Our Watch List

As we’ve mentioned before, we’re in the process of upgrading our Watch List. That’s not to say our current one is not good. It’s just that we want to convert it to a valuation tool that you can use - the idea is that, with a few clicks, you should get a nuanced, well-informed view of whether your favorite investment idea is overpriced or underpriced by the market. So, if you like the story, let us do the heavy lifting with the numbers. We’re working hard to roll out this one-of-a-kind valuation tool by the end of September.

In the meantime, here’s something from our current Watch List: Last week we wrote about the FAMANG stocks – we stacked them up against each other to get a snapshot of their respective “overpricy-ness”. In the comparison Google looked quite reasonable. So, this week we did a deep dive on them. Anyway, after the slew of earnings reports released last week, here is the comparison, now based on updated financial numbers as of Q2 2022:

Google still looks pretty good. So does Meta. But, in our view, the dark cloud of data privacy laws is much more ominous for Meta. While we love Instagram and Whatsapp for their sheer dominance in what they do, Zuckerberg and team want to transport the company to some sort of Metaverse (with a not-so-subtle name change to signal his intent). When we invest, we always try to visualize what the company will look like in 5 to 10 years. With Meta, we can’t…yet.

Rational Exuberance

We have a few holdings that some might consider “speculative”. Well, all investing is somewhat speculative, in varying degrees. We try to minimize the speculation part of it as much as possible. But that doesn’t mean we invest in safe, boring names. We like investing in dominant companies, with distinct competitive advantages that will stand the test of time and are, therefore, likely to maintain their revenue growth (or preferably accelerate growth). Sometimes, this involves investing in companies that don’t yet earn cash profits. That’s fine. Not that long ago neither did Amazon. So, because they don’t make money….yet…many investors deem these stocks speculative. But we think of them as “getting in early”…with RATIONAL exuberance.

Here’s how these holdings stack up in our Watch List. The chart below tells us that, as of yesterday, we don’t need to assume any IR-rationally exuberant growth rates to keep holding them. Incidentally, these companies have all (except BioNTech) reported Q2 2022 earnings, and they were generally good numbers, received positively by the market. Most of the stocks reacted very positively. Those numbers have now been incorporated in the chart below, where we stack up “what we need to believe” to keep holding these stocks.

We’re comfortable with holding these expectations. We’ve dug into their stories, which tell us that “what we need to believe” is utterly believable. Sure, it’s possible that these growth numbers may not come to pass. That’s a risk we must take. However, that risk, we believe, is low.

More on these companies next week after we parse through some of the earnings reports.

Chiplomacy

US Speaker of the House Nancy Pelosi was in Taiwan to reiterate US-Taiwan solidarity against Chinese belligerence. Predictably, China blasted a few missiles in response…not at Taiwan but just generally into the sky. The China-Taiwan factor, especially considering Putin’s recent belligerence (and the ideas it may give Xi Jinping), is the biggest risk to our portfolio. We’re still heavily invested in semiconductors but, as we delineated recently, we’re going to be much more disciplined about entry and exit prices.

These were the exit prices we had published a couple of weeks ago:

Some of these stocks are approaching these exit prices. AMD is the obvious one.

Portfolio Changes

We’ll be selling AMD over the next few weeks while we keep picking up some Google stock. We’ll do this over a few weeks to even out normal fluctuations in the market. While not in the same industry, we consider both companies to be AI bets. On that note, we’ll be improving our Portfolio page next week to make it more transparent and easier-to-use.