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Michael Mauboussin: If there is one bit of advice you could give to an investment professional,  what would it be?

 Daniel Kahnemahn: Go down to Duane Reade and buy a notebook for $2 and write down your  decisions. Keep an investment journal. You will be amazed at what you thought. And you will be amazed for the times you did well for the wrong reasons and so forth.

October 27, 2021 - I've been a shareholder of Kraft Heinz for a couple years now so I've been following the stock.

My thesis is based on a turnaround story for a company with a couple really good brands that produce a good amount of free cash flow.

There are a bunch of not-so-good brands and a decent amount of debt but I thought, and still do think, that the price paid and the really good brands make up for it.

I think the new CEO is doing a great job so far, and they just reported a good 3rd quarter to help his case.

Here is my summary:

Kraft Heinz reported positive organic growth and exceeded Wall St.'s expectations for the 3rd quarter.

GAAP EPS: $0.59 (beats by $0.03)

Non-GAAP EPS: $0.65 (beats by $.07)

Revenue: $6.32B (beats by $240M)

Net sales for the 3rd quarter decreased 1.8% yoy from last quarter, but that -1.8% includes the divestiture of Planters. Therefore, when Planters isn’t included, Kraft Heinz reported positive growth in net sales.

Organic net sales increased 1.3% versus the prior period and 7.6% versus the comparable 2019 period.

This is a good sign because Wall St didn’t believe that Kraft would be able to maintain organic growth following the pandemic when lockdowns kept everyone at home and gave a big tailwind to food companies.

There were no asset impairments in Q2 2021. Although the write downs don’t affect actual cash flows, I think it’s reassuring that Kraft Heinz can put their bad investment behind them. It appears that the accounting values of the bad business lines that they have (cold cuts, cheese, etc) may have finally bottomed for them. If there were more write downs, I would assume that these poor business lines are continuing to get worse. Since there were no write downs, I'm hoping that they'll be ok going forward. The retained earnings and equity accounts should be increasing going forward.

Kraft Heinz increased its expectations for 2021 for organic net sales and adjusted EBITDA.

They continue to pay down debt. Long-term debt went from $28.07 billion at Dec 2020 to $22.9 billion at Sept 25, 2021. This $4.1 billion reduction in debt, mostly from the sale of Planters, is a good sign for shareholders.

Management mentioned that their outlook doesn’t include the pending sale of their cheese business. It's hard for me to tell exactly but since they say "pending", I gather that this could be good news (as long as the deal goes through of course) because Kraft Heinz will have another $3 billion cash inflow after the completion of the sale which I'm expecting them to use on reducing their debt even further.

The market seemed content with the results pre-market but eventually the stock price fell to around $35.66 midway through the day before recovering in the afternoon back to where it started. I don’t take much from this activity but I do believe that this was a good quarter for Kraft Heinz and I like the progress the company is making.

While I'm writing this up, I'll comment on their sale of the nuts business (Planters). Kraft Heinz is over indebted and so of course they want to deleverage. It was rumored that they shopped many of their brands to potential acquirers (remember the Maxwell House rumors?) in the past 2 years but weren't able to get a price they wanted.

I always thought Planters was one of their better brands. Planters has a good brand name so this brand was an easier sell for them to help them deleverage. I also think they took the price since the nuts business is getting much more competitive. I've def seen more brands for peanuts popping up on shelves, including from Walgreens with their store brand called Nice!.

The purchase price for their cheese business they recently sold (pending) is a low-ball price but I still want them to take it so I hope it closes. The cheese brands that they sold aren’t that relevant in my opinion. They were older brands without any brand recognition at all. Cheese is one of the most commodified products at the super markets these days. They still have Kraft cheese but there is a lot more brand value to this name than the ones that are pending sale.  

Kraft Heinz currently trades at a EV/TTM EBIT of 10.8x, P/TTM FCF of 11.2x and P/TTM NI of 20.6x. NI is lower resulting in a higher multiple because of goodwill impairments but I'm not expecting there to be more goodwill impairments going forward. Seeking Alpha has a forward P/E at 13.4x which brings some justification to this point. 

The valuation is low but there are also many better businesses out there. Finding a decent price for those better businesses is much harder in these markets though. The real gem of Kraft Heinz I believe is the Heinz brand. 


October 19, 2021 - I take a long-term approach with stock investing by looking out at least 5 years.

I think this is the easiest advantage to achieving successful equity returns for active investing because 90-95% of other investors are taking an approach that is less than 5 years with the great majority being focused on 1 year or less.

Therefore, if you

1. look at a company and pay attention to the fear that is surrounding the company and find out what is causing the low stock price

2. then figure out if this is a solvable problem for the company to get over within 5 years (if it's not a solvable problem then move on) and

4. then find out if it will still be a strong company following this problem then I believe the company's stock will deliver good returns.

Example I see today: BUD

AB InBev's stock has been performing poorly because of

1. Lots of debt from the SAB Miller acquisition.

2. Coronavirus

3. Inflation

4. More competition

But in 5 years I believe that BUD will be able to adapt to these challenges for the following reasons:

1. BUD is still producing lots of cash flow.  They have economies of scale that allows them to spread out their higher costs like marketing across a wider volume of products which lowers their unit costs. For 2019 FCF was $8.9B, for 2020 FCF was $7.1 (even during coronavirus) and TTM FCF was $9.4B. This allows them to generate excess cash to pay off debt.

2. Nobody wants coronavirus around anymore. It’s killing many people and ruining lives. When the whole world works at solving a problem, there is a high likelihood that that problem will be solved. There has been a lot of progress already thanks to vaccines. We will get past coronavirus, and I would say with decent confidence that in 5 years we will be past it.

3. Remember when everyone thought oil was going to $120 a barrel in 2012, 2013, 2014 and then it didn't? Remember when it seemed like oil would never come close to reaching $100 a barrel in 2019 because of shale oil and then in 2020 because of coronavirus lockdowns? Well guess what, it's at $80 and I'm seeing estimates of oil possibly reaching $100 a barrel again. That is what oil prices and all other commodity prices do, they fluctuate based on supply and demand. Right now, supply is being disrupted and demand is at very high levels as the world is opening up more and more from staying in during coronavirus. Aluminum, paper, oil, wheat and many of the other inputs to BUD's products and supply chain will go back to normal or AB InBev will increase their prices as will their competitors and consumers will get used to the new normal of paying a higher price for alcohol. What I don’t see consumers doing is giving up alcohol because the prices went up 5-10% which translates into maybe 25 to 50 cents per beer.

4. AB InBev has some of the most valuable brands in the world for beer. Will consumers just stop drinking beer? Will they all just give up alcohol (no) or will they switch to another option like mixed drinks, hard seltzer or canned cocktails? Most likely a mix of all of these with beer still being pretty relevant. Beer sales are down in developed markets like the US but I don’t view this as the case in developing markets where they have huge monopoly power in countries like South Africa and many parts of South America. AB InBev has made it a priority to diversify away from beer by expanding distribution for the follow brands: Mike's Hard Seltzer (internationally), Cacti, Michelob Hard Seltzer and Bud Light Hard Seltzer. They also purchased Babe Rose Wine and Cutwater. Although beer is declining, it isn’t going away and AB InBev has a distribution network that will allow them to successfully diversify away from beer into other parts of the alcohol industry with hard seltzer, canned cocktails and wine.

This last one is harder to contend with than the others since the barriers to entry have shrunk for consumer brands, therefore, this is the area I will be watching the most closely. So does the current valuation give a valid margin of safety to compensate for these risks involved?

EV/EBIT: 14x
P/E: 19x
P/FCF: 12x

I think it does.


When looking at the major beer companies, we see that Coors and Bud are trading very similar to each other. They have had lots of drawdowns recently. We also see large drawdowns for Boston Beer as well which was more likely due to high a valuation from management overestimating growth for their hard seltzer brand.

Constellation has seen drawdowns more similar to Heineken than Boston Beer, Coors and AB InBev which leads me to believe that the drawdowns for Bud and Coors are mostly related to their high debt levels more than any other factors.

When I look at Heineken, I only see small drawdowns but nothing close to what Boston Beer, Tap and Bud have experienced, therefore, I believe that the high debt levels are the major reason that BUD and TAP are down so much.

Constellation and Heineken don’t have much of a presence in the hard seltzer market compared to their larger peers. I didn’t see Corona Seltzer picking up meaningful market share compared to Mark Anthony Brands, Bud, Boston Beer and even Coors with their Vizzy and Top Chico brands. Therefore, the huge drawdowns are probably not related to diversifying away from beer because Heineken is the least diversified of all of them meanwhile they have had the least drawdowns.


What metrics do I need to pay attention to?

Organic sales. I would prefer to see a breakdown for each segment - wine, hard seltzer, canned cocktails, beer. Beer will likely continue to decline except for pricing mix which was positive for Budweiser, Corona and Stella for Q2 2021 year-over-year. Canned cocktails are growing triple digits and hard seltzer is growing double digits. Their beyond beer category isn’t going to move the needle yet since it is too small as a percentage of revenue compared to beer.

Another metric to watch is net debt and Net Debt/EBITDA. These 2 metrics should come down over the next 5 years... no excuses.

I suppose gross margins should be watched as well due to inflation but this is short-term focused so I'm not too concerned with this. I don’t want to see operating margins fall below 20% though. Net margins should increase as debt decreases along with interest expense. 


July 24, 2021 - I've read a lot about Snowflake lately and here are the big ideas I've gathered so far:

Their platform can be used on any of the 3 big cloud vendors (AWS, GCP and Azure) which customers like because they don’t want to be locked into just 1 cloud provider.

Almost all (maybe all??) of Snowflake’s cost of goods sold goes to the 3 big cloud vendors with AWS getting the highest portion of the 3.

Snowflake’s data network allows customers to sell their own data to other Snowflake customers on the snowflake data network.

Retention ratio was 160% last year which means that not only are customers renewing but they are also spending more money.

The platform is very simple to use and customers love it.

The CEO has lots of success after bringing 2 other companies public that he was the CEO of.

Customers are charged based on the compute or data they use which tailors the costs a lot better to the customers’ needs and makes it a lot less costly for them.

So far, all signs point to this being an exceptional company but what about an exceptional stock?

Of course valuation needs to come into play when talking about whether or not Snowflake makes for an exceptional stock and at the prices the stock is currently trading for in the market today, well that is what has been holding me back from buying.

Revenue:     2019         2020        2021        TTM
                   $96.7M   $264.7M   $592M    $712.1M

TTM Price/Revenue Multiple: 111x (waaaay too high)

Optimistic Revenue Scenarios (assuming revenue doubles each year):

                    2022 est.     2023 est.   2024 est.     2025 est.

Revenue      $1.18B        $2.36B       $4.73B         $9.47B

Multiple*          67x              33x             16x               8x

*Based on 7/23/21 market cap

Based on 2025 estimated revenue and today’s market cap, the price starts to look a lot better but there is already too much optimism priced in.


Especially since the CFO, Mike Scarpelli, has a revenue target of $10B in Snowflake’s 2021 Investor Day Presentation (6/11/2021) not until fiscal year 2029.

With this being said, it’s too hard for me to buy at these prices today but I would be enticed at $150 a share as the upper range where a TTM revenue multiple would still be pretty high at 63x but future revenue multiples based on the trend of revenue doubling each year would be more reasonable at 38x in 2022, 19x in 2023 and 10x in 2024.


June 23, 2021 - Patrick O’Shaughnessy does a great podcast where he brings on a guest that breaks down a business for his listeners to better understand.

One of Patrick’s episodes featured Ro Nagpal who did an amazing job of explaining Twilio’s business and how it’s used by all of its users.

Below is a quote from the interview that briefly describes in simple terms what Twilio does and the difficulty it would take for another company to compete with Twilio. 

“Twilio is software that enables companies to communicate with their customers through SMS, through voice, through video or chat. Some examples of your everyday life, if you get a text that your ride is here from Lyft, that's Twilio. [If you push the call my driver button on Lyft, that's Twilio.] If you get a text from United that your flight is late, that's Twilio. Texts reminding you about your doctor's appointment, that's Twilio….

Prior to Twilio, if you wanted to do this, you would need to go out and hire 10 engineers with a decade of telecom experience that were all super expensive and you'd need to have them sit in your building and spend 12 months making all the connections to Verizon and AT&T to enable you to do this. And what Twilio did is they took that really complicated, old problem that had a lot of people and turned it into a few lines of code. So a developer can go, download Twilio software, implement the code and be up and running, which is the power of what they've created.”

Twilio is a company that is on my watchlist, but the company isn’t much of a secret since the valuation is so high.

TTM P/E: Negative
FORW P/E: Negative
TTM P/R: 31x

Even if revenue doubled from the last 12 months, the TTM price-to-revenue multiple would still be pretty high at a little bit over 15x. 

With that being said, I’ll be a little bit more patient on this company and would prefer buying at 5-10x revenue which is possible if over the next year or two their revenue doubles and the stock price gets cut in half or if revenue doubles over the next 2 years and the share price gets cut by 35%. 

That would put a target price closer to the range of $192.50-$250 a share. 

Source: https://joincolossus.com/episodes/50437644/nagpal-twilio-messaging-margins-and-markets?tab=transcript


April 11, 2021 - I just came across a very interesting company called Evolution Gaming to keep my eye on.

This company is owned by Chris Mayer of Woodblock House Family Capital and he says he believes it has the possibility to be a 100 bagger.

I took a quick look at the company and the first two things that stood out for me are the company’s incredibly high returns on capital and it's very high operating margins.

2020 operating margin: 53.5%
2020 returns on capital: 21.5%

Having very high operating margins aren’t a necessity to be a 100 bagger (although it certainly doesn’t hurt) but high returns on capital are a necessity.

A matter of fact, high returns on capital and the ability to reinvest new capital at high rates of return on capital are the biggest necessities to become a 100 bagger.

And Evolution Games certainly does look like it qualifies so it makes sense to me why Chris Mayer thinks Evolution Games could be a 100 bagger.

Although not a big necessity, valuation still does matter and I will get to that in a little bit but first let's look at returns on capital.

Here are Evolution Gaming's returns on capital for the last 5 years from quickfs.net:

2016    2017    2018    2019    2020

 89%    113%   107%   145%   21%

As you can see, they’re very high. But does it make sense that they're very high?

Yes, it does and here's why.

Evolution Gaming is a software company and software companies usually have higher returns on capital because after you spend the money and the time to develop the software, you can distribute the software for a very low cost to a very wide user base.

And Evolution Gaming is the largest software maker for online live casinos. They create the software for live casino games for poker, online slots, roulette, blackjack and other games.

They also own Ezugi which is another big online live casino.

So Evolution earns high returns on capital but can the capital be generated at these high rates in the future?

Well it's likely that a competitor will try and challenge their market share since returns are so high but Evolution Gaming looks like they already have relationships with many of the casinos already and it could be hard to break this relationship.

Plus Evolution Gaming just opened up a studio in NJ two years ago and a studio in Pennsylvania last year because gambling is starting to be legalized more widely in the US so this creates an additional opportunity for Evolution Gaming to invest more capital at high rates of return.

And as state budgets suffer from deficits that only got worse from the coronavirus it could be possible that more states legalize online gambling as well. And as more online casinos open up, it is very likely they will continue to use Evolution Gaming’s software.

I'm not going to rush out and buy this company though because the market has already caught on to this company.

It trades at around 44x price-to-revenue and 100x earnings. The stock price went from a high of around $43.50 per share in Feb 2020 to $158 today.

So I think this company checks a lot of boxes as a great company to own, but I think the valuation is too high for me right now although I think it’s important to keep in mind that I will eventually have to pay a premium to own this company because of how good its economics look so I can’t be too cheap when determining which price to buy it at.


February 13, 2021 - 2020 was a very memorable year for all companies including Fairfax Financial.


At the end of March 2020 they were looking at a loss in their investment portfolio of $1.5 billion but finished 2020 with a gain of $300 million in their investment portfolio meaning that the investment portfolio gained $1.8 billion from the end of March 2020 to December 31, 2020 - a truly historic rise as acknowledged by Fairfax management and all other investors who witnessed probably the quickest recovery on record for markets following what was probably the quickest drawdown on record. 

I just finished reading the 2020 earnings call and I want to write down some of Prem Watsa's remarks from the call.

"As mentioned in our 2019 annual report, we will never short stock indices or individual companies again."

"As I've said previously, long-term value investing has gone through a very difficult time for many years now. Valuations of value-oriented stocks versus growth stocks, particularly technology have never been so extreme, exceeding even the extremes of the dot com era in 2000. As the economy normalizes we expect a reversion to the mean and value oriented stocks coming to the fall. After the Pfizer vaccine was announced in early November 2020, we started to see this taking place.

Two examples very quickly will make it clear here for you. Fairfax India was selling at $6.80 per share at the end of the third quarter while its book value was more than $16 per share. Today it’s up to $12.40 per share. We think it's only a matter of time [before] Fairfax India exceeds its 2020 high and does exceptionally well as the Indian economy recovers from COVID-19. The Indian government came up with an exceptionally user-friendly budget recently.

Atlas Corp. was another one that I mentioned to you run by David Sokol and Bing Chen closed 2019 at $14 per share, went down to $6.30 per share in March, today it’s at $12.70 per share. Atlas is financially very strong, has great management, and we think it's only a matter of time before it exceeds its previous high. We expect a significant return on our stock portfolio as the economy continues to normalize."

And here is a remark from Fairfax's CFO, Jen Allen, about their covid losses:

"As noted in 2020, we reported COVID-19 losses of $669 million which were comprised primarily of business interruption exposure, approximately 35% primarily from our international businesses, and event cancellation coverage of approximately 34%. The COVID-19 losses principally comprised of incurred but not reported that represented 51% of the net losses, and the net losses were primarily recorded at Brit $270 million, Odyssey Group $140 million and Allied World at $113 million."

So covid losses seem to be a lot lower than what was originally expected back in March 2020 and April 2020 but covid isn't over yet and there is still a lot of litigation that needs to take place.


January 29, 2021 - Bloomberg is already asking the question of whether or not the 2020s will "roar" like the Roaring 1920's with their most recent Bloomberg Businessweek cover. 

I think that really says something about these current times based on the monetary and fiscal policy approach that the government took since March 2020 in response to the coronavirus pandemic.

It makes me wonder about Ray Dalio's quote from an old Bridgewater letter he wrote to his investors on how we continue to extrapolate the recent past so we almost always think the last decade will be the same as the next, but it never is.

Here is a summary from that old letter he wrote:


"1920s = "roaring" - slow growth early building to a boom later, low inflation, extreme inventiveness, stock market boom.

1930s = "depression" - basically the opposite of the 1920's, bad for stocks and good for government bonds.

1940s = "war/post war" - the economy and markets were classically war dominated.

1950s = "stability" - good stock and bond markets.

1960s = "economic acceleration" - greater optimism and prosperity; good for stocks.

1970s = "stagflation" - good for inflation hedge assets and bad for stocks and bonds.

1980s = "disinflation" - bad for inflation hedge assets and good for stocks and bonds.

1990s = "roaring" - slow growth early leading to a boom later, low inflation, extreme inventiveness, stock market boom."

But his letter didn't include the 2000s and 2010s because it was written before those decades played out so below would be my own summary of those 2 decades: 

2000s = dotcom bubble and great recession - very poor for stocks

2010s = deleveraging, money printing, low interest rates, low inflation - great for stocks and bonds

2020s = ???

I find it very hard to believe that the 2020s will be like the 2010s - filled with low interest rates and low inflation, which would be 2 great ingredients for a "Roaring 20s" -  but more with higher interest rates and higher inflation.


January 29, 2021 - I ask myself why I missed GameStop as such a low risk/high reward opportunity because it was in plain sight for me.

I knew the company as I've bought many video games there when I was younger.

I saw that they did have lots of cash on their balance sheet that exceeded their financial debt which didn’t include leases on their retail stores though.

I saw that Michael Burry, who has a great track record as a value investor, was buying the company for his fund and it had lots of signal value because it was one of his larger positions.

What I didn’t though see was the short interest and how this could be such an important catalyst.

This tweet does a great job of giving the backstory going back over a year of what led up to the epic short squeeze in GameStop:


And this tweet does a great job of figuring out the problem of why Robinhood limited trading for its clients:


The reasoning for what made GameStop such a high reward/low risk bet was the high probability of a short squeeze possibly happening.

I don’t remember when exactly the short interest exceeded 100% but my guess was it's been pretty high for a while. Probably at least 50% meanwhile I consider 20% short interest high.

And as a learning exercise I do remember very well why I didn't buy the stock (a silly decision of course with hindsight being 20/20):

1. GameStop did have a lot of cash on hand but they also had leases on their stores which make up a large portion of their business. I don’t recall if they were capitalized on the balance sheet at the time when I was looking at it but leases do complicate the balance sheet if they aren’t capitalized since leases do very much act as debt - there is a consistent cash payment over a term, with a maturity date and depending on the quality of the borrower, the leases can require some form of collateral.

2. The company was and still is most likely a melting ice cube where their business will slowly fade toward bankruptcy. They did just recently make a strategic decision to hire some directors from chewy.com to help their online business but if video games are sold directly on the console to consumers and can be downloaded very quickly by cutting out the middleman, and if GameStop can’t adapt to this which I don’t think they will, then they will be toast.

3. I was looking at this company during coronavirus when much of the economy was shutdown making it difficult for their stores to remain open. I do recall them making "contactless" adjustments in spite of the mandated lockdowns and I viewed this as more of them being closer to their end as they were defying the shutdown mandates.

4. Lastly, I didn’t view this as a capital compounder but a value investment at best similar to Warren Buffett’s cigar butt investments. I thought GameStop could maybe survive part of one more business cycle before the full transition to direct video game sales over the internet but that in the end leads to .50 going to $1 instead of capital compounders which goes from $1.30 to $5 or more.

In the end, this is a great case study in how markets can become irrational and inefficient at times. The stock didn't really do anything for at least a year but when Ryan Cohen from Chewy.com joined GameStop's board that was the huge catalyst that the longs needed.

Perhaps, the short squeeze will force Wall St. to have to deleverage from their more high quality names thus resulting in lower prices for better companies.... or maybe this is just my wishful thinking.

But as I write these thoughts down, it makes me think more and more about how unpredictable the world is and how poor we humans are at predicting it. Therefore, putting yourself in the right position, not just in the markets but in real life as well, to give yourself big opportunity and less risk can go a long way.


December 28, 2020 - AT&T did a good job refinancing a lot of their debt during the depth of the pandemic. AT&T originally had the following debt schedule before they were able to refinance:

2020: $11B

2021: $11B

2022: $12B

2023: $10B

2024: $11B

2025: $11B

They were then able to refinance to the debt schedule below:


2020: $2.3B

2021: $2.8B

2022: $6.5B

2023: $7.7B

2024: $7.8B

2025: $6.4B

This schedule is a lot more manageable over the short-term as it removes much higher liquidity needs over the next 5 years. 


Investors should continue to see a 7% dividend yield at the current price but very little if any at all capital appreciation until AT&T can put themselves in a better financial position as their business is seeing headwinds from the coronavirus due to delays in studio production, revenues from their movie releases (Tenant is an example), accelerated loss of cable subscribers and satellite TV subscribers, and other areas such as T-Mobile gaining market share in mobile subscribers, Spectrum entering the mobile phone market and high fixed costs to maintain their networks and infrastructure.


In addition, the previous CEO walked away with an incredibly large amount of money despite taking on lots of debt which included wasting lots of capital by overpaying for Direct TV. The new CEO is not an outsider but an insider who worked closely with the old CEO who wasted this money on overpaying for Direct TV and by putting AT&T in the position it is in today so it will remain to be seen if the new CEO can put AT&T in a much better position going forward. 

AT&T doesn't have much growth and I expect them to continue to use a lot of their free cash flow on debt repayment and dividends and I don't expect them to raise the dividend over the next year. They will continue to explore divesting non-core assets to raise cash to lower their debt.

I also expect 5G and cap-ex to consume a lot of their operating cash flow.

I am hesitant to add to my position unless the stock price drops to $25-$27 which would give me a higher margin of safety to compensate for their high net debt position, uncertainty on the new CEO and large capital requirements to run the business.  


December 21, 2020 - Are we in a disruptor bubble?

With 0% interest rates since March and with interest rates close to zero for the last decade following the Great Recession plus all of the debt monetization (QE), the popularity of venture capital, huge innovation in technology culminating from the internet in the 90's and now with the surge of software, cloud, data, networks, cybersecurity and other tech companies, plus the popularity of entrepreneurship from unicorns and social media, it looks like we would have all the ingredients for new innovative companies that would threaten the incumbents (disrupt) to create a disruptor bubble.

Then the coronavirus happened which led to an influx of new investors (mostly retail) who received stimulus money and had more time due to government mandated shutdowns and work-from-home to trade stocks.


A lot of the new investors I think realized that the market was in a long bull market from 2010 to the start of 2020 so they waited for an opportunity which finally came in March 2020 when markets around the world were plunging. I don't believe this new influx of money has left the markets and there has also been a lot of money added by the Fed.

It seems like everywhere we look whether its software, cloud, semis, data, cybersecurity, disruptor companies are trading at price-to-revenue multiples of at least 10x.

And I remember thinking back in March and over the summer that I might be able to get Airbnb at a fair valuation like 4-5 times revenue; I was very mistaken. After the first day of trading Airbnb doubled which is a return of 100%... in one day. The stock now trades at a multiple of around 20x revenue.

Has disruption on such a large scale happened before in our history? I would say of course to this question.

The times that come to mind are the 1920's with the innovation of the radio, the huge growth in automobile companies, the innovation of household appliances and I think of the 1990's with the commercialization of the internet. The invention of the railroads was probably another time in the mid 1800s.

I then think, so we have had huge disruption before that has led to large run ups in asset prices and what happened next?

Well there was the collapse of railroad stocks in Ireland and Britain (Railway Mania), the Great Depression that followed the 1920's boom, the Dot Com bubble that led to around a 50% drawdown from 2000-2003 in the S&P (the 9/11 terrorist attack contributed as well to the pessimism toward equities). And the drawdown in the NASDAQ with its 78% drop was much greater than the S&P 500.

So what happens next?


If we vaccinate everyone and develop immunity, will the reopening of the whole economy pull over-allocated funds from "disruptor companies" to the "old, boring incumbent companies?", will there be setbacks in distributing the vaccine and/or getting rid of the threat of the coronavirus, will there be lots of unexpected inflation over the next 2 years, will we be in a similar position to Japan after the late 1980's, will there be global conflict that leads to war?

I don't know but if the Fed continues to have very easy monetary policy with 0% interest rates then they can probably keep the disruptor/coronavirus bubble inflated for longer similar to the 1997-2000 period.

For now, I'll wait on buying the "disruptor" companies but will continue to research since I believe that a much better opportunity will come to buy.

And I just realized that as I'm wrapping up my thoughts on this, Tesla will be included in the S&P 500 index later today at the following valuation:

P/S: 23.5x
P/E: 289x 


December 20, 2020 - ASML makes systems and equipment that use extreme ultraviolet light to put circuit patterns on a semiconductor. ASML is paramount to the process of making semiconductors and they're a supplier to all of the big semiconductor manufactures: TSM, Intel and Samsung.

Problem ASML Solves:

In order for technology to progress to the next level, new industries such as AI, robots, internet of everything need more advanced chips. This requires the advancing of Moore's law of doubling the amount of transistors on the same area of silicon roughly every 2 years. ASML's photolithography systems allow Moore's law to continue which in turn allows technology to continue to advance by using extreme ultraviolet light (EUV) to increase the amount of transistors on the same area of silicon.


ASML has a moat due to their expertise in this area. Their 2 closest competitors are Canon and Nikon but according to Gartner, ASML has 88% of the lithography market. What ASML does is incredibly hard to do and here is are 2 quotes from Brinton Johns and Jon Bathgate of NZS Capital in an interview with Shane Parrish that sums this up:

"These are some of the most complex machines humans have ever built. They're virtually impossible to reverse engineer. And in the case of something like photolithography which allows Moore's law to go ahead, there's only one company that builds the next generation machine that is keeping Moore's law [on] track. It's ASML in the Netherlands."

"ASML, which literally has a monopoly on photolithography, which is probably one of the most kind of complex processes that humankind has ever engineered. I mean, it literally is more difficult than putting a man on the moon or building a 747 or you kind of pick what."

And ASML's very high returns on invested capital over the last 5 years support this:


 2019    2018   2017   2016     2015
21.5%   22%    20%   17.8%   19.6%

Financial Position:


ASML is in a very solid financial position with cash of $4.1 billion and short-term investments of $1 billion and total debt of $5.37 billion.  This results in a net debt position of $200 million which isn’t concerning to me since ASML has been earning free cash flow of $1.7B in 2017, $2.9B in 2018 and $2.8B in 2019.



Valuation is very high in my opinion and this keeps me away from buying at the current price. If the price comes down, I would be more interested in initiating a position. I would be more interested in buying at a P/S ratio of 5-6x and/or a P/E of around 25x. 


TTM P/S:     12.3x

Forw P/S:    10.8x

TTM P/E:     51x

Forw P/E:    40x

TTM P/FCF: 66x



The semiconductor industry has historically been a cyclical industry and although the internet of things and the ubiquitous presence of electronics being so embedded in our daily lives makes this seem unlikely, this can’t be ruled out.

The implementation of new chips can be complex and can result in delays which would affect ASML since the majority of their revenues come from 3 big suppliers – Samsung, TSM and Intel.

Any risks from ASML’s own suppliers would affect ASML. Their biggest supplier is Zeiss who supplies optical systems to ASML for their lithography equipment.

Although unlikely at the moment due to the complexity and difficulty, the risk of another competitor developing the same technology can't be ruled out also. 

The technology war going on between the US and China has put ASML in the middle since the Netherlands government has limited ASML's ability to sell their equipment to SMIC. Maybe not a big risk now but should be kept in mind since this could limit ASML's future revenue growth while the company is currently selling at a multiple that reflects lots of growth and also ASML is also a big supplier to Taiwan Semiconductor.


September 13, 2020 - "The current return on equity is not the correct "normalized" return on equity. If I can buy low P/E and high normalized ROE, that combination is good. I would want to do that too. When you do current high ROE as a metric, you will tend to pick everything at a cyclical peak. The earnings are above trend so the P/E is low and has a high ROE. You will be buying every commodity or manufacturer (like today, February 2, 2005) at its cyclical peak. Be careful of blind screens."


                                                                                                                                                                                                     - Richard Pzena

Source: Joel Greenblatt Special Situation Investing Classes at Columbia Business School