Value Investor Daily #10

TikTok Takes on Amazon, Munger's Playbook for the Modern Investor, Small Caps Are Not Undervalued Right Now

Table of Contents

TikTok Plans to 10x Shop Sales, Aiming at Amazon

According to Bloomberg, TikTok is looking to expand its eCommerce business in the US and Latin America and increase sales by as much as tenfold this year to around $17.5 billion.

TikTok saw global merchandise sales of around $20 billion (their cut is a fraction of that) in 2023 and has a base of 150 million users in the US.

TikTok’s Shop product is seeing rapid adoption by users, with ByteDance investing over $500 million in seller incentives and warehousing space in the first year. Sales reached over $7 million per day.

Amazon launched its own Inspire product for influencer-made content in response.

Amazon is at 21x TTM cash flow. Earnings were $2.69 in 2023. Analysts expect EPS to grow 28% over the next 3-5 years.

TikTok's parent company, ByteDance, is not publicly traded.

Here’s a quick look at cash flow multiples of other competitors and expected EPS growth over the next 3-5 years.

Does Chasing Momentum Work? Yes and No.

NVIDIA more than tripled in 2023. Should you buy it now?

Does chasing the best winners from the previous year work?

What if you bought the top 10 S&P 500 stocks each year?

CFA Nathan Fitzpatrick recently did the analysis, going back to 2003.

Here’s what he found:

  • Overall, it worked, delivering 12.1% returns vs. 10.4% for the S&P 500

  • However, drawdowns were brutal, over 70% at times

  • Beta was 1.22, implying 22% higher volatility

  • Sharpe and Sortino ratios were lower

  • Turnover was over 98%

So it works, but the juice likely isn’t worth the squeeze. You’re not going to get the 100-300% gains the stocks just had again the next year. You can chase the hottest stocks if you want, but eventually, it’s going to give you whiplash.

Most just can’t and won’t stick with a strategy with 70%+ drawdowns and 98% turnover, even if it works.

Any strategy involves risk and drawdowns, but if you know what you own, you’re more likely to stick with it long enough to work out in your favor.

That’s why we prefer to be the turtle, not the rabbit, and invest based on fundamentals vs. solely on price action.

Upcoming Earnings This Week

The market rally stalled last week with almost no big earnings catalysts to focus on.

Banks report this week on Friday:

  • JP Morgan

  • Bank of America

  • Wells Fargo

  • Citigroup

Other key companies reporting this week we’ll be watching:

  • BlackRock

  • UnitedHealth

  • Fast Retailing

  • Delta

Over 400 other companies report this week. You can see the entire list here.

Will Munger’s Playbook Keep Working?

It’s no secret growth stocks have dominated in recent years. Their performance has trounced value stocks.

Value investing used to be easy. According to Charlie Munger, it was like shooting fish in a barrel.

But, he said at his final appearance at the Berkshire Hathaway meeting in 2023, “My advice to value investors is to get used to making less.”

Simply put, the cat is out of the bag. Due to the method's success, value investing is more competitive than ever.

Millions of investors have access to instant screening tools to find the cheapest companies instantly. Algorithms and hoards of online traders quickly exploit any anomalies.

Furthermore, low interest rates, especially since 2007, have posed challenges for value investors. Value stocks tend to outperform in higher interest rate environments.

Growth stocks are able to borrow capital and expand, seemingly infinitely, under low interest rate regimes.

So what’s a value investor to do?

Munger said to join the club: “I think that the modern investor, to get ahead, almost has to get in a few stocks that are way above average…. They try and have a few Apples or Googles or so on, just to keep up, because they know that a significant percentage of all the gains that come to all the common stockholders combined is going to come from a few of these super competitors.”

However, many of Munger's disciples remain committed to his investing philosophy, which emphasizes identifying the fundamental value of businesses and seizing opportunities when they arise.

As Phil Town says, “We wait for an event.” He bought Chipotle when it collapsed.

When Google (aka Alphabet) fell recently in response to Microsoft’s investment in OpenAI, Bill Ackman made his move.

Seth Klarman highlighted the fall and rise again of Meta stock last year.

Another idea is to buy the cheapest stocks in every industry. That way, you’re not eliminating gains from higher-priced sectors, like technology, from your portfolio, but you’re still using value as part of your criteria.

Ultimately, even Buffett had to evolve, which is exactly what he did under the tutelage of Munger.

“The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

For the patient investor, there will always be opportunities to buy wonderful growth companies at value prices.

Hulbert: Small Caps Aren’t as Cheap as They Seem

The Russell 2000 small-cap index was up 17% in 2023, lagging the large-cap S&P 500 by seven percentage points.

But are they cheap right now? Mark Hulbert says no.

The stated iShares P/E ratio for the Russell 2000 currently stands at 11.5. But it only looks at profitable companies. When unprofitable companies are taken back into account, the true P/E ratio jumps to 27.1.

According to FactSet, 40% of those small-cap Russell 2000 firms lost money last year.

For comparison, the S&P 500 trades at 21x earnings.

Additionally, the economy is moving toward a winner-take-all phenomenon, in which larger corporations dominate, and smaller companies have a smaller piece of the earnings pie.

In 1975, the top 100 companies made 48.5% of all profits made by publicly-traded firms. In 2015, that share grew to over 84%.

To put it bluntly, smaller companies are left fighting over scraps. If this trend continues, the Russell 2000 could continue to underperform the S&P 500.

Thanks for reading. We’ll have lots more coming your way this week.

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