Kris Abdelmessih recently put out a great post on MoonTower Meta about the cognitive dissonance required to be a ‘value’ investor in high quality businesses:

VC makes sense because overpaying doesn’t matter if you are truly drawing from a power law distribution (that’s a big “if” though).

And trading oriented managers can be evaluated. Just ask them the terms they want to be evaluated, hang them on their own inconsistencies, and choose from whoever’s left.

But long-term investors who want cheap prices? I don’t know if that job is even doable ex-ante and if it is I don’t think you wear a suit to do it.

Naturally, this led me to question whether I’ve moved too far in the other direction over the past few months. I’m now doing the ‘obvious’ things, namely: investing in index funds and geographically diversifying my holdings. The concentrated bet on software that my portfolio represented from 2019 to late 2022 may have been far from optimal in terms of risk-management, but it generated a phenomenal return, often after buying in at valuation multiples that many would have considered either far too dear or just plain stupid. They were probably right! But that didn’t stop stock prices increasing until the uncertainty around long-term rates became too great for markets to ignore.

[ETF Inflows.png] Source: FT

The problem with doing ‘logically obvious’ things is that you’re far from alone in doing them. By joining them, you are condemning yourself to average returns, although that still beats paying someone else to underperform the average. From Matt Levine’s recent Money Stuff: ‘Nobody Wants Mutual Funds Now’:

Many ordinary people do not want to think about their investments much, and modern finance has designed a product that is ideally suited for them. It is the index fund (or index exchange-traded fund), whose essential thesis is that thinking about investments is unnecessary and in fact bad, and you should just buy the market and save on costs.

Anyway, back to my self-indulgent ruminations.

[EV NTM Multiples 10.2023.png] Deservedly cheap, or an opportunity? Source: Clouded Judgement Newsletter

Many businesses are now operating in an environment that they won’t be familiar with; the last time rates were this elevated, a large number won’t even have existed. At the same time, valuation multiples in certain sectors (software) are as low as they’ve been for many years, the constant stock chatter on Twitter that increased in pitch towards the end of the last bull market has settled to a more bearable tone, and there seems to be a growing acceptance that higher-for-longer is here to stay and that once again ‘investing is hard’. In other words, opportunities are out there.

There still seems to be a (completely understandable) focus on valuation, though. It’ll be a while before I willingly buy into a stock priced at 2020/21 level multiples but there is a lot of grey area below that in which the odds of finding a long-term compounder that is both ‘cheap’ (and not for a good reason) and overlooked, must be close to that of winning the lottery, if not slimmer. The past couple of years have been taken by many investors as a lesson in the importance of valuation but what proportion of multiple resets are a downstream consequence of the biggest economic regime change in 15 years? Where would prices be now if covid and its resulting inflationary effects hadn’t taken hold? So, valuation will maintain its ‘higher-importance-than-pre-2022’ place on my mental checklist, but I want to take care not to learn the wrong lesson from this period; only in rare cases will it decide whether or not I make a long-term investment.

Business Updates

ASOS

As I haven’t previously elaborated on my small ASOS position, allow me to give some brief background:

The business was founded in 2000 and quickly established itself as a leading online fashion retailer in the UK, focussed on a target market of young adults. Over the next decade, the group experienced steady growth, benefitting from the online shopping boom as customers favoured their fashion-forward clothing and accessible pricing.

Since 2014, the share price has experienced multiple periods of extreme volatility, losing more than 65% from peak to trough twice, and recovering more than 250% on both occasions, all within the space of 7 years! Reasons are numerous but include a warehouse fire in 2014, several profit warnings and, most importantly, the rise of ultra-fast fashion brands like Shein in the last few years. Couple the latter with inventory mismanagement, a first ever net loss as a public company last year, and a shrinking balance sheet prior to the installation of a new CEO 12 months ago, and the stage was set for investor confidence to drop to recent lows.

Since Jose Calamonte has taken up the top-job, inventory has been reduced by 30%, further financing secured, and profitability restored, though ASOS remains a turnaround story with significant risk attached given the inflationary pressure and the fickle nature of retail spending.

Catching back up to the current day, the announcement of FY23 results was pushed back a week to 1st November to ‘allow its auditor, PwC, to complete its planned testing.’ As stated in the press release:

PwC has assured the Board that the outstanding procedures are limited in nature.

There’s also the further complication of Mike Ashley’s involvement (currently holds around 18% of shares). He has long admired the Topshop brand that ASOS bought back in 2021, though as recently as this past weekend news broke that ASOS is now looking to sell it. As someone who’d be considered a front-runner in any potential bids, it’s possible a sale to Ashley’s Frasers Group would both provide cash to pay down outstanding debts, while also dis-incentivising Ashley to continue to hold a significant position in ASOS. What happens next remains to be seen, but it’s sure to be a (hopefully profitable) rollercoaster!

Amazon

[Amazon Q3 Income Statement.png] Source: App Economy Insights

As much as commentary on Amazon earnings seems to be concerned with AWS growth, this quarter was further evidence of improving retail operating margins (as usual, MBI Deepdives gives a great overview), now on a path back to their highest level since 2019. Advertising revenue has continued to outpace AWS growth, now at just over half the size on a revenue basis.

Turning to AWS itself, YoY growth of 12% was a carbon copy of the last quarter, though there was continued positive messaging around slowing customer cost optimisations:

Similar to what we shared last quarter, while optimization still remain a headwind, we’ve seen the rate of new cost optimization slowdown in AWS, and we are encouraged by the strength of our customer pipeline.

Compare this to Microsoft’s Azure growth rate of 29% for the same quarter, and it’s tempting to conclude Amazon’s cloud-based lunch is being eaten. But it should be noted that while Microsoft’s Intelligent Cloud is at a very similar ~$24B revenue level to AWS, it doesn’t just consist of Azure (also includes Github, Windows Servers, and Visual Studio), so this isn’t an apples-to-apples comparison.

Either way, Amazon are certainly behind when it comes to AI narrative. Perhaps as a result, much of the call focussed on playing AI buzzword catch-up with the rest of big tech; The Information reported a 200% increase in mention of CodeWhisperer (Amazon’s AWS-tailored code completion assistant).

YTD return vs benchmarks

(Index source: Koyfin)

Portfolio Nasdaq S&P 500 FTSE 100
26.9% 31.6% 9.2% 1.34%

Portfolio

Holding Ticker(s) Weighting (%)
Cash - 27.1
iShares Core UK Gilts UCITS ETF GBP (Dist) IGLT.L 11.3
Xtrackers NASDAQ 100 UCITS ETF XNAQ.L 9.2
Alphawave IP Group plc AWE.L 7.8
Adyen N.V. ADYEN.AS 5.7
iShares VII PLC - iShares MSCI EM Asia UCITS ETF USD (Acc) CEA1.L 5.4
Twilio Inc. TWLO 4.9
ASOS Plc ASC.L 4.5
Invesco Bloomberg Commodity UCITS ETF CMOD.L 4.0
iShares Core MSCI Europe UCITS ETF EUR (Acc) SMEA.L 3.9
CrowdStrike Holdings, Inc. CRWD 3.6
Datadog, Inc. DDOG 3.4
Howden Joinery Group Plc HWDN.L 3.4
Amazon.com, Inc. AMZN 3.0
Advanced Micro Devices, Inc. AMD 2.7

Adjustments

Absolutely none!

Next Month

Earnings updates from:

  • AMD
  • ASOS
  • Howden’s
  • Datadog
  • Twilio
  • Crowdstrike