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Hidden Value Gems
Tips from the legendary Walter Schloss on investing 👇
Quote of the day #69 https://t.co/IZs5rikyfa
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Tips from the legendary Walter Schloss on investing 👇
Quote of the day #69 https://t.co/IZs5rikyfa
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Invest In Assets 📈
RT @InvestInAssets: Visa Business Breakdown $V 💳
Operational
- ROIC: 30%
- Gross Margin: 80%
- Operating Margin: 67%
- FCF/Net Income: 113%
Growth (5Y CAGR)
- Rev: 9.8%
- Op. Income: 10%
- EPS: 20.1%
Valuation
- Fwd. PE: 30
- EV/EBITDA: 26
- FCF Yield: 3.8%
Let's take a look 👇🧵 https://t.co/Gzrn4S30PO
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RT @InvestInAssets: Visa Business Breakdown $V 💳
Operational
- ROIC: 30%
- Gross Margin: 80%
- Operating Margin: 67%
- FCF/Net Income: 113%
Growth (5Y CAGR)
- Rev: 9.8%
- Op. Income: 10%
- EPS: 20.1%
Valuation
- Fwd. PE: 30
- EV/EBITDA: 26
- FCF Yield: 3.8%
Let's take a look 👇🧵 https://t.co/Gzrn4S30PO
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Stock Analysis Compilation
CL Capital on Hostelworld $HSW LN
Thesis: Hostelworld's innovative social features and strong market position make it a compelling play on the growing online hostel booking market
(Extract from their Q2 letter) https://t.co/PVh1MhReBt
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CL Capital on Hostelworld $HSW LN
Thesis: Hostelworld's innovative social features and strong market position make it a compelling play on the growing online hostel booking market
(Extract from their Q2 letter) https://t.co/PVh1MhReBt
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Hidden Value Gems
RT @HiddenValueGems: Enjoyed the interview with @JohnArnoldFndtn who achieved ~100% compound annual
return over 12 years and retired at 38 as a billionaire.
✅ “The market is usually right, but success in investing often comes from the confidence to believe when it’s wrong.”
✅ "Investing requires the balance of confidence to challenge the market and the humility to accept when you’re wrong."
✅ "In investing, the rarest skill is not just finding opportunities but knowing when you’ve made a mistake."
✅ "Success in investing isn’t about always being right; it’s about knowing when you need to rethink your strategy."
✅ “There's this phrase that fear and greed determine markets, and those are two very strong emotions. I've seen traders who either because of fear or greed, they change their pattern, they change their process. And so, for better or worse, I think I'm classified by being able to be detached from my emotions.”
✅ “The amount of infrastructure that's required to run the data centers for AI is immense. The industry is under a real challenge. It's putting tremendous challenge upon the utility industry.”
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RT @HiddenValueGems: Enjoyed the interview with @JohnArnoldFndtn who achieved ~100% compound annual
return over 12 years and retired at 38 as a billionaire.
✅ “The market is usually right, but success in investing often comes from the confidence to believe when it’s wrong.”
✅ "Investing requires the balance of confidence to challenge the market and the humility to accept when you’re wrong."
✅ "In investing, the rarest skill is not just finding opportunities but knowing when you’ve made a mistake."
✅ "Success in investing isn’t about always being right; it’s about knowing when you need to rethink your strategy."
✅ “There's this phrase that fear and greed determine markets, and those are two very strong emotions. I've seen traders who either because of fear or greed, they change their pattern, they change their process. And so, for better or worse, I think I'm classified by being able to be detached from my emotions.”
✅ “The amount of infrastructure that's required to run the data centers for AI is immense. The industry is under a real challenge. It's putting tremendous challenge upon the utility industry.”
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Matt McGarry
The ads that drive <$2 cpas aren't creative at all.
in fact, the entire process is data-driven.
let me explain: https://t.co/ng1lfdsjcz
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The ads that drive <$2 cpas aren't creative at all.
in fact, the entire process is data-driven.
let me explain: https://t.co/ng1lfdsjcz
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Stock Analysis Compilation
Heartland Advisors on Hexcel $HXL US
Thesis: Hexcel is well-positioned for a long-term recovery, with a focus on defense diversification and wide-body aircrafts, and shares are attractively priced for investors
(Extract from their Q2 letter) https://t.co/O4Mbz36dCo
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Heartland Advisors on Hexcel $HXL US
Thesis: Hexcel is well-positioned for a long-term recovery, with a focus on defense diversification and wide-body aircrafts, and shares are attractively priced for investors
(Extract from their Q2 letter) https://t.co/O4Mbz36dCo
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App Economy Insights
What's Uber's big autonomy plan?
In today's coverage:
🚖 $UBER vs. $TSLA Robotaxis.
💰 What unit economics to expect?
📊 BONUS: $DIDIY and $GRAB visualized.
https://t.co/NLuSRJ5LqQ
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What's Uber's big autonomy plan?
In today's coverage:
🚖 $UBER vs. $TSLA Robotaxis.
💰 What unit economics to expect?
📊 BONUS: $DIDIY and $GRAB visualized.
https://t.co/NLuSRJ5LqQ
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Musings on Markets
The Corporate Life Cycle: Managing, Valuation and Investing Implications
As I reveal my ignorance about TikTok trends, social media celebrities and Gen Z slang, my children are quick to point out my age, and I accept that reality, for the most part. I understand that I am too old to exercise without stretching first or eat a heaping plate of cheese fries and not suffer heartburn, but that does not stop me from trying occasionally. For the last decade or so, I have argued that businesses, like human beings, age, and struggle with aging, and that much of the dysfunction we observe in their decision making stems from refusing to act their age. In fact, the business life cycle has become an integral part of the corporate finance, valuation and investing classes that I teach, and in many of the posts that I have written on this blog. In 2022, I decided that I had hit critical mass, in terms of corporate life cycle content, and that the material could be organized as a book. While the writing for the book was largely done by November 2022, publishing does have a long lead time, and the book, published by Penguin Random House, will be available on August 20, 2024, at a book shop near you. If you are concerned that you are going to be hit with a sales pitch for that book, far from it! Rather than try to part you from your money, I thought I would give a compressed version of the book in this post, and for most of you, that will suffice.
Setting the Stage
The notion of a business life cycle is neither new nor original, since versions of it have floated around in management circles for decades, but its applications in finance have been spotty, with some attempts to tie where a company is in the life cycle to its corporate governance and others to accounting ratios. In fact, and this should come as no surprise to anyone who is familiar with his work, the most incisive piece tying excess returns (return on invested capital minus cost of capital) to the corporate life cycle was penned by Michael Mauboussin (with Dan Callahan) just a few months ago.
My version of the corporate life cycle is built around six stages with the first stage being an idea business (a start-up) and the last one representing decline and demise.
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F172072c0-193f-42e9-b98e-3d8c3a9bbd9b_1422x1540.heic
<svg<polyline<polyline<line<line
As you can see, the key tasks shift as business age, from building business models in the high growth phase to scaling up the business in high growth to defending against competition in the mature phase to managing decline int he last phase. Not surprisingly, the operating metrics change as companies age, with high revenue growth accompanied by big losses (from work-in-progress business models) and large reinvestment needs (to delivery future growth) in early-stage companies to large profits and free cash flows in the mature phase to stresses on growth and margins in decline. Consequently, in terms of cash flows, young companies burn through cash, with the burn increasing with potential, cash buildup is common as companies mature followed by cash return, as the realization kicks in that a company’s high growth days are in the past.
As companies move through the life cycle, they will hit transition points in operations and in capital raising that have to be navigated, with high failure rates at each transition. Thus, most idea businesses[...]
The Corporate Life Cycle: Managing, Valuation and Investing Implications
As I reveal my ignorance about TikTok trends, social media celebrities and Gen Z slang, my children are quick to point out my age, and I accept that reality, for the most part. I understand that I am too old to exercise without stretching first or eat a heaping plate of cheese fries and not suffer heartburn, but that does not stop me from trying occasionally. For the last decade or so, I have argued that businesses, like human beings, age, and struggle with aging, and that much of the dysfunction we observe in their decision making stems from refusing to act their age. In fact, the business life cycle has become an integral part of the corporate finance, valuation and investing classes that I teach, and in many of the posts that I have written on this blog. In 2022, I decided that I had hit critical mass, in terms of corporate life cycle content, and that the material could be organized as a book. While the writing for the book was largely done by November 2022, publishing does have a long lead time, and the book, published by Penguin Random House, will be available on August 20, 2024, at a book shop near you. If you are concerned that you are going to be hit with a sales pitch for that book, far from it! Rather than try to part you from your money, I thought I would give a compressed version of the book in this post, and for most of you, that will suffice.
Setting the Stage
The notion of a business life cycle is neither new nor original, since versions of it have floated around in management circles for decades, but its applications in finance have been spotty, with some attempts to tie where a company is in the life cycle to its corporate governance and others to accounting ratios. In fact, and this should come as no surprise to anyone who is familiar with his work, the most incisive piece tying excess returns (return on invested capital minus cost of capital) to the corporate life cycle was penned by Michael Mauboussin (with Dan Callahan) just a few months ago.
My version of the corporate life cycle is built around six stages with the first stage being an idea business (a start-up) and the last one representing decline and demise.
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F172072c0-193f-42e9-b98e-3d8c3a9bbd9b_1422x1540.heic
<svg<polyline<polyline<line<line
As you can see, the key tasks shift as business age, from building business models in the high growth phase to scaling up the business in high growth to defending against competition in the mature phase to managing decline int he last phase. Not surprisingly, the operating metrics change as companies age, with high revenue growth accompanied by big losses (from work-in-progress business models) and large reinvestment needs (to delivery future growth) in early-stage companies to large profits and free cash flows in the mature phase to stresses on growth and margins in decline. Consequently, in terms of cash flows, young companies burn through cash, with the burn increasing with potential, cash buildup is common as companies mature followed by cash return, as the realization kicks in that a company’s high growth days are in the past.
As companies move through the life cycle, they will hit transition points in operations and in capital raising that have to be navigated, with high failure rates at each transition. Thus, most idea businesses[...]
Offshore
Musings on Markets The Corporate Life Cycle: Managing, Valuation and Investing Implications As I reveal my ignorance about TikTok trends, social media celebrities and Gen Z slang, my children are quick to point out my age, and I accept that reality, for the…
never make it to the product phase, many product companies are unable to scale up, and quite a few scaled up firms are unable to defend their businesses from competitors. In short, the corporate life cycle has far higher mortality rates as businesses age than the human life cycle, making it imperative, if you are a business person, that you find the uncommon pathways to survive and grow.
Measures and Determinants
If you buy into the notion of a corporate life cycle, it stands to reason that you would like a way to determine where a company stands in the life cycle. There are three choices, each with pluses and minuses.
*
The first is to focus on corporate age, where you estimate how old a company is, relative its founding date; it is easy to obtain, but companies age at different rates (as well will argue in the following section), making it a blunt weapon.
*
The second is to look at the industry group or sector that a company is in, and then follow up by classifying that industry group or sector into high or low growth; for the last four decades, in US equity markets, tech has been viewed as growth and utilities as mature. Here again, the problem is that high growth industry groups begin to mature, just as companies do, and this has been true for some segments of the tech sector.
*
The third is to focus on the operating metrics of the firm, with firms that deliver high revenue growth, with low/negative profits and negative free cash flows being treated as young firms. It is more data-intensive, since making a judgment on what comprises high (revenue growth or margins) requires estimating these metrics across all firms.
While I delve into the details of all three measures, corporate age works surprisingly well as a proxy for where a company falls in the life cycle, as can be seen in this table of all publicly traded companies listed globally, broken down by corporate age into ten deciles:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F3a9b2ec4-d96a-43b0-8197-3e2cdf177285_1344x458.heic
<svg<polyline<polyline<line<line
As you can see, the youngest companies have much higher revenue growth and more negative operating margins than older companies.
Ultimately, the life cycles for companies can vary on three dimensions - length (how long a business lasts), height (how much it can scale up before it plateaus) and slope (how quickly it can scale up). Even a cursory glance at the companies that surround you should tell you that there are wide variations across companies, on these dimensions. To see why, consider the factors that determine these life cycle dimensions
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F6b1dc3fc-a844-4681-bbca-129fc3bf4a9c_1498x970.heic
<svg<polyline<polyline<line<line
:
Companies in capital-light businesses, where customers are willing to switch from the status quo, can scale up much faster than companies in capital-intensive businesses, where brand names and customer inertia can make breakthroughs more difficult. It is worth noting, though, that the forces that allow a business to scale up quickly often limit how long it can stay at the top and cause decline to be quicker, a trade off that was ignored during the last decade, where scaling up was given primacy.
The drivers of the corporate life cycle can a[...]
Measures and Determinants
If you buy into the notion of a corporate life cycle, it stands to reason that you would like a way to determine where a company stands in the life cycle. There are three choices, each with pluses and minuses.
*
The first is to focus on corporate age, where you estimate how old a company is, relative its founding date; it is easy to obtain, but companies age at different rates (as well will argue in the following section), making it a blunt weapon.
*
The second is to look at the industry group or sector that a company is in, and then follow up by classifying that industry group or sector into high or low growth; for the last four decades, in US equity markets, tech has been viewed as growth and utilities as mature. Here again, the problem is that high growth industry groups begin to mature, just as companies do, and this has been true for some segments of the tech sector.
*
The third is to focus on the operating metrics of the firm, with firms that deliver high revenue growth, with low/negative profits and negative free cash flows being treated as young firms. It is more data-intensive, since making a judgment on what comprises high (revenue growth or margins) requires estimating these metrics across all firms.
While I delve into the details of all three measures, corporate age works surprisingly well as a proxy for where a company falls in the life cycle, as can be seen in this table of all publicly traded companies listed globally, broken down by corporate age into ten deciles:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F3a9b2ec4-d96a-43b0-8197-3e2cdf177285_1344x458.heic
<svg<polyline<polyline<line<line
As you can see, the youngest companies have much higher revenue growth and more negative operating margins than older companies.
Ultimately, the life cycles for companies can vary on three dimensions - length (how long a business lasts), height (how much it can scale up before it plateaus) and slope (how quickly it can scale up). Even a cursory glance at the companies that surround you should tell you that there are wide variations across companies, on these dimensions. To see why, consider the factors that determine these life cycle dimensions
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F6b1dc3fc-a844-4681-bbca-129fc3bf4a9c_1498x970.heic
<svg<polyline<polyline<line<line
:
Companies in capital-light businesses, where customers are willing to switch from the status quo, can scale up much faster than companies in capital-intensive businesses, where brand names and customer inertia can make breakthroughs more difficult. It is worth noting, though, that the forces that allow a business to scale up quickly often limit how long it can stay at the top and cause decline to be quicker, a trade off that was ignored during the last decade, where scaling up was given primacy.
The drivers of the corporate life cycle can a[...]