The Big Four

Here’s my post on the big four U.S. banks: JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America. I go over third quarter results and what’s happen for the big banks.

Reposted from Seeking Alpha. The full article is available here.

Preview:


The Big Four

Summary

  • The big banks are hated. The negative sentiment creates an good entry point.
  • Once dividends and buyback restrictions are lifted, the space could attract more investors.
  • Q3 numbers suggest that banks are well-positioned to operate in an uncertain environment.
  • If the economy improves and the banks can release some of the reserve set aside.

This is a brief article on the four main big U.S. banks and its recent results. Earnings season has come and gone for America’s biggest banks. The results were better than expected but the sentiment is still negative. There’s no love for banks and to be fair they are hard to love. The combination of ultra-low rates, the pandemic, a recession, credit issues, the election, and regulations is not the cocktail that attracts investors. The Feds has also announced that it was extending restrictions on share repurchases and dividends for the largest banks—those with more than $100 billion in assets—for at least one more quarter. Buybacks historically accounted for roughly 70% of the banks’ capital return to shareholders.

The shares of Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) fell after earning release. 2020 hasn’t been a good year for bank investments. The KBW Bank index (BKX) is down 30% year-to-date. To summarize, earnings have surprised to the upside as robust trading activity helped offset lower net-income margins, and profits weren’t crimped by having to add billions to reserves to protect against bad loans. But the problem with banks is often what you don’t see. Trust is important. Insurance companies and banks are often considered black boxes. You don’t know with certainty if you can trust the balance sheet. Accounting and disclosures are opaque. Deutsche Bank (DB) trades at a paltry 0.3 times book value. Accounting can conceal more than it reveals about economic reality. Do bank’s financial statements provide a meaningful clue about its risks?

Banks are integral to how our system functions. Bank results are akin to taking the pulse of the economy. You get a diagnosis on how things are doing. Without getting deeply technical on how a bank functions, they are one of the organs that decide how much money circulates in the economy. When consumers pay down loans, that money gets recycled into new loans. A healthy bank system is core to a healthy economy. Look at Europe. The old continent desperately needs its banks to function better. Despite its flaws, I fundamentally believe the U.S. banking system is the best in the world. They are excellent at their primary function of allocating capital to the most promising opportunities which leads to an overall increase in the standard of living.

Continue reading “The Big Four”

Low Interest Rates and Risk Taking

There’s an issue with loose lending standards. There seems to be a pattern. Excessive borrowing and risk taking is encouraged. Then something somewhere blows up and everybody flees and the Federal Reserve has to step in and bail out that market. It happened in the 90s, the 2000s, and now with the pandemic. And yet the lesson doesn’t seem to be learned. We are on the same path as before. The current low interest environment pushes investor towards more risk taking. The main question is how do you restrict the amount of excessive risk-taking occurring at the same time? Is it possible? If yes how would you even do that.

Podcast: Discussing TikTok And Social Media

Here’s my latest podcast on The Intelligent Investing Podcast with Eric Schleien where we discuss Tik Tok among other things (Apple and Microsoft etc…). I tried Tik Tok in August just to get a better understanding of the app and it’s phenomena. I was really impressed with the quality of the app and AI recommendations. I have since deleted the app because the content is not appealing to me. But I understand how sticky it is and how losing an hour of your life feels like 5 minutes.

The podcast was recorded a couple weeks ago. A lot of developments has happened since. Tik Tok and Oracle now have a deal in place and it’s not clear if the government will approve it. The matter will be played out after the elections. A judge ruled Tik Tok won’t be blocked in the US, for now.

You can listen to it here:

Podbean

iOS

Android

If you prefer video:

A Supreme Court Mess

Just before going to bed Saturday night, I looked at my phone (which I normally avoid at night) and saw the headline that hit me like a truck: Justice Ruth Bader Ginsburg passed away at 87 years old. I immediately regretted looking at my phone. Really, what good can come out of looking at the news before bed. I instantly knew a political bomb was dropped in an already over-the-top gonzo super-charged election. The “October surprised” came early is a mild way of putting it.

Trump and Mitch McConnell didn’t waste time saying that they were going to fill the seat before the election, of course causing a massive controversy. The Democrats still haven’t digest what the Republicans did in 2012 with then-President Obama.

Some President never gets a pick. Just having one pick is a major decision. Trump is getting three picks in his first term assuming this one goes through. His first two picks were re-nominating conservatives judges to maintain the statue quo. But now he gets to flip a seat from liberal to conservative. Trump and McConnell gets to complete a judicial coup and install a 6-to-3 conservative majority. I don’t recall anything like that from happening and the Dems are freaking out.

The Democrats really have no power to stop them. So they make threats that if they take control of Congress that they will make sure that they get their day (severe retaliatory actions like expanding court, adding states (D.C. + Puerto Rico). For the Dems to take action they will need at least 52 seats plus the White House.

I don’t want to rehash everything that happened. If you read the news you know what happened in 2012 when McConnell and the Republicans stalled Obama to let the voters decide with ten months to go before the vote. It’s hard not to see the hypocrisy. But this is politics. Hypocrisy is an enduring norm with a long pedigree. Wouldn’t you have expected otherwise? You think the Democrats wouldn’t have not the done same in a similar situation? Try to imagine the reaction of Chuck Schumer, Nancy Pelosi if a conservative Supreme Court justice had died weeks before the re-election bid of a Democratic president while that party also controlled the Senate.

At first I was a “shocked” that the Republicans will go ahead with that. It’s hard to have faith in your politician, the government, the institutions when they pull that kind of tricks. But now that I digested the news, maybe the Republicans are shooting themselves in the foot with rushing the process.

At the moment of typing this post Trump is leaning towards Judge Amy Coney Barrett as a potential replacement. But it could change soon because they often send ” trial balloons” in the media to measure the reaction. Nominating Amy Barrett signals two things 1) Trump is going after the female vote 2) Trump is going after that “undecided/frustrated” middle-right centrist voter.

However that strategy might not pay off. Install Barrett and centrist GOP voters have one less reason to hold their nose to vote Trump. This could make the difference in the Presidential election. The Republican establishment probably already know that but staging the legal coup is very important to them. It’s worth the price to pay.

The simple answer here has always been that the GOP would confirm someone, because it’s worth an awful lot to them, and also that they’ll pay a price for doing so, because it’s worth paying a price for something that’s worth a lot to you. Maybe to the Republicans is worth sacrificing a few seats if you can reverse abortion and have a long-term hold on the judicial branch. If you’re McConnell you just want to get somebody confirmed as soon as you can, and then deal with the consequences (electorally and otherwise) later.

By paying a price, the polling suggests this is an unpopular move, perhaps verging on very unpopular depending on which poll you look at. So, it’s likely to make it harder (though far from impossible) for the GOP to hold the Senate. Is that the decision that will push the Senate to flip blue? And get slaughtered in the 2022 mid-term. But the playbook plays out, the Dems will be able to draw some decent House maps in redistricting, they can add D.C.+ Puerto Rico to help mitigate their Senate disadvantage, and the GOP seems to have trouble winning the presidency; it’s not a bad medium-run position.

SA Interview: Value Investing With Brian Langis

I got the privileged to be interviewed on Seeking Alpha. I believe the article is behind a pay wall at the moment unless you pay $200/month. Should be free after a week I think. It’s a long one, 19 pages. Enjoy!

Here’s a preview:


(Exclusive) SA Interview: Value Investing With Brian Langis

Summary

  • Brian Langis is a Chartered Business Valuator (CBV), investor, and manages Cape May Capital, a private investment company.
  • The first question he wants to answer in the research process, the value in seeing what the credit markets have to say before investing in the equity and the importance of thinking like a business owner are topics discussed.
  • Brian Langis shares long ideas on Intertape Polymer Group, Brookfield Asset Management, Brookfield Property Partners, Alimentation Couche-Tard and Jungfraubahn Holding.

Feature interview

Brian Langis is a Chartered Business Valuator (CBV), investor, and manages Cape May Capital, a private investment company. You can follow him on his blog at BrianLangis.com and on Twitter. We discussed how to evaluate a company’s culture, how to gain an edge from “on the ground” research and what “quality shareholders” are (and why companies need them).

Seeking Alpha: Walk us through your investment decision making process. What area of the market do you focus on and what strategies do you employ?

Brian Langis: First I want to answer the question “will it be around in the next twelve months?” In other words, does the company have a solid balance sheet? Does it have enough cash to pay its bills? To fulfill their obligations? To keep the lights on? To grow? To return money to investors? It’s a snapshot, akin to a quick blood test to prevent pitfalls. It also saves you time. It doesn’t matter how convincing the story is, cash is blood. Happiness is positive cash flow. A bad investing experience when I was a teenager left some scars in my brain. Basically the company was sexy, the product was better than anything on the market, and the CEO was smooth. But the company ran out of cash and creditors took over. If I repeat that mistake again I didn’t learn anything. People are attracted to investing for potential lucrative short-term returns. For me I can’t play that game. I don’t know what is going up today or next month. If you want to do this a long time, you need to survive, and you survive by avoiding losses. We see it today with the pandemic. It reinforces lessons we already knew. Liquidity and survival remains paramount.

Once I get a handle on a company, I look for four main things:

1. Is the company profitable? Do they generate strong free cash flow (FCF)? Good return on capital (ROC)?

2. Is it run by an honest talented management? Is management and shareholder interest aligned?

3. What are the re-investment opportunities? This is the capital allocation portion. What do they do with their cash? Are they a disciplined allocator?

4. Valuation. Can I buy it at a fair price?

You will notice that the first 3 points of the process are intermingling. It’s hard to have one without the others. A solid management team with a disciplined capital allocation process usually leads to excess FCF generation and great returns. Now the main question is can I buy it at a fair price? How much am I willing to pay for it? It’s a highly subjective exercise. It’s the “art” part in valuation. I know price and value and they are two different concepts. In order to know what action to take, you have to look at the asset’s price relative to its value. Assets are only attractive if they are priced right.

You can read the rest here.

‘Quality Shareholders’ Review

Coming out on November 3, 2020

I was approached by Columbia University Press to write a galley review for Professor Lawrence Cunningham’s latest work: Quality Shareholders: How the Best Managers Attract and Keep Them. The book is expected to be released on November 3, 2020.

Professor Lawrence Cunningham (@CunninghamProf) is acclaimed for his work on Warren Buffett and Berkshire Hathaway. If you want to better understand Buffett and the Berkshire organization, he’s the guy. His most famous work is The Essays of Warren Buffett: Lessons for Corporate America, currently in its 5th edition, is a must for investors. Professor Cunningham is also on the board of Constellation Software, (CSU.TO), a company that I had the misfortune to watch its stock rise for years without ever investing.

I was approached to write a review for the blog. So here it is.

In his new book, Quality Shareholders, Professor Cunningham touched on a concept that I had in mind for a long time – that certain shareholders, Quality Shareholders (QSs), are more beneficial to have than others. The idea that there is a Quality Shareholder (QS) class is what this book is about. The concept in my head wasn’t as articulate. It needed a little polishing. I like how Professor Cunningham lays it out. The book brought clarity and structure to the concept. QSs are defined as shareholders who buy large stakes and hold for long periods. They see themselves as part owners of a business, understand their businesses, and focus on long-term results, not short-term market prices.

Continue reading “‘Quality Shareholders’ Review”

So I tried TikTok

I had to figure out what TikTok was. What is it that required the full weight of the Presidency of the United States? Why do the US and other countries want to ban it? Why are the news paying so much attention to it? Why does TikTok even matter? And why Microsoft (MSFT) and Twitter (TWTR) sniffing around?


Before downloading the app I knew that TikTok was a Chinese video-sharing social media app with short videos mostly about music and dancing. ByteDance, the parent company of TikTok, has 60,000 employees in 126 cities. Beside TikTok they have a bunch of other apps that I never heard of. It goes without saying that TikTok is one of the most popular social media app, especially among young people. Despite its rapid rise, there are still plenty of people — often, older people — who aren’t quite sure what TikTok is, including me until recently. It’s kinda of my job to know these things even if I don’t use them. And I’m a parent of two young guys, so maybe I should be concerned with what’s coming.


To give some background, I often create “ghost” accounts just to check things out and I notice that the same patterns recurring. First I don’t get it. I didn’t get Twitter at first and it took like five years before I started using it. I didn’t get Snapchap (SNAP) and still don’t. I didn’t get Reddit and now it’s awesome. I didn’t get Instagram and now I like it better than Facebook (FB). My thinking at first was “why use Instagram when you have Facebook?” Why use WhatsApp when you have Skype? Why have another app that does almost exactly the same thing as the other one? It takes me a while to understand these Internet trends. Now I use WhatsApp and keep Skype for my mom because the hassle and of getting her a new video conference app is not worth it. I use Twitter, Instagram, Reddit and dislike Facebook. And what they hell happened to Facebook? When I got it around 2006 it was just to post drunk pics. Now Facebook is a giant cluttered monster that decides elections results. You can also see FB’s influence on Instagram where they are starting to clutter the whole thing. So yeah social media is the toilet of the Internet and I’m stuck in it.

Continue reading “So I tried TikTok”

Thoughts On Nvidia

I’ve admired Nvidia (NVDA) for a long time. It’s a great company with great leadership and great companies are not typically cheap. Greatness comes at a premium. How much of a premium? That’s the key question and there’s no easy answer.

Unfortunately I’ve never invested in the company and I certainly regret it. Nvidia has a market cap just over $250 billion and is trading at an all-time high. The stock is up 80% year-to-date. Nvidia has $9 billion in net cash. Nvidia is not cheap. It’s trading at 22x sales and 60x EV/EBITDA. This suggest that the price might be ahead of its valuation. But Nvidia always traded traded at crazy multiples. The people buying Nvidia at these numbers believe the company will exceed expectations. Will Nvidia live up to the lofty expectations?

I’ve pinned down two reasons for not investing in Nvidia in the past.

  1. Price
  2. Lack of understanding (circle of competence)

The first reason, price, is still valid. Despite how great the business and its future is, I just can’t get myself to justify paying this much. Of course I said the same thing when Nvidia has a market cap of less than $100 billion. Now the question is will Nvidia be a $500b company in the future?

The second reason is my mistake in labeling Nvidia as a “video game” company. Nvidia is famous for its graphic cards, the GeForce. A graphic card is commonly refereed to as graphic processing unit or GPUs. People that builds gaming rigs use Nvidia graphic cards for the best gaming experience. A good graphic card can cost $1000 and more. Prices are on the rise and the hardware gets outdated pretty quickly. AMD is their main competitor.

Then the cryptocurrency bubble happened and Nvidia became a “crypto” company. When the bubble popped Nvidia did fall but quickly recovered.

Reviewing Nvidia forced me to reframe what Nvidia really is. Labeling Nvidia as a “video game” or “crypto” company was a mistake. Nvidia is way more than that.

Nvidia was founded in 1993 by Jensen Huang. Huang is the current CEO. The main idea was to accelerate computing and video games was the first obvious application. But at the time there wasn’t really a market until Quake came out, a 3-D first person shooting game that demanded a lot of computing juice.

Now Nvidia has parlayed video game success into super-computing dominance and artificial intelligence (AI). These multi billion markets didn’t even exist back then. This year, Nvidia’s data center will generate more revenue than its gaming unit. Nvidia recently inked a new partnership with Mercedes-Benz for computing hardware, software, and services starting in 2024.

Nvidia is becoming an end-to-end platform company. What does that mean? Nvidia is building the architecture, developing applications, and providing the software and hardware. Whereas a chip could go for a couple of hundred dollars, autonomous driving applications could go for several thousand dollars. Mercedes is going to design their cars with Nvidia in this partnership.

Labels can be misleading. Without trying to repeat the mistake of the past, Nvidia is more than just a chip company. Now the business model is the chip and the infrastructure for developing artificial intelligence. When you think Nvidia, you have to think accelerated computing (not videogames). Adding the accelerator to microprocessor became the GPU, well because it does graphic, but it does so much more.

Now scientific computing takes Nvidia into data centers. AI crunches a lot of data and needs a lot of muscle to accomplish that. Nvidia’s chip speeds up the algorithm to make the approach viable from months to days. Nvidia is a key component in the pick and shovel of AI, along with Intel, Amazon, and Microsoft among others.

Nvidia is tackling big markets, anything “smart”. Nvidia is at the center of AI, supercomputing, autonomous driving, 5G, virtual reality, gaming, medical, industrial and robotics. Each of these are multi-billion dollar market with a great future.

Now the main question is how much is this company worth? I’m not talking about next quarter numbers, but in five years when we had made progress in these big areas. I will keep an eye on Nvidia if the stock corrects.

Alimentation Couche-Tard And Circle K – Invest In One Of The Best Retailers In The World

I finally got around writing a new article for Seeking Alpha. I can’t believe it has been eleven months since my last one. In this latest article I made the case for investing in Alimentation Couche-Tard, better known for operating the convenience store Circle K. It’s a great business with great management. It’s simple, predictive, and generates tons of free cash flow. The company is undervalued. The market discounts potential acquisitions and growth opportunities.


Summary

  • ATD is an excellent retail operator. ATD has demonstrated a record of consistency and profitability few businesses can match.
  • M&A is the bread and butter of ATD. They are pros at buying, integrating, extracting synergies and operating.
  • ATD’s best opportunities have come after a difficult period.
  • Excellent balance sheet. Low leverage. Great cash flow.
  • ATD’s culture contributes to its success.

Note: Alimentation Couche-Tard use US$ as their reporting currency unless mentioned otherwise. USD-CAD 1.35, Price of 1 USD in CAD.

Alimentation Couche-Tard (TSX: ATD.A, ATD.B, OTCPK: ANCUF) is primarily traded on the Toronto Stock Exchange under the ticker ATD.B.

Alimentation Couche-Tard (ATD) is a CAD$47 billion Canadian convenience store and gas operator juggernaut that’s flying under the radar. ATD is the second biggest convenience store and gas station operator in the world after 7-Eleven with 14,880 locations and 133,000 employees in 26 countries. For those readers that want to polish their French,‘Alimentation’ stands for food and a ‘couche-tard’ is a night owl, a person that stays up late. The night-owl also reflects the company’s personality: patient, quiet, keeping an eye on things, and when the right opportunity presents itself it is ready to strike like a predator.

Continue reading “Alimentation Couche-Tard And Circle K – Invest In One Of The Best Retailers In The World”

Book: Daring to Succeed: How Alain Bouchard Built the Couche-Tard & Circle K Convenience Store Empire

The following business biography delivers: Daring to Succeed: How Alain Bouchard Built the Couche-Tard & Circle K Convenience Store Empire. It’s business biography that delivers,a lot on business, management, culture, M&A, and leadership. It’s an easy read, not dry, and contains tons of real life lessons. It’s better than most of the stuff I read in business school.

It’s a great business book that’s under the radar. You probably never heard of Alain Bouchard or Alimentation Couche-Tard (ATD). But convenience store chain Circle-K probably rings the bell. Alain Bouchard and ATD are the low profile type, French Canadian, and convenience stores are a boring business. Combined all that together and it doesn’t vibrate “best seller” list. But if you are looking for quality content, then you won’t be disappointed.

Circle-K is the global leader in convenience store. But how did 4 guys (Alain + 3 partners) from Montreal, Québec, achieved that kind of success? And who dreams of becoming a convenience store leader?

What kind of success you asked? Well since the IPO in 1984 Couched-Tard is up 875x. It’s up more than 10x in the last ten years. It’s closing in $60b in sales (well pre-covid). Not bad for a boring business.

Summary: Great book if you are looking to further your business/investment knowledge for the slow summer days.

If I have the time I will try to write notes to share.