Analysis

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Avoiding the hype

You can drive an electric car without buying $TSLA (Tesla Motors, Inc.) (P/e 1758.63)


You can be vegetarian/vegan without eating $BYND (Beyond Meat Inc.) (P/e N/a)


You can have a video call without using $ZM (Zoom Video Communications Inc) (P/e 244.14)


If consumer behaviour changes, it doesn't necessarily mean that everyone will flock to these companies. There are other options out there. Their sky high valuations are not justified. These companies are priced to perfection right now and everything has to go right for them. Everything.


I'm hearing a lot of "but this time it's different". It's not. In the short term markets can be irrational and hype & FOMO can drive prices. In the long term the price of a stock is based on the fundamentals of that business. If the fundamentals don't support the valuation then when the hype fades you'll see the price plummet. I witnessed a lot of this when I was a student during the dotcom bubble.


Rather than speculating on these high risk companies that promise to takeover an industry I invest of companies that actually dominate their markets. I invest in companies that are market leaders for a reason and will continue to be market leaders in the future.


I do not use leverage or take unnecessary risks with mine or my copiers capital because I know that over the long term I will make significant returns from my strategy - benefitting from investing in solid companies as well as enjoying compounding returns. I have been doing this for 17 years and will continue to do so for the rest of my investing career.


At times it may look like I'm missing out on the next great opportunity. I'm not. I'm avoiding the noise and the excess of the markets. Eventually my method will prove to be correct.


If you'd like to invest in my portfolio you can copy me for as little as $200. I invest for the long term (at least 3 to 5 years) and so to get the best copy experience you should invest with a long term view too (although, of course you don't have to). Each addition to the portfolio is made with the whole portfolio in mind and so you should copy my open trades - don't worry if I'm already up 49.5% on $AAPL (Apple) or 40.5% on $AHT.L (Ashtead Group) because if they're in my portfolio I believe they'll go higher. Finally, don't be concerned if there are unfamiliar names in my portfolio - I conduct very thorough, independent research and so you can be assured that I know as much detail as possible about every company I invest in.


Best wishes


William

Nike (NKE)

Nike reported the second quarter results for 2021 after the market close today 18th December 2020.


  • Revenue $11.2B up 9% year on year or 7% on a currency neutral basis & beating consensus expectations by $730m

  • Diluted EPS $0.78 smashing expectations of $0.62

  • Gross margin of 43.1% beating estimates of 42.8%

  • Nike Direct sales of $4.3B up 32% on a reported basis & double digit growth seen across all geographies.

  • Strong inventory control with inventories declining 2% versus prior year

  • Digital growth of 84% offsetting the lower revenue in wholesale and Nike owned stores.

  • More than 90% of stores operating today under the restrictions of the pandemic.


Management have delivered an excellent set of results under very challenging conditions globally. They have kept tight control on inventory management which can't have been easy during 2020 where many of the retail stores faced temporary closure. The effect of the pandemic has been a rapid growth in their digital sales, an area where Nike are able to keep a greater share of their profits.


Management have also worked hard to strengthen the balance sheet. Share repurchases were cancelled during the fourth quarter of 2020 to maximise liquidity. The dividend was not sacrificed, however. In fact, Nike recently increased their dividend by 12.2%. Nike now has $11.8B in cash & equivalents and short term investments - an increase of $8.3B or 237% compared to last year.


On a quarterly basis, sales have increased year over year across every region they operate in led by China with a 24% increase in revenue.


Nike may be a stalwart of their industry but, as their investor relations page points out, Nike is a growth company.


I have been an investor in Nike since 2006 when the shares were changing hands for $12. At the time of writing, the shares are trading at $143.50 in after hours trading.


William Bishop

18th December 2020


Disclosure: At the time of writing I hold shares of Nike (NKE) in my eToro portfolio.

Domino's Pizza Inc (DPZ)

Domino's Pizza released their 3Q earnings before the market open on 8th October 2020.


Global retail sales (excluding currency impact) up 14.8%

US same store sales growth of 17.5%

International same stores sales growth of 6.2%

Revenue of $967.7m, up 17.9% and beats estimates of $954.9m

Diluted EPS up 21.5% to $2.49 but misses estimates of $2.73

The company have demonstrated their resiliency to the COVID-19 pandemic. During the recent quarter, Domino's has been able to reduce the number of stores temporarily closed. From a total store count of 17,256, there are now fewer than 300 stores temporarily closed.

The company has responded innovatively to the pandemic by introducing touchless delivery while also rolling out a program of delivering to non-traditional public spaces such as beaches and parks.

I believe history is repeating itself with Domino's Pizza. During the credit crunch of 2008, restaurant spending declined. However, the belt tightening of consumers only stretched so far - in general they did not want to spend large amounts on restaurant meals but they still wanted premium quality from their takeaway. Because of this, Domino's Pizza were able to increase their earnings during that recession. The cause of change in consumer behaviour during this pandemic is obviously different to the credit crunch but the takeaway from it (pun intended) is that customers still want quality and if they're not at the restaurants they'll order premium takeaways.

The company finished the quarter with 83 more stores. Currently less than 1.7% of their total estate is temporarily closed. The company generated free cash flow of $319,236,000 during the quarter. The net cash from operations covered their capital expenditure by 7.2x.

The increased cost of COVID-19 precautions has weighed on the Q3 EPS figure. Another negative factor was the increased interest payments incurred this quarter due to the higher average debt levels. These are both temporary headwinds.

While the company's EPS figure rose by 21.5%, it missed the lofty expectations of analysts. The reaction to this has been negative and at the time of writing the shares are down 4.42% in the premarket.

The conclusion I draw from this is that the EPS miss does not tell the full story here. As I have learned from history, $DPZ are able to thrive during market adversity. I believe any subsequent fall in the share price only provides an opportunity to buy this exceptional company at any even more attractive price.


William Bishop

8th October 2020


Discloure: At the time of writing I hold shares of Domino's Pizza Inc (DPZ) in my eToro portfolio.