Disney | Charter | Banks

Published on 09/19/23 | Saurav Sen | 1,303 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: Disney + Charter

In an unexpected turn of events, a Streaming juggernaut (Disney) signs a deal with a Traditional Cable TV company (Charter Communications) to, hopefully, start a new trend of win-win deals between former adversaries. Traditional Cable TV companies have suffered from the onslaught of Streaming behemoths like Netflix, Amazon, and Disney. Since 2012, the number of households in the US paying for Traditional TV dropped from around 96 million to 72 million. For context, Netflix has around 75.6 million paying households in the US, as of June 30th, 2023.

Anyway, despite this news, our take on Disney remains unchanged. If anything, we agree with Stratechery’s take that this should be a boost for Disney. The stock market doesn’t think so, yet. But for us, Disney is a long-term bet on Bob Iger’s ability to give momentum to a fantastic content library with a wide economic moat. And while this deal seems like a win for Charter as well, at least on the surface, we’re not interested in their stock. The Buycaster tells us that it’s irrational for us to expect CHTR to get us our desired return of 80% cumulative in 5 years (12.5% CAGR). That’s not to say that CHTR is a bad company or a bad stock – it just doesn’t rank high among stocks that we – rationally – expect to deliver our required return.

Here the comparative Rationality Ratings for these companies and their stocks:

For details on these ratings, please visit The Buycaster.

The BuyTheme of the Day: Finance & Fintech

Last week we introduced you to the Bankcaster. We hope that it’s as useful to you as it is to us. We’re working on incorporating banks in the Buyscreener, so that you can filter our entire universe of around 4,000 stocks & ETFs for “High Rationality” bets all in one place. In the meantime, here are the top 5 banks (in our universe of 250) with the highest Rationality Scores. In other words, if our desired/required return is 80% cumulative return in 5 years (you can select your preference in the Bankcaster), these bank stocks seem to be the most rational bets – based on “what we need to believe about the business in terms of revenue growth and profitability to consider buying the stock”. Of course, if we invest, we will dig into their stories.

The subjective evaluation of any company or bank takes time (usually takes us a week). But what the Bankcaster (and the Buycaster) does is that it automates the numbers part of the analysis as much as possible. That shaves off at least 25% (if not 50%) of our time when evaluating any company an investment candidate.

Macro Dose: Indexing, rationally...

Passive Investing has been all the rage over the last decade, and for good reason. Why take bets on portfolio managers with high fees who seldom outperform their respective benchmarks? Just buy an index fund and forget about it. John Bogle, founder of Vanguard, democratized this idea of Indexing, a.k.a Passive Investing.

The “passive” prefix refers to giving up the activity of picking stocks. “Active” investors spend a lot of time and money trying to – actively – pick “winners”, but many of them end up picking enough losers along the way that their long-term performance tends to lag the index. Of course, maybe 20% to 30% of active portfolio managers beat their benchmarks over the long-term (depending on which study you believe) but it’s safe to say that most don’t. And Index Funds don’t even charge that obscene annual management fee. So, the decision to go all-in on Passive Investing should be a no-brainer. But there’s a snag.

There are a couple of overlooked nuances about Passive Investing that give us pause:

  1. It’s not really “passive”. Well, it could be if we, for example, buy an S&P 500 index fund (like SPY) and forget about it for 30 years. That’s as passive as it gets. But if you have a portfolio of index funds, then you’re probably quite “active” – not in picking stock winners, but in picking index winners. So, you’ve just shifted your “activeness” one level up from stocks to ETFs or asset classes. It’s just a different “active”. But what does “winning” mean anyway?
  2. It is not a guarantee or even a probable outcome that XYZ index fund will return X% over the next 10, 20 or 30 years just because that index has returned X% over the last 10, 20, 30 years. The idea that past is prologue is a superficial one. Economies have changed. Industries have changed. Generations have changed. Consumption baskets have changed. And the effect of any technological paradigm shift on equity returns over the next decade and beyond is unknowable.
  3. So, naturally, it’s best to start with our definition of “winning” and then work backwards.

We stared hard at our Buycaster tools and wondered if we could only have something like this for Index Funds and ETFs. So, we took a crack at building something. We’re thinking of calling it the Fundcaster. We took the insights from the Buycaster (and the Bankcaster) and rolled them up to the Index or Fund level. We’ll be doing this for as many Index Funds as we can. So, the analysis we see for any ETF is a bottom-up analysis, not a superficial top-down one.

We believe the Fundcaster will move the needle for Fund/ETF analysis for these reasons:

  1. Ratings will be derived from the Buycaster and Bankcaster insights of “what we need to believe about the future of the underlying companies/stocks to consider buying them as a basket”.
  2. Because of #1, any Risk/Return analysis of the Fund will depend on the PROSPECTIVE BUSINESS LEVEL analysis of its parts (individual stocks/companies), and NOT on HISTORICAL fund-level ratios and metrics that do little more than provide false comfort.
  3. This analysis, therefore, does not subscribe to the notion of “well, this index has returned X% for the last 40 years, so…”. That type of analysis is shallow – too shallow if we want to go all-in on Passive Investing with our savings.
  4. All analysis starts with the Return – the desired or required return. This is the main north star of investing – the whole point of doing it. Our Buycaster and Bankcaster tools are set up the same way.

We will be releasing the Fundcaster to our subscribers within the next couple of weeks. Stay tuned!

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