The Buy Scan | Jun 28th, 2023

Published on 06/28/23 | Saurav Sen | 1,136 Words

The BuyGist:

  • We send out The Buy Scan at least once a week.
  • We cover the most pertinent (and trending) topics in investing.
  • We rely heavily on our primary valuation tool - The Buycaster - to get actionable insights.
  • We hope that each Buy Scan provides at least one salient insight.

The BuyChart of the day: BYD

We like to keep track of the great Mr. Buffett. The latest news is that Berkshire Hathaway, the company through which he executes his brilliance, has been reducing its stake in the Chinese EV company, BYD, over the past few months. We were never investors in BYD (we don’t do China) but we were curious about the reasons. Since we don’t have a direct line to Mr. Buffett’s desk in Omaha, Nebraska, we’re speculating.

The simple, Level 1 explanation is that the stock price has shot up like an electric vehicle rocket. Over the past 5 years, the stock price (BYDDY ADR) has increased by whopping 462%! So, it’s time cash in some chips. The Level 2 explanation is that the fundamentals are increasingly out-of-sync with the stock.

We’ve constructed a Buffett-Munger Ratings from scratch (for The Buycaster) based on our lifelong study of their process. We did this because we’re nerds and we like comparing our own Buycaster Ratings to something that represents their style. Just for fun. And then we also track Wall Street, Sell-Side Analysts opinions. Why not? Here’s how the 3 ratings stack up for BYD in our Buycaster dashboard:

Normally, we consider ratings above 9 (out of 10) to be “buy-worthy”. 8 is OK for some stocks. But BYD is not even close. The low Buycaster Rating means that we won’t be considering BYD for our portfolio any time soon. While the Buffett-Munger Rating is better, it’s still unimpressive. Only sell-side analysts on Wall Street love this stock. Not surprised.

Now if you’re a nerd like us, you might be asking why the Buffett rating is so low. The Appendix section in The Buycaster breaks it down. On every measure, barring leverage, BYD is undoubtedly unimpressive. By the way, a high Leverage rating means the company’s leverage (debt to EBIT) is, in fact, low, which is a good thing. It’s a bit counter-intuitive but we wanted to keep it consistent with the scales of the other rating.

Note: The Buycaster Rating is a score of out 10, which signifies how rational it is to expect the stock to deliver our required return (ours is 80% cumulative within 5 years). The higher the scrore, the more rational it is, and the more likely we are to buy the stock. The ratings are a combination of Sanity & Safety. Sanity refers to “what needs to happen in the business for us to – rationally – expect the stock to generate our required return”. Safety refers to the potential capital loss if revenue growth is anemic over the next 5 years. Generally, we like stocks with overall Buycaster Ratings above 9, which implies high Sanity and Safety. You can unpack these Buycaster Ratings in granular detail in The Buycaster.

The BuyTheme of the day: AVs & EVs

BYD got our motor going! We were curious, so we went back to The Buycaster to do a quick survey of some of the Automobile companies in our universe. Here’s how their Buycaster Ratings stack up (hmm that Benz looks pretty good...):

Note: The Buycaster Rating is a score of out 10, which signifies how rational it is to expect the stock to deliver our required return (ours is 80% cumulative within 5 years). The higher the scrore, the more rational it is, and the more likely we are to buy the stock. The ratings are a combination of Sanity & Safety. Sanity refers to “what needs to happen in the business for us to – rationally – expect the stock to generate our required return”. Safety refers to the potential capital loss if revenue growth is anemic over the next 5 years. Generally, we like stocks with overall Buycaster Ratings above 9, which implies high Sanity and Safety. You can unpack these Buycaster Ratings in granular detail in The Buycaster.

Macro Dose: Long-term Equity Returns

Recently, we gave our Investment Methodology a (mostly cosmetic) makeover. There is a section that talks about long-term equity returns. When analysts or advisors normally answer this question, they largely fall in 1 of 2 camps: 1) Statistical and 2) Business Economics (Common Sense). Most of them fall in the Statistical camp because it’s an easier sell – you can wow people with pretty charts. We fall in the Common Sense camp, which we’ve explained in our manifesto. But we were curious about the long-term numbers anyway. We think this is the way to do it:


Here’s some context for the chart above (taken from our Investment Methodology doc):

The chart above shows Minimum and Maximum Annualized Returns over every major time-window. If the future rhymes with the past, this chart gives us 2 important insights:

  1. As the time-window expands, the range of returns shrinks. This means that our degree of confidence in any sort of average return number – to be used as a harbinger of things to come – increases.
  2. As the time window expands, the data suggests that the likelihood of losing money decreases significantly.

About averages, we’d like to reinforce a couple of important points on the chart: The average of the Min and Max shown in the chart above is not the same as the average annualized return over that full 30-year period. The Annualized Return over this particular 30-year window from June 1993 to May 2023 is about 7.9%. Over the past 25 years, it's about 9%.


We wish you many Happy Returns!


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