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Avoiding the Underperformers
Sometimes in life you want to pick the best. You read reviews on Angie’s list about the best electrician or plumber. You read endless Amazon reviews before making a purchase. You can to send your kids to the best schools. In stock picking maybe at least some of our focus should be on avoiding the losers instead of finding the winners.

My curiosity about this is based on a study by SPGI of stocks in the S&P 500 over the last 20 years. 55% of stocks in the index delivered a 100% or less return over 20 years compared to the indexes 322%. Including 1 in 8 that went bankrupt or lost at least 50% of its initial stock price.

I wanted to see what the worst 55% had in common and how this review can help us be better stock pickers.

Some we know the stories well. Don’t buy into frauds like Enron or Worldcom. That’s easier said than done. Companies don’t put in their 10k “these numbers are made up.” I’ve read Financial Shenanigans by Howard Shilit twice to get a better grasp on this. But for us non-forensic accountants, I’m not doing so well finding today's Enron.

Next, we need to avoid bankruptcupcies Lehman, Chrysler, GM, Washing Mutual, the Airlines. A company goes bankrupt if it can’t service its debt. So I avoid companies with excess debt and high-interest payments as a percent of net income. Warren Buffet suggests less than 15% interest payment/net income.

Lastly, we should strive to stay away from u**nder-performers**. These companies don’t go out of business like the previous 2 categories but they return -50 to 100% return over the previous 20 year period. When the market returned 322%. This was my favorite and most time consuming part of this review. What are some trends that I see among these companies that we can use to avoid the stocks that may significantly underperform over the next 20 years.

*note I haven’t completed the review. 500 is a lot of balance sheets. But I figured I’d post my initial findings then finish with a part 2 later

Without further ado, so what do under-performers have in common.

Low <10% or negative ROE and ROI
High-interest expense. Some are > 100% of net income are spent servicing their debt
High cap ex/net income. Frequently > 100% among under performers
Certain industries. Most notably banks (almost all of them), communications (50%), energy (33% which would have been 66% if the ending period was 2021 and not 2022).
On the other side only around 10% of basic materials, insurance, consumer cyclical and consumer defensive underperformed over the last 20 years.

Some companies stuck out to me while doing the review that where really bad offenders of the criteria

$T 56% interest expense. 76-135% capex/net income. ROE 10. ROI 4. One of the most indebted companies in the world. Stock return over 20 years $18 to $21. (Not including dividends, I know)

$F interest expenses 50-200% net income.
Capex to net income 35-200%. ROE 5 year avg is 11. Stock $15 to $11.

$CCL is a bankruptcy risk candidate to me. Neg ROE and ROI. Even in good times capex/net income >100%. Had to issue a Brinks truck loads of debt due to Covid to delay the inevitable

$CHTR 70-100% interest expense. 150% capex to net income. Despite these expenses still managing to buy back stock by issuing debt to do so. Approx 80% per year of buybacks financed with debt not cash flow from the business

Not all companies fit the mold. Below are exceptions

$HBI underperformed despite not meeting the above criteria
24% interest expense/net income
Avg 20% capex to net income
ROE 79%. ROI 10%
Stock performance $6 to $10 and was just taken out of the S&P 500 index

$AMZN over-performed despite consistently spending 100-150% capex/net income.

$HD over-performed despite having neg ROE

Discussion IMO the above can be used as a screen to avoid certain companies at risk of underperformance. If you’re highly leveraged and have to spend 50% of your net income on debt payments that doesn’t leave much cash flow to do other beneficial things like acquisitions or stock buybacks. If you have a very capital intensive business, where you spend over 100% of capex/net income to build new factories to build new cars or buy more airplanes as the old ones are retired you also may not be able to do fun things with cash flow. These two make high ROI harder to achieve and therefore you don’t get years of excess cash compounding to make more cash.

With that I’m going to avoid investing in these companies. What about you?
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Dillon Jacobs's avatar
$88.8m follower assets
Back in the Saddle
Please check out my poll below!

It's been a long few months of inactivity on Commonstock. I've had limited time to do anything but focus on transitioning back to civilian life this spring/early summer.

I spent most of April and May in Germany preparing for the overseas move back to the US. I also had to complete a seemingly endless amount of paperwork in order to separate from the military.

After arriving back in the US in early June, I completed the separation process for the military (although I'm technically on terminal leave until 14 August, but I digress...). We moved to Knoxville, Tennessee in mid-June and have been settling in.

Right now, I'm preparing all the paperwork for college. I've also had some time to reconnect with my investments and the community.

The busyness I've had over this crazy market period has actually been a blessing. I've probably made better decisions (I haven't bought or sold anything since the declines began) because I've been too busy to focus on my portfolio's performance.

Coincidentally, my six month non-compete clause is about to expire in mid-July following my sale of VVI earlier this year. With more time to think and write, this couldn't come at a better time. Over the past few months, I've had some ideas for a brand-new publication. Unfortunately, I haven't been able to put much brain power into them lately with all the distractions.

Here's where I turn to you, fellow Commonstock(-ers)? Below is a poll to help me narrow down some community thoughts. I didn't want to use the poll function since it only allows for one question and I want more of a nuanced discussion. Let's talk in the comments.

  1. What kind of content do you feel is lacking in our community?

Note: Our community has lots of different types of content (weekly newsletters, equity research, content curation, etc.) but what do you feel is neglected?

  1. What content brings most value to you as a reader?
Note: I know the most popular answer here is probably actionable equity research, but that kind of content seems to be very bloated at the moment. If that really is the true answer, then fine, but I encourage you to try and think more outside of the box for a better answer if you please.

For instance, is it really the research itself that you enjoy, or the specific author's take? Maybe both?

  1. What type of content cadence or schedule do you prefer (or do you not care at all as long as the content is good)?

Note: The focus here is what do you find to be more of value. Something that's regular, repeatable, and digestible? Or maybe something quite less infrequent, but you know will be high quality every time.

  1. Do you prefer newsletter type publications or more lengthy story based content?

Note: I know which I prefer to read and/or write, but I am curious to what you all think.

Thanks everyone for helping me out and glad to be back!
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Yegor's avatar
$174.8m follower assets
See some excitement on fintwit (because Friday and today was positive for a lot of growth names) please don’t get caught up in the noise and don’t make same mistakes (not saying anyone did) of getting excited and mesmerized by Mr Market.

As with red days when you can’t watch the market because it’s painful, shall be with green days when it’s fun… stop looking at your portfolio…
ParrotStock's avatar
$257m follower assets
I'm Back!!!
A week away in the mountains is just what the doctor ordered... That and a nice fat green day in the markets!

Since I missed the first of the month portfolio update, here it is. Despite some promising days, still ended another month in the red.

I have a feeling the 2nd half will be much better!

I have a feeling the 2nd half will be much better!

🤞🦜
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Nice to get some downtime now and then, helps us realise there is more to life than tickers and bips :)
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One big reason why $AAPL and $GOOGL will not ban the Chinese spy app anytime soon: TikTok is consistently in the top 5 grossing apps in the US 💰
It's a huge money maker for both Apple & Alphabet in their App Stores. Unfortunately, it will be a hard sell for them to ban it.
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Jared Watson's avatar
$10.8m follower assets
S&P down 1% today while my portfolio is up 3.5%. Impressed and slightly concerned that I now have a negative Beta portfolio.
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My portfolio
I like how people post monthly or quarterly portfolio updates. I’m learning a lot about what people are actually putting their hard earned money into by reading these.

My current mindset is, this is a top 10 bear market all time, as long as your buying companies without near term bankruptcy risk and with a long enough time horizon, it’s easy to buy great stocks a low multiples right now. With that said now that I’ve mostly finished building my new positions in $YETI and $DOCU. This month I’m looking to add more to my existing positions. Mostly $GOOGL, $ASML, $MELI, $PYPL, and $WRBY. I also started a small position in $UPST and I’ll cont to add to that as well.
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Nice, most are solid names in my book (the once that are not solid is because I don’t know much about them 😅)
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$RKLB Rocket Lab To Send CAPSTONE Satellite To The Moon For NASA
I'm so excited for my stock $RKLB to accomplish this mission. This is BIG. Stock price isnt showing how big this is but thats okay, I have complete faith that sentiment will change soon.

  • In a little over two hours, Lunar Photon's HyperCurie engine will conduct a final burn to raise #CAPSTONE's apogee from 70,000 km to 1.2 million km from Earth, setting it on an energy efficient path to the Moon for
. Burn scheduled for 06:56 UTC.


Conor's avatar
$12.9m follower assets
My $ABNB trades
Another $100 into my Robinhood account that is following @brianferoldi and @brianstoffel's Commonstock portfolio.

This is the 11th stock added to the portfolio in the 11th week. So far I am loving the picks by Brian and Brian and have even added $SEMR, $MELI, and $AXON to my main account on Fidelity.

What stocks do you like best out of the Brian's picks so far? Comment below!
Paul Cerro's avatar
$27m follower assets
Klarna launches loyalty feature to hone in on engagement and sales growth
The news: Klarna launched a feature that lets customers store loyalty cards in the Klarna app, per a press release.

Here’s how it works: Customers can save their loyalty cards in the app by scanning the barcode on the physical card or typing in their membership number.

The feature will automatically apply any discounts and rewards when customers scan or display their Klarna app at checkout. It’s powered by Stocard, the Germany-based discount shopping platform that Klarna acquired last year.

All about engagement: Although Klarna achieved major user growth in the last few years, it seems to be focusing more on monetizing and increasing sales from its customers. Klarna’s US user base grew 70.1% year over year (YoY) in 2021, per Insider Intelligence forecasts, but growth is expected to slow to about 45% YoY in 2022.

Consumers value loyalty programs and rewards highly. Klarna can use its new feature to simplify rewards redemption: 61% of consumers worldwide said they’d use loyalty programs more often if the rewards were automatically applied at checkout, per 2022 Salesforce data.
Letting customers store these cards within its app can help Klarna drive engagement during checkout. That could increase the chances that customers use Klarna to pay—boosting Klarna’s revenue potential. The feature may also complement Klarna’s own loyalty program and incentivize use by letting customers bundle loyalty programs to increase their rewards potential.

Why it matters: Klarna has been buffeted by financial headwinds—making it more important than ever to seek out growth opportunities.
  • It laid off 10% of its staff last month due to what CEO Sebastian Siemiatkowski called “a tragic and unnecessary war in Ukraine, a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession.”

  • Klarna is reportedly seeking a fundraising deal that would bring its valuation down to just $15 billion—about two-thirds lower than it was valued last year. Fears of a recession have spooked investors, who are prioritizing profitability over growth. Klarna and other BNPL providers have struggled with profitability despite rapid user growth.

  • BNPL regulation is starting to take shape across many markets—which could strain growth for providers like Klarna: Just this week, the UK government outlined plans to regulate BNPL, which included requiring providers to gain approval from the Financial Conduct Authority and carry out eligibility checks.
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Edmund Simms's avatar
$18.3m follower assets
Cost of drinking crisis
•••

A preview of the cartoon in Friday's issue of Valuabl. Subscribe now at: valuabl.substack.com
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Chinese Sportswear Market
Domestic players in China have done much better than I assumed...

Interestingly, Nike has RARELY mentioned either of these companies on quarterly calls, at Investor Day events, etc.; I see one instance in the past decade (per BAMSec). A bit odd, no?

FWIW, here's CEO John Donahoe on the Q2 FY22 call: "I'm just going to repeat what I said last quarter and the quarter before, which is NIKE always has, and we always will, take a long-term view in China. We've been there for 40 years... We have built up a very strong brand connection with the consumer in China. We're going to continue to invest to lead in China."
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We've discussed this but I think it is a huge risk to any western brand operating in the country. Just look at what happened to H&M. Nike definitely has stronger customer loyalty but still
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Stock Metal Investment Substack
I love trying out new things, so I opened a Substack for my monthly portfolio updates. First post coming later today after work, feel free to check it out and sign up for free https://stockmetalinvestment.substack.com/p/coming-soon
Lester Leong's avatar
$11.7m follower assets
Beginner guide to all major cryptos
First off, this is a repost from u/WhiskasTheCat (<- all credit goes to that guy), but it was so funny that I had to share.

The crypto space can be overwhelming for beginners, there's just so many coins!
But fret not, I created simple explanations for all major coins to help you level up your crypto knowledge. Enjoy!

Bitcoin (BTC): The first crypto currency, created by Nvidia to boost graphics card sales
Ethereum (ETH): BTC but can also calculate your taxes
Tether (USDT): US dollar but what if the money printer had a modem
BNB (BNB): ETH but what if rug pulls were cheaper
XRP (XRP): CBDC (Central Bank Digital Currency) beta release
Cardano (ADA): A whitepaper became self aware, grew a beard and created a crypto currency
Solana (SOL): ETH but what if <SEG FAULT #F9E7>
Dogecoin (DOGE): BTC but what if dog
Polkadot (DOT): You throw a party for blockchains but nobody shows up
Avalanche (AVAX): ETH but you think it's too simple and make it 3 blockchains
Polygon (MATIC): ETH but you want to run ETH on it
Litecoin (LTC): Dogecoin beta release
Uniswap (UNI): What if you wanted to swap 1 ETH worth of coins for a fee of 2 ETH
Chainlink (LINK): What if random numbers cost money
Cronos (CRO): You create a coin but you don't like it having use cases so you remove them
Monero (XMR): BTC but what if it pissed off regulators even more
Algorand (ALGO): What if you brought democracy to a blockchain without bombing it first
Bitcoin Cash (BCH): BTC but with an insolvent CEO
VeChain (VET): What if your coin's use case doesn't work out so you try out a new one every month
The Sandbox (SAND): Minecraft but what if it was designed by a hedge fund
ApeCoin (APE): What if you bought an ape JPEG for 1 million USD and still had money left over
Internet Computer (ICP): ETH but what if the price chart was reversed
Filecoin (FIL): Google Drive but what if you paid Bob to store your data instead
Axie Infinity (AXS): A full time job where your salary can get hacked
EOS (EOS): What if you were the cool kid once but now work at McDonalds
Aave (AAVE): What if you got liquidated but it's decentralized so it's ok
IOTA (MIOTA): What if your toaster could trade crypto currencies
THORChain (RUNE): Created by Marvel fans to get Chris Hemsworth's attention
Loopring (LRC): Polygon but partnered with dying retail stores
Nano (XNO): A fast and feeless currency so good that nobody wants to use it
Terra (LUNA v2): Created for ponzi scheme victims that still had money left over
HAHAHAHAHAHAHAHAHAHAAH, I haven't laughed this hard in a while. This is premium content
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Leandro's avatar
$123.2m follower assets
How long does a technological revolution last?
I have started reading the book "Technological revolutions and financial capital" by Carlota Perez and found this chart pretty interesting.

According to the author, technological revolutions typically last around 50 years and are divided into 4 phases:

It's often the case when the tech is already there but the society and the institutions must be willing to adapt to it. This is why it takes some time until the revolution reaches phase one.

This lag, imho, might be what happened during the dotcom bubble. The internet was in gestation period but stock prices were already reflecting explosive growth. The revolution came, but it did so later than investors anticipated.

What do you think will be the next technological revolution?
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Comparing $UBER to $DASH (delivery perspective)
Here are the gross booking numbers from Uber's latest earnings report:

And here are the revenues and their source from Uber's latest earnings report:

And here are numbers from DoorDash's latest earnings report

In this memo, I'm focusing on revenues from UberEats and from DoorDash.

Looking at $UBER:
  • Delivery booking grew by 12% YoY
  • Delivery revenues grew by 44% YoY

Looking at $DASH:
  • Revenues grew by 35% YoY
  • Total orders grew 23% YoY

Overall, it looks like Uber continues to grow faster than its biggest peer in the food delivery space despite the fact that DoorDash is purely focused on delivery while Uber is a conglomerate that is focused on many other types of services like rides and freight.
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Portfolio Update: June
I posted my thoughts on the month of June, along with some changes I have made to the portfolio in recent weeks. I continue to hold a sizable cash position (~20%). As cash comes in, I slowly reallocate to my strongest, highest conviction companies. However, I have stopped adding to a few positions, and have reduced the pace at which I am adding to a few more.

Slowing: $CFLT, $SHOP, $U

Stopped Adding: $GDRX, $SE

Check it out:

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Commonstock is a social network that amplifies the knowledge of the best investors, verified by actual track records for signal over noise. Community members can link their existing brokerage accounts and share their real time portfolio, performance and trades (by percent only, dollar amounts never shared). Commonstock is not a brokerage, but a social layer on top of existing brokerages helping to create more engaged and informed investors.