Sunday Finds + 3 Thoughts From Last Week
NVR Corporation and IDT
Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. Who is on the Mt. Rushmore of Buybacks?
This question sparked some interesting conversation:
I had three criteria for why I chose Autozone, NVR, and Swedish Match for my list:
Multiple decades of returning cash through buybacks
Shares outstanding down at least 50%
Clearly created value for long-term shareholders (all three of these companies are 100 baggers)
There were some interesting candidates that people threw out for the fourth spot. A lot of people liked Texas Instruments and Ally Financial, although I don’t think they would make my list unless they continue on this buyback pace for another decade.
Some people threw out Apple, whose management team has clearly created value since starting the buyback program in 2014. But they haven’t reduced shares outstanding by enough and bought back stock for a long enough time.
A good candidate is Fair Isaac Corporation (FICO scores). It started aggressively buying back stock right after 2000, has brought shares outstanding down by well over 50%, and is now a 100 bagger. I don’t think it is crazy to add FICO to the 4th spot.
Of course, there are some examples from further back in history like Teledyne. But I really wanted to focus on more modern companies.
2. TikTok’s Losses. Are They Subsidizing Other Companies?
There was a surprising report out from the WSJ this week about ByteDance, TikTok’s parent company:
TikTok parent ByteDance Ltd. saw its operating losses more than triple last year to above $7 billion as it spent heavily to continue its torrid growth, according to a financial report shared with employees that offers a rare look inside the private company’s closely guarded finances.
ByteDance’s revenue continues to expand, up nearly 80% to $61.7 billion in 2021, but so too are the company’s expenses as it focuses on growth. The Chinese company’s cost of sales came in at $27.4 billion for 2021, up 79% from the previous year. Among the factors offsetting its rapid revenue growth: $14.6 billion in research and development spending, $19.2 billion in selling and marketing expenses and $75.6 billion in market-value changes on a range of convertible securities. That was up more than 76% compared to 2020.
A few thoughts here. First, 80% revenue growth on that large of a base is incredible. Has any company ever achieved that? I don’t think so.
Second, how much of ByteDance’s operating expenses are fueling the profitability of other advertising-supported businesses in the West, and is that sustainable? $19.2 billion in marketing expenses is a lot. However, given its superb gross margins (subtracting out the cost of sales from the above paragraph), it could easily reach profitability at this current run-rate of advertising expenses. I wonder whether this number will grow, shrink, or stay the same over the next few years.
Third, we are all aware that the Beijing-headquartered company may not have profitability as its first priority. Is that a good thing for the other companies it spends advertising dollars with (like Facebook) or a bad thing? I really don’t know.
Overall, it is clear now that ByteDance is an important variable in the global economy. Where and how much it decides to spend its money could have major effects on the profitability of other companies.
3. The COVID Bubble Has Officially Roundtripped
I’ve decided to timestamp early October 2022 as the time we got back to normal in financial markets:
It is nice to see everyone acting a bit more rational these days, with a lot of the B.S. finally getting weeded out. On the other hand, it is sad to think about all the people who go swindled out of their money and will probably think stocks are a scam for the rest of their lives.
Is this survey a good buy indicator? Maybe. Looking at the above chart it seems like it would have worked to fade these survey respondents by buying in 2016, late 2018, early-to-mid 2020, and possibly now.
But I’ve always doubted the usefulness of contra-indicators. They can put your head in a pretzel. It is probably best to just focus on yourself and buy a stock when you think it is cheap, regardless of what other market participants are doing.
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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Catch up on Our Shows From Last Week
IDT Corporation: A Spinoff Machine (Ticker: IDT) With Rich Howe
Investing Power Hour #27: Succesful TWTR Arbitrage, POSH acquisition, Mt. Rushmore of Buybacks
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3 Good Reads
The Illusion of Corporate Governance “Best Practices” - Directors & Boards
Contrary to what good parents have long taught their children, it’s now acceptable in corporate governance to say “everyone else is doing it, you should too.” Advocates of so-called good governance urge companies to take specific actions because they “lag behind their peers” on some favored practice.
This is new. A generation ago, the norm in corporate governance was to recognize differences among companies — the need to tailor governance to fit needs, to shun cookie-cutter approaches. In recent years, however, the norm has veered to a universal expectation that all boards should follow identical guidelines, usually anointed as “best practices” or “gold standards.”
The Great Progression, 2025 - 2050 - The Big Think
This slow-moving, pro-progress story is being missed by most of the mainstream media chasing the minute-by-minute story of crisis and decline. Yet all the pieces of this positive story are now positioned to be catalyzed: There’s a loose pro-progress movement that’s emerging through different sectors of politics and the economy. There's a new way of thinking about how to move American society, the Western world, and the world at large ahead. There’s also an emerging majority of smart, decent, and practical Americans who are realigning and getting positioned to make rapid progress in the years ahead.
Engaging With History - Morgan Housel
What’s great about reading old writers is not necessarily the wisdom of what they said, but comparing what people believed then vs. what they believe today and seeing what overlaps.
Marcus Aurelius said, “We all love ourselves more than other people, but care more about their opinion than our own,” which to be honest sounds like something you’ll find written on an $11 IKEA poster today. Part of the value of reading an Aurelius quote like that is that he said it almost 2,000 years ago. Its age is the important part. If it was true then, and it’s true today, then it’s a fundamental part of how humans work and of course it’s going to be true for the rest of my life. So I should pay close attention to it.
1 Good Listen
One of the biggest drivers of inflation is rent. Arguably, it's the whole ballgame right now. If rent growth stays firm, it's hard to see inflation getting back to the Federal Reserve's intended target anytime soon. If it rolls over, then maybe that will allow the Fed to breathe a little bit easier. But signals about the future direction of rents are mixed. While the government data is red hot, various private surveys do show some easing. On this episode, we speak with Omair Sharif, the founder of Inflation Insights, who walks us through rent prices and how the numbers are gathered. He also discusses a key change coming to the measured price of healthcare that will likely be a significant drag on inflation in the year ahead.
Smart and Funny Tweets:
