Companies to Watch

Paypal is growing at 21% and we still don’t know much about Braintree and Venmo. Braintree and Venmo are two assets Paypal owns. PayPal doesn’t give us much information on the performance of those two businesses. Paypal’s future growth will depend on how well they grow and build defensible businesses with Braintree and Venmo.

Paypal’s three main businesses

• B2B = Business to business

• B2C = Business to consumer

A quick look at their earnings

  • Excluding the sale of a loan portfolio, revenue grew 21%; in line with expectations. EPS rose 17%, beating analyst estimates and the company raised full-year guidance.

Greater opportunities

Paypal’s traditional product is the button you see when buying something online. (see above)

Estimates say this button accounted for 86% of last year’s revenue. However, analysts have good visibility as to the growth of this product, thus there is not much room for upside surprises.

The bigger growth driver for Paypal will be Braintree and Venmo.

Braintree is B2B (business to business) product that specializes in mobile and web payment systems for e-commerce companies such as Uber and Airbnb.

Braintree processed 1.64 billion transactions in the third quarter, up 33% from a year ago.

Venmo is a B2C (business to consumer) product that allows you to pay and request money from your friends. Verto analytics estimates that Venmo has 10 million unique monthly users as of August.

According to the WSJ, 24% of Venmo users have used the app in a way that generates money for the company. This is up 17% from a year earlier.

Both of these products, Braintree and Venmo, have a macro tailwind as both digital payments and the use of mobile apps to manage money grows in the coming years; especially with millennials.

Owning trust and attention

Trust in traditional financial institutions is lacking among millennials.

This presents an opportunity for companies like Venmo and Square to start selling financial products such as mortgages to millennials who trust them.

What should we do?

Huge markets present big opportunities but also cut-throat competition. It’s not clear which companies will build defensible businesses in this space.

It’s important for us to try to understand why customers choose Braintree and Venmo over other options such as Stripe (Braintree competitor) and Square cash (Venmo competitor).


Down and Out

Housing stocks continue to get crushed. Value or value trap?

What’s going on?

Several things are at play:

• Rising interest rates and price increases have made houses unaffordable for many Americans; especially in large cities.

• The new tax law passed in December cuts back on how much mortgage interest and property taxes homeowners can deduct; making houses less affordable.

• Ample supply of rental apartments has made buying less attractive.

Ways to trade

We don’t look for 10x returns in the housing category. We look to buy when other investors are bearish and sell when they are bullish. There are several ways to trade this category; through ETFs or individual stocks. The two largest ETFs in this category are iShares U.S Home Construction (ITB) and SPDR S&P Homebuilders (XHB).

These ETFs aren’t pure plays on homebuilders. Both ETFs hold companies that support the housing sector such as Home Depot and Lowe’s.

Here’s a quick look at both.

iShares ITB

Fees-0.43% or 43 basis points. You pay 43 cents for every $100 dollars invested.

AUM-~$900 million.

Options available-Yes

SPDR XHB

Fees-0.35% or 35 basis points. You pay 35 cents for every $100 dollars invested.

AUM-$644 million

Options available-Yes

The iShares product tilts heavier toward home builders; it’s a better vehicle if you are looking for a pure homebuilder play.

The data points to a weaker housing market going forward

A few good charts on the housing market, courtesy of WSJ Daily shot and Piper Jaffray.

The past two times we have been close to the blue line, we have tipped into recession.

U of M conditions is a report that is part of the University of Michigan’s surveys of consumers.

These are the main metrics used to gauge the health of the housing market. As the chart above shows, they have been trending downward since 2012.

Equity Charts

We use charts because they give us a real-time view on how people view a stock or category.

We’ll go through the two ETFs + the top four homebuilders to see where we stand.

iShares ITB

Click to enlarge

SPDR XHB

Click to enlarge

D.R. Horton (DHI)

Click to enlarge

PulteGroup (PHM)

Click to enlarge

Lennar (LEN)

Click to enlarge

Toll Brothers (TOLL)

Click to enlarge

Wrapping up

We know two things:

  1. The data is pointing toward a weaker housing market.
  2. Homebuilder stocks have been terrible in 2018.

We believe homebuilders fit into the non-consensus bucket (see above).

However, whether or not a long position is right for you will depend on your tolerance for volatility and time frame. If your time frame is 10 years plus, the odds are that you will be ok.

For us, if we take a long position, it will be via an ETF or a basket of 5-10 homebuilders.

If you wait for the fundamentals to improve before buying, you will miss the best chance to buy. However, if you buy now, these stocks could have further to fall and could take years to recover. Can you deal with that?

That’s why it’s important to write down why you making an investment and under what conditions you would sell. Otherwise, you will be swayed by random noise.

We are watching several charts and might take long positions in a few depending on how the rest of the month plays out.


Investing Wisdom

The bond king, Jeffrey Gundlach, offers his best investing advice.

Jeffrey Gundlach is the founder and CEO of Doubleline Capital. They are primarily a bond shop and have $123 billion in AUM.

He sat down with Forbes for an interview. Below are some highlights. Here is the full interview.

When asked about the best financial advice he could impart:

Patience is the most important thing in investing. Things take longer to develop and longer to tip over. Weird situations can be held together much longer than people think.

Caleb here: Totally agree. While we are constantly bombarded with information, most of it is noise. There are only a handful of A+ opportunities per year. We try our best to focus our attention on those. We work, work, work, and hope to have a few insights. Most of our time is spent reading and researching; we sit on our hands most of the time when it comes to investing capital.

Anytime everyone’s doing the same thing, they will all sell together. It leads to a very dangerous setup that the momentum on the upside turns into the momentum on the downside. It’s really important to not get sucked into this herding kind of behavior because you all get slaughtered together, the entire herd.

Caleb here: In order to succeed in investing, you must think and act differently than other investors. But it’s never that easy; timing is key. You can act differently and still lose money. That’s why investing hard…

When asked about his favorite books:

He mentioned a technical book about bonds called “Inside the Yield Book”, by Marty Liebowitz.

The other was Reminiscences of a Stock Operator. He said:

Everything in that book is absolutely true in terms of how markets work, how human nature works, the mistakes people make, the greed that they have, the ways they get themselves in trouble. It’s all exactly the same. We can have the internet, we can have algorithms. We have robo-advisors, we have drones — you know what, it’s all just human nature and it hasn’t changed. It’s not going to.

Caleb here: I’ve read that book a dozen times. The lessons are timeless.


Thanks for reading and have a great day,

Caleb

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