Value Investor Daily #9

Brenton's 20% Annual Returns, Carrefour Drops Pepsi, 33 Undervalued Stocks

In Today's Edition:

The Secrets of Andrew Brenton's 20% Annual Returns

Value investor Andrew Brenton discusses the investment strategy of his firm, Turtle Creek, a Canadian investment firm, and how it has consistently outperformed the market since 1998.

They’ve compounded capital at a 20% rate since 1998, returns delivered by few other investment managers, like Buffett himself. The market returned just 7% per year in the same time frame.

He attributes their success to:

  • A background in private equity that focused on investigating management and finding fairly priced valuations

  • Focusing on highly unique companies in their space

  • Meeting with management teams to determine the quality and attitudes of CEOs toward shareholders

  • Focusing on hitting singles, not home runs

  • Focusing on cash-flow-positive companies

  • A counter-intuitive approach to valuation, including not being overly conservative

  • But also using a fairly aggressive 9% discount rate with financial modeling

The interview is full of gems from an absolute pro and well worth the watch. Go check it out now.

Offshore Wind Powering U.S. Grid for First Time

Renewables now generate 21% of the U.S. energy supply, and it’s growing.

Big offshore wind farms in the US are starting to contribute renewable energy to the grid, marking a historic moment for the country's clean energy transition.

Offshore wind turbines at the Vineyard Wind 1 site near Martha’s Vineyard delivered 5 megawatts of power to the New England grid, with a total capacity of 62 turbines planned for the site.

The project is a collaboration between Avangrid (AGR) and Copenhagen Infrastructure Partners. Massachusetts Governor Maura Healey noted that the farm would eventually generate enough power for over 400,000 households, reducing reliance on natural gas.

This success follows the South Fork Wind project near Montauk Point, New York, which has two turbines installed and operating, with plans for ten more in 2024.

The global wind power market is projected to grow at 13% CAGR through 2030 to $278 billion.

Avangrid trades for 14x cash flow.

Carrefour Drops Pepsi Over High Prices

French retailer Carrefour, with over 12,000 global locations, has announced that it will stop selling PepsiCo products due to high prices. The move is in response to PepsiCo's decision to increase prices in an attempt to offset rising costs of raw materials and transportation.

Carrefour's decision comes at a time when many retailers are grappling with the same issue of high input costs and passing those costs onto consumers.

However, Carrefour's move may also be seen as a strategic decision to negotiate better prices with PepsiCo, as the retailer is one of the largest food retailers in the world and has significant bargaining power.

Inflation in France has dropped from over 6% to 3.7% in December 2023.

Carrefour did over $91B of sales last year, trading at 9.8x earnings and 2.6x TTM cash flow.

Alibaba: Down 75%, What’s Next?

Alibaba, the Chinese tech giant, has faced a difficult year with a scrapped cloud IPO and a management shake-up. These issues have caused the company's stock to plunge, going from over $300 a share in 2020 to below $77 a share.

The cancellation of the cloud IPO and management changes highlight larger problems for Alibaba, which has traditionally served as a bellwether for foreign investors in China. The company has also faced political challenges, such as a record fine of $2.8B for alleged monopolistic behavior.

Additionally, slowing economic growth has negatively impacted Alibaba's business.

Revenue growth has slowed to 6.4% YoY vs. a 5-year average of 28%.

While the IPO market has been tough, especially for Chinese companies, Alibaba still has plans to list its Cainiao logistics business and Freshippo grocery store chain.

The stock trades at 6.6x TTM cash flow.

But proceed with caution. It now faces stiff competition in streaming, e-commerce, and cloud services from ByteDance, Pinduodo, Huawei, and Tencent.

Overall, Alibaba still faces significant challenges in recovering its darling status as a leading global tech firm.

Morningstar: 33 Stocks Trading Under Fair Value

Morningstar has identified 33 undervalued stocks for 2024.

They estimate the market is fairly-valued overall. However, there are still undervalued pockets.

According to their view, small-cap value stocks are trading 29% below fair value, while large core stocks are overvalued by 8%. The communication services sector is trading 11% below fair value, while technology, industrials, and consumer cyclical stocks are overvalued.

Some of the most undervalued stocks include:

Hanes (HBI) at .24x price/fair value

VF Corp (VFC) .33x price/fair value

Moderna (MRNA) .44 price/fair value

Paypal (PYPL) .46 price/fair value

Other names include Albemarle, Charles Schwab, Comcast, Estee Lauder, Exxon Mobil, and Walt Disney.

Read the entire list here.

SpaceX Expands T-Mobile Coverage

SpaceX has significantly expanded coverage for T-Mobile customers by launching the first satellites capable of connecting to smartphones on the ground.

The partnership between T-Mobile and SpaceX, announced in August 2022, allows T-Mobile to utilize SpaceX's satellites to connect customers in areas outside of the carrier's network.

Once activated, the service will allow T-Mobile customers to stay connected, even in areas where they previously had no network coverage. Initially, the service will only support text messaging, but T-Mobile plans to expand it to voice and data services in the future.

While T-Mobile has not yet disclosed when the service will be available or its compatibility with different plans, the carrier hopes that most smartphones already in use on the network will be compatible.

It's worth noting that T-Mobile's competitors, such as AT&T and Verizon, are also working on their own satellite connectivity solutions.

However, T-Mobile's partnership with SpaceX gives it a competitive edge in offering expanded coverage to its customers.

A look at valuations in the space:

T-Mobile (TMUS) - 10x cash flow

AT&T (T) - 3.3x cash flow

Verizon (VZ) - 4.3x cash flow

Firms Struggle to Keep Raising Prices

After years of high inflation, some companies are now finding the limits of their pricing power.

FedEx, Target, General Mills, and airlines have all cut their sales outlooks or slashed fares due to slipping demand, price-sensitive consumers, easing inflation, and better supply.

However, companies are finding other ways to grow profits without raising prices. They are cutting costs, either through layoffs or becoming more efficient.

Nike has lowered its annual sales growth forecast but announced plans to cut costs by $2 billion over three years.

Companies such as Spirit Airlines have offered salaried workers buyouts, while toymaker Hasbro announced layoffs of 1,100 employees.

Despite reducing sales forecasts, companies are determined to maintain margins. Sales growth for companies in the S&P 500 is expected to average 2.7% in 2024, down from 11% growth in 2022. However, net margins are expected to fall slightly to 11.6% from 11.9%.

Overall, companies are adapting to the changing pricing landscape and finding ways to streamline operations and reduce costs. Despite the challenges, analysts expect earnings to improve in 2024, with a 6.6% increase in earnings.

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Thanks for reading, and happy investing!