Stock Picking Insights | Conservative Investing | Audio Support for stockpickinginsights.com

Written Post: http://stockpickinginsights.com/investing-in-timber-vs-buying-pulp-stocks

00:00 Intro

00:12 Summary

3:00 Investing in timber: oligopoly controls the market

4:58 There is also geographical concentration…

6:43 Final remarks

11:45 Action points

Summary

• Portugal is a huge Eucalyptus Globulus producer;
• Portuguese timber investors depend on Navigator and Altri;
• Pulp makers have other dependencies, like BHKP prices and China.

Action points

• Do the companies I own depend on a few customers?
• Do the commodities I own really protect me against inflation?
• Am I blindly expecting land to protect me against inflation? If so, will it really?

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Written Post: http://stockpickinginsights.com/altri-production-costs-overview

0:00 Intro

0:17 Summary

3:30 Altri production costs

7:54 Summing it up

9:05 Action points

Summary

• Altri produces mainly BHKP, most of which BEKP;
• Altri’s operational costs are ~500€/ton;
• Its operational efficiency gains are getting more and more limited.

Action points

• Is the product that my companies make a commodity?
• What’s the production cost of the commodity producers in my portfolio?
• Are gains from operational efficiencies being exhausted, slowing/eliminating future gains?

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Written Post: http://stockpickinginsights.com/inditex-shipping-and-returns-analysis

00:00 Intro

00:10 Summary 

03:15 Inditex shipping and returns: Europe

07:34 Inditex shipping and returns: United Kingdom (UK)

12:30 Inditex shipping and returns: United States (US)

15:16 To sum it up

18:19 Action points

Summary

• Inditex (Zara) ships the fastest, and is the most flexible when it comes to returns;
• Nike has free shipping and return, supported by the price premium of its great brand;
• Boohoo competes well in its home country (UK) with its subscription service;
• H&M is similar to Zara, Uniqlo isn’t competitive and Shein is the typical low-cost retailer.

Action points

• Are shipments and returns important for the companies in my portfolio? If yes,do the companies I own have defensible shipment/return competitive advantages?
  are they globally competitive, or only in their home country?
  are they offering differentiated services like same-day delivery, subscriptions or point schemes?
  
• What’s the impact of shipments and returns in my company’s margins?

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Written Post: http://stockpickinginsights.com/inditex-store-profitability-per-store-per-m²

0:00 Intro

0:14 Summary

1:22 Inditex store profitability on a per store basis

3:31 Inditex store profitability on a per m² basis

5:51 Inditex profitability per concept, per m²

7:37 Action points

Summary

• Inditex has an EBIT/store of 450k€, compared to H&M’s 275k€/store;
• Their revenue hovers around 5000€/m² of selling area, EBIT is 900€/m² and Net Income is 700€/m²;
• Zara’s physical profitability is healthy and it is the main Inditex brand to monitor.

Action points

• What’s the revenue per m² of space for the companies I hold with physical presence?
• Is Zara working on further strengthening its brand?

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Written Post: http://stockpickinginsights.com/inditex-expansion-of-physical-stores

0:00 Intro

0:14 Summary

4:10 Inditex expansion by physical store count

8:29 Action points

Summary

• Stores play a logistics and advertising role today, being an important chess piece;
• There’s 94k potential store openings worldwide, with emphasis on China and U.S.;
• Inditex expansion potential is high because the fashion retail market is highly fragmented.

Action points

• Do physical stores play a role in the companies I own, or are they liabilities?
• What’s the physical expansion potential of the companies I own?

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Written Post: http://stockpickinginsights.com/investing-is-a-zero-sum-selfish-game

0:00 Intro

0:18 Summary

2:15 Passive ownership = zero-sum

4:48 Action points

Summary

• The company you own produces new goods and services, so it isn’t a zero-sum case;
• Passive ownership is useless to everyone but yourself;
• Entrepreneurship is a direct contribution to the world, unlike stock picking.

Action points

• Do I care about contributing to the evolution of humanity?
• Are the companies that I own focused on producing goods and services?

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Written Post: http://stockpickinginsights.com/mcdonalds-expansion-potential

00:00 Intro

00:15 Summary

01:59 Mcdonald’s expansion due to volume

03:32 Mcdonald’s expansion sensitivity analysis

10:01 To sum it up

Summary

• The U.S. is the benchmark of restaurants per 100K, with a value of ~4;
• China is 1/3 to 1/2 of the potential restaurant count upside;
• Almost all of the restaurant count growth comes from developing countries with low ARPU’s.

Action points

• How is MCD’s china expansion working out?
• What top line growth do I expect of MCD? Where will it come from?

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Written Post: http://stockpickinginsights.com/stock-analysis-checklist-updated-version

0:00 Intro

1:20 A few quick notes

3:24 Stock analysis checklist: latest questions

Because new analyses were made since then, new questions came in too. This is an update to that checklist, and here’s the updated pdf I promised.

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Written Post: http://stockpickinginsights.com/shareholder-focused-companies-no-thanks

00:00 Intro

00:12 Summary

02:11 Facebook’s shareholder focused approach

05:47 Alphabet: shareholder focused or not?

12:14 To end…

15:22 Action points

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Written Post: http://stockpickinginsights.com/bitcoin-disruption-in-financial-services

00:00 Intro

00:13 Summary

02:34 Bitcoin disruption: merchant side

07:07 Credit cards, fraud and privacy

09:04 Bye Paypal, bye Wise, bye Revolut

11:36 Bitcoin disruption via Lightning Network (Strike)

20:03 Competition is good

25:57 Action points

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Written Post: http://stockpickinginsights.com/the-impact-of-dividend-in-total-returns

00:00 Intro

01:15 Summary

02:17 Impact of dividend distributions: the good and the bad

07:25 Do you want risk or return? The impact of dividend in your portfolio

10:05 Action points

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Written Post: http://stockpickinginsights.com/sp-500-historical-returns-with-dividends

00:00 Intro

00:27 Should we look at historical returns with or without dividends?

01:29 Accumulating (Acc) v Distributing (Dist) ETF’s

04:15 A look at S&P 500 historical returns with dividends

05:24 What about over a 20 year period?

08:25 40 Year rolling S&P 500 CAGR

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Written Post: http://stockpickinginsights.com/sp500-rolling-returns-10-20-and-40-years

0:00 Intro

0:23 Why bother as a stock picker?

1:48 S&P 500 Rolling 10 Year Returns

4:40 A bigger picture: 20 Year Returns

6:43 The ultimate boss: 40 year S&P 500 CAGR’s

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Written Post: http://stockpickinginsights.com/return-on-capital-formula-conservative-approach

00:00 Intro

00:27 Return on capital by Joel Greenblatt

02:18 What’s the problem with return on capital?

04:33 So, is ROE and ROCE ok?

05:58 My return on capital proposal

09:04 To end…

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Written Post: http://stockpickinginsights.com/dcf-alternative-reinvested-capital

00:00 Intro

00:22 Quick DCF model overview

02:03 DCF alternatives that are not CAPM related

05:00 The DCF alternative is: reinvested capital

08:36 DCF alternative: assumptions and adjustments

11:12 Where is the money going?

14:04 Summing up reinvested capital model as a DCF alternative

The reinvested capital model is meant to be used in growth companies, such as FAANG stocks.

Reinvested capital model is a DCF alternative for companies that reinvest into their business, so it doesn’t make sense to use with companies that aren’t expected to grow. It uses returns on capital, so by definition it penalizes companies with lots of debt and cash (some people don’t throw cash into ROC, I conservatively do). It favours companies that reinvest back into the business.

I love it because reinvesting profits for growth is my favourite capital allocation option. It is riskier for an investor than to distribute it, but more rewarding if the company has a long-term competitive advantage. An exception to this is reinvesting heavily into non-core businesses.

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Written Post: http://stockpickinginsights.com/spotify-churn-rate-39-hurdle

00:00 Intro

00:12 Spotify doesn’t fully disclose churn rates

03:41 Spotify churn rate sensitivity analysis

06:53 Final remarks

Spotify churn rates are just one of the forces that move revenues, although a concerning one: a 39% hurdle. If these assumptions are right, they are 10 to 20% short in revenue growth. 

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Written Post: http://stockpickinginsights.com/conservative-investing-measures-for-stock-pickers

00:00 Intro

00:24 Basic guidelines for conservative investing

01:58 Accounting for inflation in conservative investing

04:36 Getting specific

07:25 Normalize some things, but not others

10:04 Summing it up

Conservative investing is playing on the safer side and widening the margin of safety. The main focus is to protect purchasing power. There are quantiative measures you can do to make valutaions more conservative such as normalizing. Qualitatively, a conservative investor pays less for what he/she doesn’t know and vice-versa.

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Written Post: http://stockpickinginsights.com/twitter-mdau-doesnt-tell-the-whole-story

0:00 Intro

1:36 From Twitter MAU to Twitter mDAU: History

6:25 Can mDAU substitute MAU?

We will take a look at part of Twitter’s user growth history by analysing Twitter mDAU and MAU. The objective is to analyse the company as a potential investment.

One of the most important metrics in a social media advertising company is user growth. User growth allows the same ad space to reach more people, as explained when Facebook was analysed from a quantiative standpoint. It also increases network effects due to the volume of content created and data collected.

Rising mDAU is great because it means that users are engaging more with the platform than before. But it doesn’t necessarily mean that the total number of users accessing Twitter is growing (MAU). We can have rising mDAU with decreasing MAU, which is comparable to cost reductions in a business: how much more can you squeeze?

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Written Post: http://stockpickinginsights.com/index...

0:00 Intro

1:04 Why aren’t you buying the stock?

2:56 Indexing as an alternative 

8:45 Conclusion 

Indexing can be an alternative for a stock picker with parked cash. Is this a good idea?

Depending on the type of investor you are, you may be holding a hot potato (cash). And indexing may not help if you usually buy large-cap growth stocks, based on the historical performance of S&P 500. Bonds are not a good place to be either, and all these issues combined bid stock prices higher.

Are you confortable holding cash? What alternatives do you use to stock picking?

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Written Post: http://stockpickinginsights.com/indit... 

00:00 Intro

00:19 Where does Inditex growth in profits come from?

05:06 Volume as a revenue source

09:28 Pricing and pricing power

14:04 Inditex growth from product mix

17:16 Inditex growth in profit from cost reductions

18:36 Headcount savings

23:45 Profiting for a longer period

29:32 Putting it all together

Today we are going to estimate Inditex growth rates based on future profit streams. It will be heavier on the quantitative side, and I recommend you to check the qualitative analysis first.

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Written Post: http://stockpickinginsights.com/alphabet-growth-potential-3-main-sources

00:00 Intro

00:18 Alphabet growth from industry shifts

02:34 Shifts from physical to cloud

07:31 Alphabet growth from Youtube

10:19 Unmeasurable sources of revenue

11:36 Conclusion

Today we're analysing Alphabet growth sources, particularly the three that are measurable and most significant.

New revenue:
Industry shifts - digitalization: 70-80B$
Industry shifts - cloud: 30B$
Youtube - MAU growth: 30-50B$

Total: 130-160B$

To end, and summing up the sources of revenue we talked about, there's at least 130B$ of new revenue for Alphabet coming in until 2030, a 6% CAGR for Alphabet growth in revenue. Is it probably higher? Yes due to the conservative estimates and unmeasurable sources of revenue.

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Written Post: http://stockpickinginsights.com/alphabets-qualitative-factors/

00:00 Intro

00:19 Alphabet's qualitative premises

01:45 Business model

03:45 Alphabet's qualitative advantages

07:41 Youtube purchase in 2006

08:49 Great business management

12:12 Free products with indirect benefits

15:08 Alphabet's qualitative hurdles

19:04 Conclusion

Alphabet's qualitative factors share a considerate part with one of its advertising competitors, Facebook. What makes this company so successful for so long? We're laying it out today.

Alphabet's qualitative factors make it a great company indeed, at the right price. Their biggest competitive advantages are network effects and talent attraction. Great talent then leads to great products and innovation.

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Written Post: http://stockpickinginsights.com/facebooks-growth-potential/

00:00 Intro

00:14 Facebook's ad engine

02:00 Where does Facebook's growth in revenue come from?

02:36 First branch: Growth from users

04:43 MAU and Total Addressable Market

07:50 Inflation and user spending

08:40 Second branch: Facebook's growth from relevance

11:37 Third branch: Advertisers

14:41 Forecasting Facebook's growth

15:13 1. How many new users do you expect?

18:07 2. How much market share will Facebook grab from offline advertising?

20:45 3. What multiple will the business be worth in 10 years?

21:47 4. How much does ad relevance contribute to Facebook's growth?

23:20 Conclusion

This is my attempt at forecasting Facebook's growth in the next 10 years, and therefore it is a quantitative analysis. If you'd like to check the qualitative analysis, click here.

All of the factors above excluding the 4th result in Facebook's top line doubling in 10 years, a 7.2% CAGR. If we assume ad relevance will contribute to 10% of the growth, it becomes a 8% CAGR. I also don't see net margins contracting, so I expect this 8% CAGR to bleed down to Net Income and consequently stock price (capital gains). This growth is net of inflation, due to the business model being spending friendly as explained before.

But considering that EV/NI will contract at a -2% CAGR over 10 years (31x to 25x), it leaves us at a 5-6% pretax CAGR at the current price of 320$/share.

There's a ton of talk about AR/VR, and also a lot of investment. I value it at 0 for now and focus on the core. The same goes for payment revenues. We get those two for free.

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Written post: http://stockpickinginsights.com/qualitative-analysis-of-facebook/

As we did with Inditex, let's start with the basic premises around this business:

• People like to be entertained. If you think about Facebook and Instagram from a user perspective, what we are doing when scrolling is actually entertaining our minds with the affairs of others. What is this person doing? How will this girl do this trickshot? We, mostly unconsciously, have the need to fill in the blanks of our day. I'm not saying this is healthy by the way;
• Social Media is a by definition a place where many people go. Being a "stage", it attracts various types of people. Firstly, business owners. They want to be where people are, so they can interact with them and sell their products. Then, attention seekers for whatever reason. For someone wanting to rant, they will want to be where people will actually listen;
• People need to communicate with each other. Even if I hated using the Facebook website, I still need to talk to my friends and family. That is why WhatsApp and Messenger have their own value, apart from Facebook and Instagram.

It is a great business with competitive advantages. I'd say they are durable too, unless other disruptive platforms steal their lunch or they cannibalize themselves by destroying their brand image.

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Written post: http://stockpickinginsights.com/per-share-values-disadvantages/

If you owned 100% of the business (paying enterprise value for every share outstanding) per share values wouldn’t even matter as you own every one of them. Also, buying back shares wouldn’t even be a capital allocation option. That is why I sweat when a company excessively buys back shares, I’d rather see them investing in their operations or, if they really have to distribute it and EV Multiples are too high, do it with a dividend.

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Use cost of opportunity instead of CAPM.

Written post: http://stockpickinginsights.com/cost-of-issuing-shares-capm-alternative/

When a company issues shares, they likely need the money for their operations. But why not get a loan instead? Sometimes they can’t. Sometimes they consider share issuing to be less expensive.

If you use beta in company valuations, CAPM may make sense for you. If not, use opportunity costs instead.

As a thumb rule, I’d rather consider that an increase of shares outstanding of x% will approximately decrease my share of all future gains in x%, divided by my investing period to get an annualized rate.

So if Facebook issues 10% of all shares outstanding and I expected a 8% Enterprise Value 10Y CAGR, I can now roughly expect a 8 – 10%/10 = 7% CAGR instead.

My stock picking checklist, to help you cover your blindsides.

Written post: http://stockpickinginsights.com/do-you-have-a-checklist/

I started building my checklist a long time ago, and from time to time I add some new questions to it. I use it in the final stage of analysing a company, it helps to mitigate unchecked aspects of a business and consequently make better investment decisions.

Here it is, all of them are yes or no questions. You can also get it in a pdf by clicking here.

Be wary of averages in your investing process, track record checking and news!

Written post: http://stockpickinginsights.com/average-returns-mean-nothing/

I invite you to take a look at the table below and see the difference between average growth and actual CAGR. This is critical in the quantitative analysis of a company, for example when analysing sales growth.

Averages are not all bad. I use averages when softening net income, for example. It is a conservative measure I use when I make my valutaions.

Careful when using PE Ratio, doesn't account for the company's debt

Written post: http://stockpickinginsights.com/market-cap-enterprise-value/

I recommend you to use Enterprise Value because it accounts for the company’s debt. This means I use EV Ratio instead of PE Ratio in any analysis. You can think of EV Ratio as a debt adjusted PE Ratio.

What you know gives you unique insights, but makes you biased.

Written post: http://stockpickinginsights.com/investing-in-what-you-use/

The takeaway is: what you use is a great place to fetch ideas. All the single companies (except holdings) I’ve invested in have products that I’ve been using before buying. Be careful with your own biases, we are rational as much as we are human.

Both have their place, Bitcoin is not as good nor bad as people think.

Written post: http://stockpickinginsights.com/bitcoin-vs-stocks-both-again/

I prefer to invest my money in individual companies everytime. Low interest rates and Fiat supply increases are in part pushing stock prices higher, leaving me personally with no choices at the moment.

The first use of Bitcoin is buying and cold storing it. This protects your portefolio against Fiat currency headwinds (inflation).

The second use of Bitcoin is for everyday purchases. Exchanges such as Binance (not a paid endorsement) offer free Visa debit cards for you to use where Visa network payments are allowed. Buy bitcoin, wait for enough appreciation to cover up spread and other roundtrip fees and use the card to pay for things such as groceries and fuel. Binance charges a spread both in Euro to Bitcoin conversion (0.3 – 1%) and Visa card payments (1 – 2.5%).

Read the first of the accidental ‘both’ series here.

The sources: TIKR.com, valueinvestorsclub.com, eaglepointcap.com, The Investor's Podcast

Written post: http://stockpickinginsights.com/sources-of-information/

Books are also great sources of information, but we know that already.

For US macro analysis, I recommend you to subscribe to USA Facts. They have great insights on how the US economy is being ran. You will find topics such as race inequality, income inequality, government spending and so on there.

I’ll leave you with a bonus source: Eagle Point Capital’s newsletter. They communicate on a weekly basis, and their insights about businesses are great.

Share buybacks are a great way to analyse management behaviour.

Written post: http://stockpickinginsights.com/share-buybacks-good-or-bad/

There is not a rule for every company, but we should have trigger points for some behaviours. Ideally, I would love to see:

• Ocasional repurchases, not every year;
• Slowing down at increasingly higher multiples.

Any behaviour that goes against this prompts a warning.

Share buybacks typically nudge the stock price up, because buyers interpret it as the company telling the world: “We think our stock is undervalued”. But many, many companies do it chronically.

Which one to choose, or both?

Written post: http://stockpickinginsights.com/net-income-or-free-cash-flow-both/

What you do with the information is up to you.

I’m conservative in my approaches, so I use a softened Net Income (3Y Average) pre-adjusted for D&A undercharges. You can take it a step further and use the lowest of the two metrics. I also take a look at differences between the two.

Most importantly, keep in mind that both can be manipulated. Big differences between them should trigger a warning and further research.

You can check out the battle between Enterprise Value ratio and PE Ratio here.

Inditex (fashion retailer) analysis from a qualitative standpoint.

Written post: http://stockpickinginsights.com/inditex-qualitative-analysis/

Let’s start with the basic premises of a fast fashion company:

• People like to look good. This applies to anything that others see: beauty products, a watch, shoes, an iPhone, you name it;
• People don’t like to wear the same clothes all the time. Think about when someone decides to buy new clothes because their current ones are “old”.

This is the root of the purchase. Inditex understood this and created a business model around it:

Selling without having another investment to put the money on

Converting EUR to USD before the opportunity to buy came

Old price anchoring

Written post: http://stockpickinginsights.com/my-investing-mistakes-2020/

You are bound to make mistakes, even when you think you won’t as at one point I thought. Better for you to be aware of it and don’t make mistakes that will cost you more than you can handle!