much to invest in equities

This article will help you decide how much of your portfolio to normally invest in equities, and how to adjust this exposure to the opportunities that are currently available in the equity market. It will help you if you’re just starting out on your investment journey, or if you just need to clear your head and start again. Read more»

Foundations #5: Choosing your first stocks

Selecting stocks can be a daunting prospect. But we believe that most intelligent people can work through this process by themselves once they’re given some general guidance on how to do so, such as we’re offering here. Read more»