Apex Mountain

👋Hello from the home office. No housekeeping today, so let’s get right into it.


Before we get started…

This article will do a lot of looking back. And it’s easy to say all of this was obvious in hindsight.

Two things:

  1. In every annual report, companies state their future intentions (i.e. their future business plans).
  2. It’s our job as investors to assign a likelihood to those intentions. And figure out one, if they are realistic. And two, if they are realistic, why this company — and not their competitors — is in the best position to execute on those intentions.

đź’ˇThe light bulb moment

I first heard the term “Apex Mountain” from The Rewatchables; a Ringer podcast. The podcast does deep dives on movies they deem “rewatchable.”

You know, those movies that suck you in when you’re flipping through channels. Movies that you can watch over and over.

They break up the podcast into different categories. Like most rewatchable scene, what’s aged the best, and is this an actor or director’s Apex Mountain? Meaning, is this their best work, the peak of their powers?

For example: Is Vince Vaughn’s Apex Mountain Old School or Wedding Crashers? I lean Wedding Crashers, but many would say Old School.

It got me thinking…

How could we apply the “Apex Mountain” framework to investing?

Most companies, whether young or mature, probably had one product that got them to where they are today. But will that same product lead their next leg up in market cap? Will it remain their Apex Mountain?

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Netflix’s Moat, Lululemon Defies Retail, Disney Breaks Out

đź‘‹ Hello from the home office.

Today’s Agenda

  • Netflix might lose its best shows in the next few years. Will people still subscribe?
  • Lululemon has defied the retail carnage. How?
  • Disney breaks out of a four-year base.

What are your favorite shows on Netflix?

I primarily watch reruns of The Office, Friends, and Parks and Rec. The WSJ reports those shows could be removed from Netflix when their contracts expire in 2021.

Two alarming facts for Netflix:

  • Three companies are launching competing streaming services: NBC Universal, AT&T, and Walt Disney. Their T.V. shows and movies make up 40% of the viewing minutes on Netflix.
  • Eight of the ten shows people spent the most time watching in 2018 were reruns and might not be on Netflix in a few years (see chart below).

Source: WSJ

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A Deep Dive on Zoom’s IPO

đź‘‹ In today’s update, we’re talking about Zoom.

  • What do they do, what products do they sell, and who are their competitors?
  • Are they an economic franchise or just a business?
  • What’s their ceiling? Risks?

Resources used in this article:

  • Zoom’s S-1: Management’s discussion about their business starts on page 54.
  • Alex Clayton’s breakdown of Zoom’s S-1.

An Overview of Zoom

What do they do?

Zoom was founded in 2011 by Eric Yuan. Eric was a lead engineer for Cisco Systems Webex product (collaboration product similar to Zoom). Zoom helps companies communicate through video. They enable face-to-face communication through video, audio, and chat in a single meeting across different devices (desktop, iPhone, iPad) and different locations. For example, they’ve helped one customer with 1,000 all-remote employees, grow and maintain their culture.

Their goal is simple: To make Zoom meetings better than in-person meetings.

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Apple’s New Products, The Inverted Yield Curve — Explained

đź‘‹ Hello, in today’s update:

  1. Apple debuts four new products
  2. What is an inverted yield curve? And what should investors do about it?
  3. What else is happening?

1. Apple Debuts Four New Products

Apple is expanding its service line-up with four new products set to be released throughout 2019.

Watch the keynote

  • Apple TV+: Not many specifics, didn’t say how much it would cost??? They will have original content from Oprah, Spielberg, and Reese Witherspoon. That’s about all we know.
  • Apple News+ (The Netflix of magazines): Cost $9.99 per month. Combination of magazines like Time, Sports Illustrated, and Rolling Stone. In addition, they added publications like the WSJ, The Skimm, and TechCrunch.
  • Arcade: Made for gamers. One subscription, no ads — you can jump from your iPhone to your iPad — to your mac, and pick up where you left off. I took a peek. Their games look cool, but I doubt we’ll be seeing Madden, Call of Duty, and other popular games with this bundle. It seems they are curating the best indie games you find in the app store and sticking them in Arcade.
  • Apple Card: Apple’s take on a credit card. Built on simplicity, transparency, and privacy.
    • Looks great. Just like you would think an Apple product would look. Minimal design, no numbers, and limited text.
    • No fees, no hidden cost.
    • Real-time fraud protection.
    • Coming this summer.

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Video: These oil companies offer attractive dividends; Facebook keeps humming

Good Evening! One housekeeping item before we get to today’s update.

I am trying out shorter emails, delivered two to four times per week, instead of one long email, delivered once a week. Each email will contain two to three items, instead of 10.

Let me know what you think.

Oh, and I am introducing videos!


Oil Companies are Printing Money, Again…

 

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Companies mentioned in the video

  • Exxon (XOM)-Div. yield: 4.74%
  • Shell (RDS.A)-Div. yield: 4.79%
  • Chevron (CVX)-Div. yield: 4.12%
  • BP (BP)-Div. yield: 5.66%

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A Look at Atlassian — Opening a Nail Salon — How to Stay Focused

Good morning, hope your week is off to a good start.

On to the update:


1. A $22 billion company you’ve probably never heard of

An overview

Atlassian develops software that helps teams collaborate on projects. They are a SAAS company (software-as-a-service). This means their products are stored and accessed via the cloud.

The next few slides are from a presentation they gave in 2017. You can view the whole presentation here.

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Rally Road…

Hello. Glad to be back! Hope you all had a great holiday season.

Table of contents.

  1. The S&P 500 tends to rally after big drops.
  2. EWA is holding on…barely.
  3. Buyers have stepped up again for Skywork solutions.
  4. Apple holds the average + some cool charts.
  5. Cheer up, the world is getting better.
  6. Fred Wilson’s predictions for 2019.

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Stability Leads to Instability

Important: We categorize investments in two ways. Strategic or tactical; occasionally, they can be both. Most of the trades we cover fall into the tactical bucket.

  • Strategic: Occasionally, we believe we have an insight into a company or theme and are willing to make a five to ten year investment to see if we are right. We are looking for businesses that have the potential to dominate their category and create a product or service that is not easily replicated.
  • Tactical: For these trades, we have a specific price target to take profits at and a stop to protect our downside. In simple terms, we try pick stocks that have the highest chance of going up in price, in a one to three-year time frame.

 

1. Stability leads to instability

The headline is part of a quote by the economist Hyman Minsky. He was referring to the economy in general but we can also apply it in the context of business.

When a business reaches a certain level of success, they can, if they aren’t careful, become complacent. They can lose focus on serving their customers and meeting their needs. And if they aren’t careful, competitors will come in and start encroach on their territory. This process could happen so slowly, that upper management might not notice.

Then one day… boooooom…They’re in a fight for their lives and their very existence is at stake. (think Netflix and Blockbuster or the demise of Sears)

Victoria’s Secret

Shares of Victoria’s Secret’s parent company, L Brands (LB), has fallen 45% this year and is one of the worst performing stocks in the S&P 500. In addition, they slashed their dividend and the leaders of both Victoria’s Secret and Pink resigned, reports Bloomberg.

How did it come to this?

Ed Yruma, a retail analyst at Keybanc Capital Markets, points out that making push-up bras, long a Victoria’s Secret staple, is something of an engineering challenge and a unique supply-chain capability. But newly popular styles like bralettes and sports bras can be made by many factories, he notes, and that has made it easier for new competitors to get in the game and tread on Victoria’s Secret’s turf.

In other words, they got complacent and didn’t innovate on the product that made them famous (push-up bra) and other companies introduced cheaper alternatives.

Dollar Shave Club

A good comparison is what happened between Gillette and Dollar Shave Club (DSC).

Gillette had firm control of the razor market, but many men just wanted a good enough razor at a fair price. DSC sourced cheaper blades from a South Korean Company, Dorco, made a viral YouTube video and sold directly to the consumer.

The result… They started taking share from Gillette. And eventually, Gillette started their own subscription razor business.

Today, any entrepreneur can build a Shopify store, source a product on Alipay, and set up shop in a few weeks. The advantage pre-internet companies had is slowly being eroded.

Down, but not out

All hope is not lost. They still have a dominant share of the underwear market and the most recognizable brand in the space. They have to get back to listening to their customers and serving them on their terms.

To conclude

Victoria’s Secret was built when the world was supply constrained (pre-internet). Meaning, the only place you could buy a push-up bra was a Victoria’s Secret store in your local mall or from their catalog.

Today, supply is infinite. There are a million places you can buy a product that meets your needs. In today’s world, the companies who are closest to the customer will have a leg up on the rest of the competition.


2. Toll Brothers tops analyst expectations

How a stock reacts to information is often more important than the actual information.

Toll Brother (TOLL) beat both revenue and earnings estimates from analyst but offered weaker guidance for the 1st quarter of 2019. Initially, this was seen as bad news, but the losses have been recouped and the stock is trading higher on the week.

How to trade it

Since 2013, this stock has traded in a $30-$40 dollar range; with a few spikes above and below those levels.

If you are aggressive, you could be a buyer at the lower end of the range ($30). Stopping out with a weekly close under $30, and looking for a rotation back toward the top of the range ($40). Or hold and look for a breakout and move back toward the 2018 high print near $52.

• The reward/risk if you target $40 is 1.28 (not great)—Meaning you would make $1.28 for every $1 dollar risked.

• The reward/risk improves to 3.97 if you hold until the 2018 high print near $52. You just have to estimate how probable that is…

Other ways to trade

If you want exposure to a basket of homebuilders (recommended), there are two ETFs you should look at.

  1. iShares U.S. Home Construction | Ticker ITB
  2. SPDR S&P Homebuilders | Ticker XHB

Important: The top three holdings for XHM are Lowe’s, Home Depot, and Williams Sonoma; only five homebuilders round out the other seven. ITB is a better pure play on homebuilders as five of the top six holdings are homebuilders.

Let’s take a quick peek at their charts.

iShares U.S. Home Construction | Ticker ITB

Thirty dollars is a crucial level of support for this ETF. A break below could see a move toward $22.50.

SPDRs S&P Homebuilders ETF | Ticker XHB

This chart is similar to Toll Brothers. Price is trapped in a narrow range between $32 and $38 dollars. And remember, this ETF is not a pure play on homebuilders. Home Depot is this ETFs largest position.


3. Technical analysis

XLE | Energy Select SPDR ETF

Where are we at?

XLE has been trading between $64 and $78.50 since March 2016. Currently, the price has tested the bottom of the range—$60—and held. For now…

Reward/Risk

  • Buying at the lower end of the range, $64, stopping out with a weekly close under $61.50, and holding for a rotation back toward $78.50 produces an attractive R/R of 5.8 (make $5.80 for every $1 dollar risked; in % terms it’s 22.60% on the upside and 3.90% on the downside) (see chart above).
  • A break under $64, could lead to losses down to $50, a -22% move to the downside.

Quick facts on XLE

  • Seeks to provide exposure to the energy sector of the S&P 500 index.
  • Gross expense ratio: 0.13%—You pay 13 cents for every $100 dollar invested.
  • Options available: Yes.
  • Dividend yield: 2.90%.

Important

Exxon Mobile (XOM) and Chevron (CVX) make up 42% of this ETF. Those two companies will have an outsized impact on its performance.

Additional information

• XLE home page.


That’s all for today. Thanks for reading,

Caleb

Spotify vs. the Record Labels. Who Will Win the War?

Table of contents:

  1. Spotify vs the record labels.
  2. Nvidia and the new industrial revolution.
  3. We have become an “asset-light” economy. Quote from Warren Buffett’s annual shareholder meeting.
  4. FAANG stocks were crushed in October. Rally over?
  5. These categories of smart home technology are poised for growth.
  6. Public offerings: How Moderna Therapeutics wants to revolutionize drug manufacturing.
  7. Two signs a recession “might” be near.
  8. Canada is fragile.

1. Spotify vs the record labels

Spotify's gross margin

The above chart is Spotify’s gross margin since 2013.

As a refresher, gross margin is (Revenue – Cost of Revenue).

From an article by Music Business Worldwide:

During the last round of negotiations with the three major record labels (Universal, Sony, and Warner), Spotify was able to reduce their payout to the record labels from 55% towards 52%. Hence the bump in gross margin improvement

The reduction was granted on the basis that Spotify hit steep subscriber targets.

See the problem… The percentage Spotify pays out to the labels has a direct effect on their gross margin.

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Chinese Stocks Have had a Rough Year. Here are Two Ways You can Buy the Dip

đź‘‹ Hello from the home office.


Quote of the Day

An analyst on Apple’s earnings:

“Even though revenue and earnings numbers may be good, a lot of those eye-popping growth numbers were already known and expected this quarter.”

-Darrell Cronk, CIO of Wells Fargo Investment Institute

Our view: The best companies don’t always make the best investments. The price you pay matters.


Chinese Stocks

After a crushing year for Chinese stocks, investors are turning to options to bet on a comeback reports the WSJ (paywall).

What’s going on?

• Chinese stocks have suffered in 2018. Two reasons cited by investors are the trade war with U.S. and poor company fundamentals.

• Bullish options on the most popular Chinese ETF, iShares Large-Cap China ETF (FXI), reached the highest level in 5 years as investors bet on a turnaround.

Follow the money

Fred Ruffy, an analyst at Trade Alert, said some institutional players are positioning themselves for an aggressive rebound over the next two months.

How to trade it

There are two China ETFs we will go over.

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