Retrograde
It’s Mercury Retrograde. Things go wrong during retrograde. During the weekend I was wondering if stocks, too, were affected by retrograde. It’s a funny idea — “don’t buy stocks during retrograde” (a long time ago Renaissance Technologies devised an algo that basically went long during sunnier days in the NY trading session — people are more optimistic in the sun).
Anyway, some math dudes who are smarter than me worked out that stocks do underperform during retrograde (new excuse for value investors: why did you stocks underperform? Oh, retrograde). Long Live Hermes! Mercury Retrograde and Equity Prices finds “that the average market returns in Mercury Retrograde periods are about 3.22% annually lower than those in other periods.”
Retrograde lasts from 1-24 April. I’ll be sitting at home playing my gameboy in the meantime, not losing money.
Formula One — racing ahead
We’ve always liked Formula One as a stock (for discussion of our global positions, see the end of this email — paid subscribers only, sorry). How often do you get to buy an entire sports franchise? Nick Sleep described the appeal in 2002:
Until quite recently motor racing has been a very fragmented sport: sanctioning bodies have tended to splinter into rival factions which form their own leagues, and the racetracks have developed on an ad hoc basis (some were originally perimeter roads to local airstrips) and remained under family ownership. Formula One with its dominant sanctioning body and almost totalitarian leadership under Bernie Ecclestone is both the exception, and due to its huge commercial success, the benchmark. International Speedway has grown through building and buying circuits throughout the south east and more recently elsewhere in the US. But the real prize from consolidation is that the firm has substantially improved its bargaining position with the broadcasting companies
You can purchase stock in Formula One via FWONK (it’s a mouthful I know). Thanks in part to the success of shows like Drive to Survive FWONK has tripled revenues from ~$1.45bn in 2020 to $3.2bn in 2023. In ‘23 they had a remarkable 1.5bn culminative viewers of the sport, while revenue continues to grow thanks to more i) race promotion revenue ii) sponsorship rights and iii) media rights (media rights is a big one).
Anyway — John Malone is behind all this (he of cable cowboy fame — Al Gore once described him as the “Darth Vader of cable”). John Malone is not a dumb dude. He’s out there in the arena. He’s trying stuff.
Now Formula One is buying its motorcycle equivalent — Moto GP — valuing it at €4.2 billion (~21x EBITDA). We think it makes sense: Formula One is a solid gold franchise with immense popularity; Moto GP is well on its way. Of course, another Malone associated company, WarnerBrothersDiscovery, just bought the airing rights for the US. That’s fire, Pookie. (Malone, alongside the Newhouse family, are major shareholders in WBD).
Expecting a “Drive to Survive”-style show about Moto GP to premiere this way soon…if Moto GP continues to grow at F1-like rates values the co. at ~16x EBITDA by ‘25…not crazy money.
BAI — My (least) favourite nebulous “AI” company is up 100% on the NZX today as of writing (!) giving it a market cap of $93mn. Multiple people wrote to me (10+ — it’s a hot topic) y’day to note that a couple of its shareholders have quite the history — founder of the school Evan Christian was once associated with Advantage and Eric Watson, while Sean Joyce was dubbed “the disappearing backdoor specialist” by the late Brian Gaynor, who profiled three of the companies Joyce was associated with on BusinessDesk (link). Per Gaynor, of Accession Capital (the precursor to BAI):
Ascension Capital listed on the NZX in 2002 as E-cademy. It changed its name to Training Solutions Plus, then TRS Investments, and has been known as Ascension Capital since July 2020. Its current board consists of chairman Keith Jackson, Johannes Cilliers, Roger Gower and Sean Joyce. Its largest shareholders are Brendan Lindsey at 17.4%, Excalibur Capital Partners (an entity associated with Joyce) at 12.2% and former director Joe van Wijk, 10.2%. A company associated with Tim Preston’s wife owns 4.1% of Ascension Capital. The company has no revenue, total assets of $74,566, including cash of $49,085, and “the focus of the board going forward is to identify a suitable business opportunity to invest in and/or acquire through a reverse takeover transaction” but currently “there are no initiatives being investigated”.
And:
The big question is: has anyone seen Sean Joyce? Is Joyce submerged in a mass of exciting proposals for reverse takeovers through Goodwood, Ascension and Blackwell? Is his door being beaten down by young entrepreneurs with potential world beating business propositions? Do Joyce, Preston and CM Partners have sufficient deal flow to execute three reverse takeovers this year? Can Joyce identify a young Warren Buffett in New Zealand as Buffett originally backdoor listed his insurance activities through Berkshire Hathaway, a struggling textile company? Backdoor listings are a legitimate sharemarket strategy, but they are difficult to execute effectively. It would be far better to have more than one individual dominating this activity on the NZX.
Well, Accession did find a likely suitor in BAI. Whether it will be a successful company is yet to be seen.
NZX tech issues — also noting people couldn’t place orders of BAI y’day. Link. Speaking of NZX — +$2mn volume in this thing today. ASM is soon…we will be there — we are very opposed to the egregious suggested bump in director’s fees.
Aus
Cettire — down +16% following a Bell Potter downgrade. We wonder if the stock will go the way of Farfetch… what is the value in being a third party retailer of luxury clothes?
Barrenjoey — ceasing coverage on the forever-embroiled Platinum Asset Mgmt — Andrew Adams and Niva Chandrasekaran said they would “cease coverage” on Platinum after a “reallocation of “resources” (don’t you just hate the word “resources”? Speak English, please). Platinum recently lost $1.4bn in mandate. Ouch.
Model Portfolio Updates – Global
Global Model Portfolio
11.23% CYTD vs benchmark 10.38%. (FTSE all-world) — returns are gross of fees, trading costs and so on. It is model portfolio.
Top performers —
Disney (DIS) — +48%. The Iger and Peltz battle continues but more importantly the haus of maus has stopped losing subscribers and theme parks + cruises continues to go gangbusters (thank you flyover states). Also noting EPSN becoming a sports betting hub is decidedly less “woke” and more profitable.
Breaking news — receiving news half the proxy votes in the Disney war have been cast, so far — Iger: 1, Peltz: Nil.
Dominos — +28%
DPZ (US) rather than the Aussie franchisor. Nothing exciting to note about it, other than pizza keeps selling and their ROIC is an extraordinary 51%. Low input costs, simple business model, efficient delivery. I used to have a matronly teacher called Mrs. Merritt. She always said keep it simple stupid (KISS). Right on, miss.
Brunello Cucinelli S.p.A. — +23.8%
The Hermes model on a smaller scale. Cucinelli makes extremely high quality scarves and other goods. They’d never be so tacky as to call it “quiet luxury”. They just do exactly what they like to do and never compromise — their fanbase is extremely loyal and monied. I keep talked about the bifurcation of luxury — a few luxury brands that are head and shoulders above the others — I think Cucinelli is on the Hermes/LVMH side of the aisle, and not on the nebulous Ferragamo/Tapestry side of the aisle (Ferragamo is a nice company; I did a lot of work on it once. However the family is fractured and never would be willing to sell it, and there isn’t clear leadership — while that vacuum exists it will never catalyse). (BTW — Rebecca over at BusinessDesk chatted about the business of luxury on RNZ y’day — good listen. Link).
Exor — +16%
Holding co of the Agnellis. I write about it here. Trades at a discount to NAV though that gap is closing. Owns stakes in automakers Ferrari and Stellantis, health-tech manufacturer Philips, The Economist magazine, etc. NAV has compounded at 18.6% since 2009. This is how you do a family office when you are billionaires properly.
MA/V — 19%, 14%, respectively.
Everyone should own Mastercard and Visa. No matter what the crypto cultists will tell you, Mastercard and Visa continue to operate as a “tollbooth” in the modern world. Paying with your Visa debit card? 0.25%, thank you very much. It all adds up. Mastercard’s operating margin is 53% and ROIC is 48%. They processed about 9tn of transactions in 2023.
Top detractors —
Paramount — -15%
While Paramount is a very small position now (~0.5%) we continue to hold onto it in the hope that Shari and co close a deal soon. Apollo just offerd ~$11bn for the studio. The problem is that both the entity is loaded with (just downgraded) debt and so is Shari’s holding company, National Amusements. A deal needs to be struck soon — otherwise Shari’s birthright will shrink away. However, there’s a whole lot of logistics involved…selling that studio alone leaves resulting stub with a mish mash of CBS, some TV channels, a money-losing streaming operator and some RE.
Leslies and Adobe — both ~ -11%
Leslie’s sells pool chemicals and I’ve followed it for a long time. I bought it after it fell from ~$9.00 following poor earnings guidance. It has continued to sit in the trenches and hasn’t done much. Adobe is still a net positive (+48% since inception of position) but has sold off a little — tech got all frothy. I still like Adobe — their tools remain best-in-class for professionals and their AI-based Firefly tool is heads and shoulders above cut-price Aussie rival Canva. We don’t hold a lot of tech in the portfolio but think Adobe will continue to do well…it’s an essential.
New positions, or, how I learned to love Korean skincare
Two Korean beauty stocks — 090430.KRX – Amorepacific Corporation, and 051900.KRX – LG H&H (don’t you just love the numbers? So catchy). We recently were recommended a laundry list of Korean beauty products (and by “we”, I mean “I”). I then promptly bought them and I have to say — the products are fantastic and cheap. They are so much better than what Mecca sells. This sleeping pack is incredible and feels like applying water from the gods on your face. It’s only $35. Go and buy it; your girlfriend or boyfriend will thank you.
Anyway — I asked our analyst, Lachlan, to look into who makes all the beauty products. I asked for a list of the best selling Korean beauty products from the major Korean beauty retailers. Lo and behold LG and Amorepacific make up 90% of the constituents of that best-seller list. I added a very small position in both to the model portfolio (~1.5%). I like the dominance of the products — I think tech-wise they are light years ahead of their western competitors — but it comes with a cost (vast R&D expenses). Amore is up +19% and LG up +16% since purchase. Not bad.
My thesis is this (I will be doing a long post on this soon): Estee Lauder and co have had disastrous quarters and this is partially due to inventory overstocking but moreso because you could make a cream with non-active ingredients ten or twenty years ago and market it well and hey presto, you had a best-selling product (see: Glossier). Now the Korean skincare products have come to the fore and they are, frankly, so much better (if any of you have seen me lately you will note my glowing and youthful skin).
Hence I wonder if the Korean beauty manufacturers — basically a duopoly — will continue to see a benefit from this shift. They don’t have the incredible economics that Estee and co used to have (all that R&D). But I think brand is starting to matter less in beauty — people understand that active ingredients matter more. See below…Amore dominates.
Abbvie — (~2% of portfolio). Ozempic is taking the world by storm. People lose weight too fast on it. Their face sags. It even has a name: “Ozempic Sag”. The maker of botox and filler (juvederm) is Abbvie. Operating margin sits at 31% and trades at 16x earnings. 35% return on equity. We love all that — in a land where everyone is mining gold, sell pickaxes. Has contributed 4.51% since adding it — not that exciting, but cause/effect…the more people who take Ozempic the more people will need to counter that ‘sag’.
Source post: Blackbull Research - Substack