Ensemble Capital
@IntrinsicInv
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Focused, fundamental-driven portfolios for private & institutional clients. Blog: . Disclosures:
San Francisco, CA
Joined December 2015
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We're excited to share a diagram of Ensemble Capital's investment philosophy. This is at the heart of everything we do in our portfolio and everything we talk about on our blog and here on Twitter.
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1/20 My driver on a recent morning spin around the suburbs of Phoenix was none other than Google’s Waymo self driving taxi service, which has been operating for over a year giving paid rides to the public. This is a thread describing my experience. $GOOGL
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Hey FinTwit, let's curate a list of great industry news/research sites. We're talking about non-investment focused sites that target industry professionals. We'll kick off the thread with a couple we like. Add your favorites as well.
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This is an amazing free resource. Anyone know who wrote them all?
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Buffett: “The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital.”
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We're very happy to announce that as of the end of 2019 Ensemble Capital's AUM has reached $1 billion. It was a long grind from 1997 to 2015 and then exciting growth over the last 5 years as we tripled in size. Very much looking forward to the decade ahead!
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1/8 Everyone is waiting for a recession. But equity investors need to realize the corporate earnings recession started six months ago. This may help explain the surprising strength of the market.
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The Lindy Effect is the idea that for some things, the longer they have lived, the longer their future life expectancy is. As an example, the paint industry is prone to the Lindy Effect. Title Insurance is similar. What are other Lindy Industries?
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Long time value investor Bill Nygren asks how someone who says they are a value investor can not own $GOOGL, $BKNG, $META and $NFLX.
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What are the best companies with current market caps under $5 billion that are sure to survive COVID crisis but whose stock price is down 30%+ this year?
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Excellent primer on the interplay between ROIC and Growth. Both are valuable, but each is more valuable if the other is high. If either is too low, there isn’t much value in the other no matter how high it is.
1/
Get a cup of coffee.
In this thread, I'll help you understand the connections between "earnings growth" and "return on capital".
This will help you analyze businesses better, and thus become a better investor.
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No matter what you own in your portfolio, you should read the Target call transcript. The level of cross currents, with some categories seeing explosive growth while others see rapid decline, is like a microcosm of the economy right now.
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1/ Why Value & Growth is no longer just about valuation.
The nature of business is not static. While core principals are often timeless, the underlying dynamics can change dramatically over time. Case in point, this is one of the most important charts in investing.
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Guessing game time. Check out this "cash burner". Can you guess what company it is? It is super well known. Note the dates on the chart.
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1/25 You can’t predict the economy, but understanding the macro context is critically important for bottom up stock pickers. Whether you like it or not your company specific outlook includes a ton of implicit macro assumptions.
The current macro situation demands your attention.
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Next year someone is going to ask you how you did in the market during COVID-19. You won't answer in percentage terms or talk about alpha. You will say "I panicked" or "I survived". For the foreseeable future behave the way that will let your future self proudly say "I survived".
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If you own a stock that falls more than 10% in a day,
@mjmauboussin
’s Man Overboard paper is the best thing you can read. It’ll help you calmly think through whether or not you’re seeing capitulation or perhaps the end of a strong momentum run.
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Interesting chart showing that in years when S&P 500 EPS declines, the market has rallied much more often than it has declined.
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High ROE, low capex, no dividend, secular tailwind...
Brain:
Don't say it
Don't say it
Don't say it
Don't say it
Don't say it
Don't say it
Don't say it
Don't say it
Me: It’s a compounder
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I’ve spilled a lot of digital ink explaining why return on invested capital is so critical in understanding business value. But the master
@mjmauboussin
does it here in just 30 words. -Sean
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[New post] Looking for the Next ROIC Machine
TLDR: ROIC longevity is often overlooked, but extremely important to long-term stock performance.
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My theory why growth is beating value: growth only adds shareholder value if paired w/ good ROIC. Most big growth companies today are asset-light w/ high ROIC. This wasn’t the case pre-internet. Thus each unit of growth adds much more shareholder value than in the past. -Sean
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There are three investors who every time they write something, a copy of it is guaranteed to be sent to us by other investors as a “must read”. Warren Buffett, Howard Marks and The Brooklyn Investor.
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We were told there was a bubble in passive investing. That when a crash came, retail would sell index funds and stocks with large index weights would get crushed. Well we got a massive crash and the opposite happened.
#InvestingIsHard
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It's hard to believe we started Intrinsic Investing 5 years ago. Sharing our thoughts on investing has greatly improved our own thinking, forced us to better understand our own ideas and triggered excellent feedback from other investors.
A thread of some of our top posts of 2021
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The changing distribution of ROIC over the last half century and particularly last two decades has huge implications. Super premium ROICs of >50% used to be vanishingly rare. Now they are 15% of all companies. Getting in the right tail used to be luck. Now it’s an attainable goal
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This is important to understand. But you can choose to not compete against the algos. Humans already lost the war of trying to move fast to create alpha. But you can play a much slower game by changing time frames. The machines are still totally naive about 5-10+ year time frames
Amazon’s earnings press release was 18 pages long. Within 10 secs of the earnings release, the stock was up 15% impacting 200B$ of mkt value. You’re not competing against other people’s emotions, you’re competing against emotionless algorithms.
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Imagine if on March 23 someone told you that over the next 8 business days over 10 million Americans would be laid off *and* the stock market would rally 14% over those 8 days. That statement would have been ridiculous and yet that's what happen.
Investing is hard.
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[New post] The Quality Margin of Safety.
The market consistently underprices exceptional businesses, even when they look expensive.
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This sort of behavior is a superpower that every investor can make large strides towards obtaining.
Larry Ellison on Bill Gates being an absolute savage.
(‘Softwar’)
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If you’re a moat-focused investor, I highly recommend Modern Monopolies. Helped me better understand what the next generation of moats could look like and why some legacy moats are in danger. One of the best business books I’ve read recently. - Todd
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Reed Hastings nails what video games are all about and how they fit into the broader entertainment landscape.
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It is one thing to know that air traffic in the EU is down 85%. It is another thing to visualize it. This is EU air traffic a year ago vs today.
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When you screen for factors like high ROE/ROIC, generous FCF, and fat profit margins, you’ll get a good moat hit rate, but also a lot of legacy moats that are targets for disruption. Screens tell you what’s already happened; your job is to consider what could happen and... 1/2
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If you're a young investor, this advice from value investing legend Bill Nygren is spot on. "If you’re going to read one book on investing, read about Warren Buffett. But if you’re going to read 10, why read 10 about the same person or even about people who all invest like him?"
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A moat simply buys a company time to implement its strategy. It isn't the growth/value creation engine. That depends on what's happening inside the castle walls.
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A thread, 1/9: In our just published post, we offer a deep dive into Netflix's recently announced results and guidance. We do not believe that the evidence supports a wholesale reevaluation of the company's growth prospects.
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The big inflection in video game end markets is first generation of people who grew up as gamers are now parents. So the whole family games and it is no longer seen as a “vice” for young kids.
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What companies do you think create tremendous value for their customers? Companies where, as Bezos might say, it is nearly irresponsible for customers to not buy from them? Bonus points for B2B companies.
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Asked an older relative today if she would cancel Netflix due to $2 price increase. She said no way. What if they raise price to $25? She said she'd be angry, but not cancel. What about $50? "I'd have to cancel my cable TV because I couldn't afford it if Netflix cost $50!"
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This is the whole thesis on travel stocks right now. If you think travel will be lower forever, you can't own these stocks. But even if you think it will be years before a full recovery, travel stocks with balance sheets to survive will generate great returns from current levels.
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Rise in yields really hurts value of stocks that won't generate cash for many years. The basket of unprofitable tech stocks is down 22% from its high, but still up 150% from pre COVID. 5-year chart shows how anomalous and large the rally was and how far these stocks might fall.
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As you read notes about analysts being nervous about $COST paying its employees more, keep this snippet of old commentaries from 2003-2004 in mind.
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Marriott CEO Arne Sorenson passed away yesterday. In April last year, having just returned to work from chemotherapy treatments to face COVID, Sorenson gave a speech that we believe stands as one of the great examples of leadership under crisis.
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McKinsey out with a new update on their COVID economic impact analysis:
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"When Mondelez invests in digital advertising, it gets a 25% better return than with TV ads, the company says. It has found that its Google and Facebook ads do especially well, generating 40% higher returns than an average digital ad."
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This is bonkers. Talk about a V shaped recovery. Can't believe this level of sales holds up. But wow.
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This is a great example of how humans assign meaning and narrative to random patterns. If you watch this and don’t come away admiring the blue marble for its perseverance you’re not a normal human.
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Companies that can consistently beat the market's assumed ROIC "fade" rate will - with hindsight - look really cheap (even with high P/Es) at t=0. Knowing them beforehand is the trick, of course, but moat identification is step 1 in the process. - Todd
This is a pretty amazing chart from
@JonFell73
and co: The multiple you could have paid in 1973 to achieve a 7% ex-div CAGR through 9/30:
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$MA and $HD, neither of which need cash, have issued new bonds. Some going out 30 years at sub 4% cost of capital. This is a good time to be a dominant company that is going to make it through this crisis.
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This slide from a SBUX presentation speaks volumes about the power of platform companies in China. -Sean
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The 9% long term rate of return to US equities has historically come from a 4% FCF yield and 5% growth. In the decade since 2009, there have been regular claims that we were back in a bubble, but the FCF yield suggested valuation was not stretched. This is still true today.
We’ve highlighted in the past the FCF yield of S&P 500 and how it pointed to the market being cheap even while PEs were high. Often got pushback on SBC impact vs history and how FCF is now overstated. Here’s some good research on topic. tl;dr SBC issue is real but not material.
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New Post: How I Learned About Moats and Joined Ensemble Capital:
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At Ensemble, we believe that successful companies deliver value to all stakeholders. Stakeholder value is the source that gives rise to profits and so companies that focus exclusively on shareholders are paying lip service to their long-term profit goals.
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In our portfolio BKNG, FRC & GOOGL trading at 20x PE w/ ~15% growth. In a famous “value” investor’s portfolio I just reviewed JNJ, PG and PEP trading that 20x PE w/ ~4% growth. Which group has larger margin of safety at today’s prices if you are a long term investor? -Sean
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Investors often confuse relevance & recognizability. Just because a customer *recognizes* a brand/service, does not mean it is *relevant* to their lives. Relevance drives attention, attention drives demand, demand drives pricing power. 1/11
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In
@LibertyRPF
’s interview with
@scuttleblurb
, David discusses investors not researching stocks that appear over valued. Such a mistake. How can you know it’s overvalued in advance? If you can, why do all the research? We fully agree with David’s approach.
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Leon Cooperman: “Everyone I know that has accumulated wealth, whether it's Warren Buffett, Ken Langone, Mario Gabelli, made their fortunes out of buying weakness and selling strength… You buy weakness and you sell strength. That's the way to make money in the market.” -Sean
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Position sizing is a topic we think gets way too little attention from investors. Today we're publishing an illustrated report detailing how we merge quantitative and qualitative analysis to determine exactly how much of any given stock we want to own.
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Dramatic illustration of the recent incredible volatility and performance differential between market cap and equal weight S&P 500. This is a 30 year chart.
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Here’s our Guide For Value Investors on How to Get Long Netflix or why the stock actually trades at a current PE of under 20x.
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Everyone is cheering
@pmarca
essay Build, which is excellent. Now read
@morganhousel
essay on post WWII America, the surge in government debt/spending, how GDP surged and debt *did not* create problems. Now combine the essays and think about implications.
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Ensemble Capital is seeking to add an investment analyst to our team. If you have strong skills in competitive advantage analysis and would like learn more, please DM us for details.
We'll be at Berkshire Hathaway this weekend if you'd like to speak with us about the position.
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Many people on FinTwit understand utilizing base rates when making growth forecasts, but for many others this isn't something they know much about. It's core to the Ensemble approach and in this podcast, the amazing
@mjmauboussin
lays out what it all means
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Unexpected and scary issues like the Coronavirus are not easy for investors to process well. The key is to focus on the longer term economic impact, if any, and be humble about your predictive abilities.
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Bad take by Buffett. Ignore buy/sell recs and price targets, but read Street reports for detailed micro color. Initiation reports particularly good. Shops like ISI, Bernstein, Blair offer excellent depth. If you’re generalist buysider, leverage their vertical expertise.
“We never look at any analyst reports. If I read one it was because the funny papers weren’t available. I don’t understand why people do it.” Warren Buffett
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One way to think about this chart is that over shorter time frames you win by exploiting valuation errors, while over the longer term you win by owning companies with superior fundamental performance.
S&P 500 return attribution by time window
valuation the biggest short-term driver, dividend growth the biggest long-term driver
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$COST CFO Richard Galanti on yesterday's call:
"Just keep driving more value and if we keep focusing on that, nobody can catch us."
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Full interview with $SBUX CEO. After telling employees they'd get paid during next 30 days whether or not they show up to work, people still showed up. Taking care of stakeholders does not come at expense of shareholders. Business is not a zero sum game.
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This is so important. It goes against everything analysts are taught. But knowing every detail of a company results in *worse*, not better, investment decisions. Here’s the link to the study (many, many studies over many years show same thing). -Sean
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This is an *extremely* good write up of $CPRT. While the business is universally recognized as excellent and moaty,
@GHadjia
wrestles with the COVID fueled surge in used car ASPs and illustrates how it has led to Copart over earning. George is a talent and an instant new follow.
Bristlemoon just published a report on $CPRT, one of the best businesses we've ever encountered (link below). The problem is that the mkt is seemingly missing the pricing-led, high-incremental mgn growth of the last few years being replaced by relatively lower mgn vol growth...
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Here is our five part growth forecasting series. While the series focused on forecasting growth for faster than average growing businesses, the margin for error is often *less* for slow growth companies. See our prior series on slow growth risk at the end of this thread. 1/x
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Remarkably low consumer sentiment levels. Similar to 2009 lows and early 1980s lows. Way below early COVID lows.
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Everyone knows that active managers underperform as a group. But most people don't realize it isn't a lack of skill or high fees, it is the fact that so few active managers are willing to run concentrated portfolios.
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The Q1 letter for the Ensemble Fund (ENSBX) is out. We discuss almost all of our holdings through the lens of their ability to get through this crisis and thrive on the other side. $CMG is a new position and we increased our prior small position in $NVR.
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This may be the most important slide in First Republic's investor presentation. Which other companies highlight to investors what they *don't* do? It might be an interesting list of stocks to research.
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Buffett's advice to read 500 pages a day is great if that fits your personality and schedule, but there's no need to force it. There's also value in other media (video, podcasts, etc.). The key is to learn every day - and avoid news/topics that will be stale in a few days.
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Anyone have ideas for moaty, high ROIC, non-cyclical businesses that you view as fairly or undervalued?
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Phil Fisher was decades ahead of investors when it came to stakeholder analysis. From "Conservative Investors Sleep Well" (1975)
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If you had bought $NFLX in the days after they first issued awful guidance in January 2022, at this point you’d have earned a 45% return vs 15% for the S&P 500… but only after first experiencing a 55% decline.
Investing is hard. And sometimes terrifying.
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This is why investors need to focus first on what a company does, then on how the financials will flow, and lastly what it is all worth. But investors often mistakenly work backwards, looking at valuation, then the financials, and only lastly seeking to understand the business.
“You don’t go into business & say I want to create a company that grows at 15% a year, has a 22% ROE & never has a down year. You create a product or opportunity set that people need, and if you do a good job then the numbers & financial metrics flow from that.” Douglas Foreman
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This, from one of Chuck Akre’s 1996 letters, is a great summary of the types of businesses we want to own and learn more about.
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This article along with the supporting data explains one of the key lessons all equity investors must learn. It is ROIC, not growth, that separates “growth” from “value”.
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This article from
@edyong209
is the best thing we’ve read on Coronavirus. Full stop. It is excellent and we urge you to give it a complete read. We pulled out some key quotes in the thread below.
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There are two kinds of CEOs: Visionaries and Optimizers. Neither is necessarily better than the other, but their success will greatly depend on the stage of the company’s lifecycle and the type of business the company runs. 1/6
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1/x Some people were surprised to hear Buffett say yesterday that Apple was a better business than anything else Berkshire owns. But it was back in 2017 that he declared Apple, Microsoft, Amazon, Google and Facebook “ideal businesses.”
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[New Post] We're long both $GOOGL and $BKNG, which confuses people in light of $GOOGL's aggressive moves to capture travel industry profit pools. But $BKNG, unlike other leading travel players, is not $GOOGL's target.
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This is where the alpha is.
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Moat erosion doesn't come from beyond the moat, but starts behind the castle walls.
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[New post] A closer look at one of our portfolio holdings: $MASI
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In our new post, we explore the
#1
question we see investors wrestling with. Why isn't the market down more? But the rally in the S&P 500 suggests investors have gotten much more defensive and are are not going "risk on" as it might appear on the surface.
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Seems possible the market may be trading at under 20x 2021 EPS with stronger than normal growth in 2022. Interest rates still very low. Yet it’s conventional wisdom market is expensive. Many speculatively priced stocks down 50% yet market is near all time highs. Strange setup.
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Don’t underestimate the importance of
#1
. There are lots of companies out there. Work on ones that interest you. But be curious and open minded. Lots of “boring” businesses are fascinating once you really understand them.
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This newsletter is gold. Like having a junior analyst listening to all the earnings calls of companies you don’t follow, breaking down all the key quotes, and pointing out the narrative themes that are running through the economy. And it’s free. 🤯
Welcome to The Transcript where we tell the story of the economy via key quotes from earnings calls.
1. Subscribe to get our newsletter every Monday:
2. Listen to our Podcast:
3. Read past Newsletters:
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