Buys: $PYPL $TTD $UPST $NET $TWLO

Sells: None

I was on vacation most of the month, but made a few recent adds. Eyeing up some $MELI in the low 600's here.

YTD return: -42.2%

*can't link portfolio on CS currently due to not being in US.

Is it just me, or has it become mainstream to slam central bankers? It seems like everywhere I turn, people are bashing the monetary policy.

Someone wanna tell me when PayPal is done being taken to the slaughterhouse. I mean cmon the takes I’m seeing everywhere is crazy. People acting like they going outta business. Venmo is still a top app and they aren’t done investing in themselves and growing. $PYPL

In September 1995, legendary fund manager Peter Lynch wrote an article (“Fear of Crashing”) where he addressed the two questions that people ask incessantly during every bull market: Is a sell-off on the horizon? And if there is, what should I do about it? This was Lynch’s primary takeaway:

“The Dow’s passing 4,700 has brought new worries about a nasty correction. The worrying started as soon as we recovered from the last nasty correction, in 1990… Let me go on record with [my] prediction: Another big correction is on the way… Assuming you agree with my forecast, how can we prepare? Mostly by doing nothing. This is where a market calamity is different from a meteorological calamity. Since we’ve learned to take action to protect ourselves from snowstorms and hurricanes, it’s only natural that we would try to prepare ourselves for corrections, even though this is one case where being prepared like a Boy Scout can be ruinous. Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Lynch’s discussion feels timely. Much like in the 1990’s, we’ve lived through an enjoyable and extended run for equity investors; but with heightened market volatility over the past 6-12 months (a fancy way of saying “stocks have gone down”), there’s great angst that the party is finally over. With a seemingly endless list of macroeconomic and geopolitical concerns, market participants are now questioning whether stocks will trade even lower in the coming quarters. (The one difference between when Lynch addressed this question back in 1995 and today is that, in our case, the “crashing” has already begun.) The key question asked in “Fear of Crashing” seems applicable: for long-term investors, how can we intelligently navigate difficult stock market environments – particularly at a time when many have concluded that even more severe macroeconomic headwinds lie ahead?

The first response most people have is a desire to do something; the problem, as Lynch explains, is that most of the prescribed solutions (when “something” is translated into concrete decision-making) are just a variation of market timing – an activity that has proven time and time again to be a net negative for the vast majority of people who engage in it. (“Recently, Forbes published its hit parade of the richest people in the world, and I was reminded that there's never been a market timer on the list. If it were truly possible to predict corrections, you'd think somebody would’ve made billions doing it.”)

If you take that answer off the table, what are we left with? While I agree with Lynch that there’s not much to be done once you’re in the storm, I do think there’s a lot of value in preparing for these tough times before they arrive.

First and foremost, we need to start with a discussion on asset allocation.

As discussed in “Mo’ Money, Mo’ Problems”, I personally advocate for a structural asset allocation. Determining the proper allocation is a financial planning decision that is reflective of one’s personal financial situation (age, income level, expected contribution / withdrawal rate over the next 5-10 years, etc.), as well as your ability and willingness to bear risk. In my mind, the outcome from that exercise should drive all future asset allocation changes (through periodic rebalancing). Naturally, during a period where equities are generating mid-teens annualized returns, as they did in the decade through year-end 2021, that would mean you are a net seller of stocks. On the flip side of the coin, when we go through a period like the past six months, you will be allocating additional dollars to stocks. This is a simple, yet effective, approach for navigating volatility over the long run. By the way, there is a market timing component as part of this strategy (on the margin); the difference is that the decision isn’t at the discretion of the individual – it’s dictated by the “rules” of the allocation, which pushes you to be “fearful when others are greedy and greedy when others are fearful”.

As a byproduct of a structural asset allocation, security selection within a given asset class is an exercise in opportunity costs; personally, I’ve found this acts as a forcing function that leads to more thoughtful and deliberate decision-making. With a structural allocation, you can’t just buy ABC because it’s cheap or sell XYZ because it’s expensive; the need for funding (to buy a new stock) or reallocation (after selling a current position) within a given asset class frames the decision through a different lens (as Sid Cottle once said, investing is “the discipline of relative selection”). In summary, I view a structural allocation as the least bad alternative – and unless you’re willing to engage in market timing, which I’m not, it’s effectively your only option.

On individual security selection, my North Star is unchanged: the goal is to own high-quality businesses with sustainable competitive advantages operating in attractive end markets with strong balance sheets and best-in-class management teams, in addition to ensuring the equity trades at a reasonable valuation (likely to deliver attractive long-term returns). The one asterisk I’d include, as discussed in “Volatility and Portfolio Construction”, relates to diversification: while I’ll always remain cognizant of the standalone merits of an investment, with the goal of owning large positions priced for attractive forward returns, that isn’t my sole focus. The companies I’ve invested in, along with their weightings, will be considered in the context of the overall portfolio. A notable current example is Dollar General, which I’d expect to continue reporting strong underlying business results if the U.S. economy faced short-term macro headwinds. It may not offer expected IRR’s that rival my favorite ideas, but it’s additive to the portfolio on other attributes (counter cyclicality); that’s played out as expected as of late, with DG outperforming the S&P 500 by ~2,500 basis points year to date.

The solution I’ve outlined above isn’t a bear market playbook; it’s the framework that I look to employ across all market environments.

What this will hopefully position me to do, regardless of whether the S&P 500 is making record highs or is down 30%, is to ensure that the next decision I make is both thoughtful / unemotional and consistent with my investment philosophy and long-term portfolio objectives. Admittedly, even when starting from a strong foundation, that’s still difficult to do. Currently, I’m uninterested in selling names like Meta, Spotify, or Netflix (which are all down 40%+ YTD). On the other hand, I continue to believe I should be very thoughtful about pulling capital from companies like DG, Markel, or Berkshire, which provide the diversification benefits discussed above (but also look more expensive on a relative basis), to keep reallocating to the other names in the portfolio. It’s a conundrum for which I do not have a great solution.

As with many things in investing, there isn’t a one-size-fits-all answer to these questions. I think the most important thing that an investor can do is to ensure they’ve implemented an approach that will allow them to remain committed to a thoughtful, long-term investment strategy regardless of what the economy and / or Mr. Market throws at you over next three months (or three years).

For me, a concentrated portfolio consisting of a few high-quality companies that I believe are positioned to weather any storm and meaningfully increase their per share intrinsic value over the next 5-10 years passes that test.

The unease that overcomes many investors when experiencing a difficult market environment reflects an inability to honestly answer that question (to find an approach that they’re committed to throughout a full market cycle). The shock and fear that they feel - and react to - as a result of stock price and business volatility is simply at odds with any reasonable idea of what it truly means to be a long-term investor. As a result, they ultimately live and die by the daily swings of stock prices, not their own independent assessment of the long-term value of a business. (“I’m amazed how many people own stocks where they wouldn’t be able to tell you why they own it… If you really pressed them, they’d say ‘this suckers going up’, and that’s the only reason they own it.”) To paraphrase John Maynard Keynes, these people are speculating (“forecasting the psychology of the market”), not investing (“the activity of forecasting the prospective yield of assets over their whole life”).

Risk management, as I define it, is ensuring that investment decisions are made in consideration of one’s ability and willingness to bear risk. With stocks, that means accepting the uncertainty of sizable and long-lasting drawdowns. As Lynch noted, one’s ability to bear risk is inextricably linked to their time horizon (by the way, since “Fear of Crashing” was published, the S&P 500 and the Dow have both more than sextupled, before dividends):

“In telling you this, I'm assuming you're in stocks for the long haul. Never invest money in stocks if you are going to need it for some other purpose in the foreseeable future. Twenty years is a reasonable horizon for investing… As soon as you realize you can afford to wait out any correction, the calamity also becomes an opportunity to pick up bargains.”

The key question to answer in this bear market, and the ones that will undoubtedly follow it in the decades ahead, is whether you’re truly a long-term investor; can you accept the fact that stocks will periodically decline by 20%, 30%, or more? If you can, the answer is to structure your portfolio accordingly (to survive whatever tomorrow brings). And when those tough times inevitably arise, it’s worthwhile to remind yourself that the good times will come again. This too shall pass. (“Over the 13 years I ran Magellan, the market went down nine times by 10% or more. Every time it went down, the fund went down more. So, I just didn't worry about it.”)

But if you simply cannot accept the vicissitudes of the stock market, I only see one effective solution: you should greatly limit your equity exposure, if you own any stocks at all. This current bout of volatility will offer an important lesson for another class of Mr. Market’s “students”: if you don’t come to that conclusion on your own, he will happily teach it to you.

My new substack on why deflation is the real bogey man that no one is looking at.

TikTok got huge in no time. It kind of kills the whole Facebook-is-a-monopoly agenda by US & EU regulators. They should focus their attention on China-sponsored data harvesting apps instead.

$META $GOOGL $TWTR $SNAP

The theme of cloud repatriation has been getting some attention lately. While this has implications for software infrastructure companies, the effect will be varied. Mega-retailer Walmart has been on a journey over the last few years to modernize their technology stack. Their CTO unveiled another milestone in its cloud platform journey last week. They now claim to run one of the largest hybrid clouds in existence. This provides us with a good example of a company choosing to run some part of their cloud infrastructure themselves.

For their latest milestone, the CTO introduced Walmart's "Triplet Model", which represents three regional cloud deployments (West, Central, East) connected to 10,000 edge cloud nodes located in their facilities. This model brings computational power and data closer to customers and associates, resulting in better application performance and low latency. It also offers additional capacity for periods of peak consumer demand. Finally, Walmart claims they were able to reduce cloud costs by 10-18% annually using this model.

Within the Triplet Model, Walmart can deploy applications to both public and private clouds and seamlessly redirect traffic between them. This is enabled by an intelligent routing layer called Traffic Management, an open source cloud management platform called OneOps and the Walmart Cloud Native Platform (WCNP), which provides a cloud abstraction layer. WCNP currently manages a huge deployment of 545k pods on over 93k nodes.

Walmart's modernization initiative was introduced in February 2020 during their Investment Community Meeting by the CEO and CTO. Walmart leadership acknowledged that the cloud was becoming central to a modern software operation, but they didn't want to just "lift and shift" all of their existing applications to the cloud. Rather, they preferred to take advantage of what the cloud has to offer. They liked the idea of making all their applications cloud native, but maintain a control plane that determines where the applications actually run. The runtimes are distributed between three hosting models:

Walmart anticipates three operational advantages to this model:

A question often raised by investors is whether this kind of use of hybrid cloud with a large private data center component represents a risk to software infrastructure companies. Like anything, it depends, and can't be treated with a blanket assumption that it reduces demand. The distinction lies in the layer of the software stack and how much commoditization exists there. Also, the level of difficulty in running that software layer internally versus outsourcing the operation to system experts is a consideration. Let's break this down into some examples.

First, I think that the lower in the software infrastructure stack a component exists, the easier it would be to duplicate in a private data center. This encompasses infrastructure like the physical space, server hardware, network connectivity, operating systems and storage. At a large size, Walmart should be able to duplicate the compute, raw storage and network capabilities in their private data centers that could be provisioned from the public cloud providers. OpenStack helps Walmart with this.

For the layers higher in the software stack, like application servers, message systems, search indexes, caching and databases, the enterprise will likely choose an open source package, perhaps nginx, node.js, RabbitMQ, PostgreSQL, Elasticsearch, Kafka, Redis, etc. Where a commercial offering exists with a paid enterprise version that provides incrementally better functionality than the open source community version, the enterprise will likely license that for their private data centers. Examples of software services that have both a commercial and open source community option (incidentally usually maintained by the same company) are MongoDB, Confluent, Elastic, Redis Labs, etc.

For these components, the deployment in a private data center doesn't represent much impact. The enterprise would still be inclined to license a commercial version of the open source software package and install it in their data center. They will also likely purchase some sort of support contract, so that they have access to the expertise of the commercial vendor and project maintainer. This is the same decision whether they use a public or private cloud. Additionally, the same open source packages generally offer a cloud-hosted version of their software on the major public cloud providers. Since the programming interface is the same, the enterprise doesn't need to make any changes to their application in order to use either self-hosted or public cloud-hosted configurations.

For external services that the enterprise chooses not to duplicate themselves, the deployment in a hybrid model would have little to no impact. This applies to externally managed software services that would not have a self-hosted model and sit outside the data center by default. Examples of these types of services are observability (Datadog), CPaaS (Twilio), endpoint security (Crowdstrike), identity (Okta), CDN/DDOS (Cloudflare), ITSM (ServiceNow). Unless the enterprise is planning to shift this functionality to some in-house solution (whether through open source or their own custom software), these providers would experience minimal impact by a hybrid model. For Walmart's use of stores as edge locations, that is somewhat unique to their use case. In a general sense, it promotes the advantages of deploying applications to the edge, benefiting edge compute providers.

Finally, Walmart recognizes the special case that large data processing and AI/ML represent. They are willing to outsource that function, acknowledging that it would be very costly and complex to duplicate in their own private data center.

All in all, the example from Walmart is instructive for investors because it provides a concrete example of a major enterprise's cloud journey and where they expect to gain operational leverage. Aside from the low-level software infrastructure services (like compute, storage and network), an enterprise's choice to run some or even most of their application workloads on their private data centers does not automatically result in less utilization of commercial software infrastructure packages and services. That utilization would likely remain comparable to a full deployment on the public clouds. Savings realized from running their own compute, storage and network hardware might even be redeployed into new high-value digital initiatives like new customer applications, more automation or better harnessing of big data through analytics and machine learning.

https://commonstock.com/post/1f26bbc9-5570-476b-822b-2175531964ac by @investmenttalk

Pretty much any asset you buy is a form of market timing. For example, if you are buying a value tilted ETF such as $AVUV, you are timing that value will out perform the market in the future time period you will be owning $AVUV. This same principle goes for most secruities. If you buy $META, you are timing that $META will out perform the market in the time period you hold Meta for.

Since we all know how hard market timing is, why not just dollar cost average DCA into $VOO (or equivalent S&P500, total market, total international index fund)?

In the past year Value has outperformed the market

In the past 5 years Growth has outperformed the market

However, you can see in both time periods the market will always be right smack in the middle. Of course, if you invested in growth you would have been lucky and considered yourself a great market timer (until this year), and vice versa if you bought value this year.

My point is don't rely on luck. Just buy the market!

Thought I was gonna get to shill CHIPS Act and semiconductor education/training incentives, instead talked $MU and Auto.

Personal Top 10 Holdings

As of June 30th, 2022

Top 10 Positions: 66.4%

Cash Position: 9.1%

Rest of Portfolio: 24.5%

So in my initial post I mentioned that my current process is dca on payday (well, I at least deposit on payday lol). It had been a busy week, so I didn't get to buy much until today, which turned out to be a good thing with how crappy the week has been in the market!

I suppose an argument can be made for making larger bets in fewer companies, but considering that I'm holding bags in a lot of my positions, I like to spread the wealth lol.

I have not seen any posts here on $SAIA, so I'm looking forward to sharing my thesis there, and I'm excited to add them to my buy list! They have similar historic returns as $ODFL, without the dividend or the size, but I like what I've read so far and will try to share in a separate post.

Comment below if you have questions or opinions (especially bearish ones) on any of these, I love hearing the other side of the argument and who knows, you may be right and may save me some money 🤣

$PLTR $LOVE $SAIA $GFL $AVLR $DOCN

$NVDA $AMD

This company doesn't get the attention it deserves.

Growth with a nice dividend yield.

Is it the best semi stock in 2022?

Why we care: Nearly all (90%) shoppers have a favorable or somewhat favorable view of products labeled “Made in the USA,” per Kelley Drye & Warren, meaning that moving production to the US makes good marketing sense.

But perhaps more importantly, moving manufacturing closer to home helps strengthen the supply chain at a crucial time when both retailers and consumers are being hit with unpredictability and inflation.

This is section one of Tomorrow's News of the Week Post. Thought I'd give Commonstock a lil sneak peak! I'll link the trade when it gets entered.

This week, I started a position in Lululemon and it will be the topic of my next deep dive after PayPal is published. For this issue, I wanted to provide a condensed (I promise) view of what I see in the company that excites me as well as my path for building the position. For my Shopify overview, there was pushback for how long it turned out to be. I’m going to do my absolute best to keep this overview short, sweet and still packed with information.

Lululemon is an athleisure apparel company with roots in Canada. The vast majority of its sales come from direct to consumer e-commerce and owned-stores which both serve up key company benefits for the firm such as holistic access to its 1st party user data to help guide product releases. In my now biased view, Lulu has a chance to join Nike and Adidas in terms of ubiquitous global clout and presence. And while there’s a several years-long way to go to get there, it’s that process playing out which would provide immense potential shareholder value.

I view this company as a high probability 15% revenue compounder for the long term -- which is where its team has guided revenue growth for the period 2021-2026. In 2018, Lulu offered long term 5-year targets that it eclipsed ahead of schedule across the board by several quarters to give an idea of its ability to overdeliver. And the runway is quite long. Lulu estimates its total global addressable market opportunity at $650 billion with its 2021 annual revenue representing around 1% of that. Since 2019, it has shown a keen ability to take more incremental market share within adult active apparel than any other company. So the opportunity is immense and Lulu has taken advantage since its inception.

The Canadian firm has broad unaided brand awareness across North America, but carries very little clout internationally. Still, it has compounded international sales comfortably above 30% for the last several years with roughly 30% annualized growth expected to continue through 2026 as it gains brisk traction. There’s a large cohort of customers especially in Europe and China that should naturally be drawn to a brand like this -- so far, so good with much more work to be done.

In terms of margins, performance here has been largely positive as well. The company’s selling channels are inherently higher-margin than wholesale endeavors, and so it boasts a lofty gross margin for a retailer. Specifically, this metric eclipsed 58% during the heat of pandemic tailwinds but has since cooled back off towards 53% -- still strong and better than most in its space. Just 11% of its sales are via “other” vectors which include lower margin wholesale.

Since Lulu’s 2018 analyst day where it offered the targets it easily beat, the company has compounded earnings and revenue at 27% and 24% respectively. As a result, margins have gone up with operating margin specifically reaching a robust 22% -- and expansion is expected to continue through 2026. Interestingly, the company’s owned stores boast its best margins out of any selling channel as its complete vertical integration allows it to command a larger chunk of the profit pie. These owned stores possess an operating margin pushing 26%, and as brick and mortar shopping returns, that could push unit economics higher with owned-stores becoming a larger chunk of total sales. Impressively, comparable store sales soared 24% YoY last quarter on the heels of some difficult comps with store productivity re-surpassing pre-pandemic levels. That was wildly impressive to me especially considering it’s despite China -- representing 15% of its total stores -- shuttered during the period.

Furthermore, in-store and e-commerce shopping both effectively raise a customer’s engagement with the other Lulu selling avenue. For example, its e-commerce conversion rate has risen 10% over the last few years with credit given to its omni-channel proliferation. This engagement juicing also comes without more customer acquisition cost making it an inherent margin tailwind as well. I’d just like to point out here that Lulu’s margins are already comparatively excellent. There may be a tad more margin expansion to come, but it will be subtle and that’s entirely fine with me as long as compression doesn’t become an issue.

In terms of capitalization, the balance sheet is a strength for Lululemon. It has $1.3 billion in cash with another $400 million in current liquid assets plus zero debt. It bought back $813 million, or a little over 2%, of its shares in 2021 which represents a doubling pace vs. the previous 3 years. It’s leaning in here as its stock gets shellacked.

The company’s founder is no longer involved with Lululemon and has a somewhat colorful history. I’ll cover that in the deep dive but for the sake of brevity will focus on current leaders here.

Hiring Trends Via LinkedIn

The main risk for Lululemon is shorter term macroeconomic volatility. Today’s economic cocktail of record low consumer confidence, generational high inflation and tanking savings rates will all inevitably weigh on discretionary spending. For a firm like this one which caters to a generally affluent shopper, it will be somewhat insulated from this pain, but certainly not immune. Macro creating more fragile customers also could present another possible issue: Shoppers flocking to cheaper brands. There are countless companies playing in Lulu’s space and most come at a lower price point. So as wallets are stretched, those fringe customers who can just afford a Lulu shirt may gravitate to a Gymshark shirt at half the price. I think Lulu’s superior quality will allow them to be somewhat resistant to that phenomenon, but we’ll see.

We also must consider hectic supply chains as a risk for retailers most effectively matching supply and demand. Many of the largest have struggled to do so, but Lululemon’s vertical integration surely provides timely support here. Again, it’s resistant here, but not immune.

This team has also not done all that well with M&A. The MIRROR acquisition could very well eventually be written all the way down as it jumped into a faddish trend at the heat of the pandemic. Thank goodness it didn’t try to buy Peloton. I still think MIRROR can enhance Lulu’s overall omni-channel value proposition but this deal is not off to a great start and it surely overpaid when playing Monday Morning Quarterback with the luxury of hindsight.

Finally, athleisure got a somewhat large boost from stay-at-home orders. No longer did employees have to wear a suit to work, and many embraced Lulu’s apparel niche as a result. Was that the reason it was able to reach its long term targets so soon? Or will the momentum be more sustainable than that? Work from home is not totally going away and Lulu had been compounding long before Covid-19 entered society’s vocabulary -- so I’m optimistic, but time will tell.

At 26.8X NTM earnings, Lulu trades right at its 5-year earnings multiple average of 27X. At these prices, I think a few things are true. The deal is compelling enough to start a position and there could also very well be more downside ahead. Specifically, 21X forward earnings looks like it will offer Lulu’s stock with significant support and I’ll use the 21X to 27X multiple range as a guide to filling out my position. With this in mind, I started VERY small with just 18% of a full position. It’s always a marathon and never a sprint, but today that may be even more true.

Furthermore, the earnings estimates for Lulu and public companies could be coming down over the year as the economy weakens. I would point out that Lulu has a wonderfully consistent track record of beat and raise, just boosted its own estimates last month and has seen analyst estimates rise accordingly, but these are unprecedented times.

Based on my preliminary research into the company and historical results, I think the following 5 scenarios encapsulate where Lulu could be in the next 5 years. I would point out that estimates like these include several rough projections making accuracy a rarity. Please take this with a large grain of salt. Results could surely vary and I do try to lean pessimistic whenever possible when building these models.

If you'd like all of my content sent to your inbox for free, you can subscribe below.