Portfolio Changes Amidst the Selloff

Over the last month or so I have reduced outsized positions in winners Microsoft (MSFT), Pfizer (PFE), and Paychex (PAYX) from between 9% – 11% to about 6.5% each. I recently redeployed some of those proceeds to a new 4% position in Unilever (UL) after they abandoned their plan to relocate from London to the Netherlands as their sole headquarters. While their big emerging markets exposure is a short term negative, it should help in the long term as that is where the economic growth will be with growing middle classes seeking to improve their standard of living.

I’m not a huge fan of the consumer staples area as a whole because of the challenges they face from upstart brands marketing on social media and concierge brands like Costco (COST) and Amazon (AMZN), but I like the odds for Pepsico (PEP), Philip Morris (PM), and Unilever, as they still seem able to generate at least modest revenue growth. I hold all three.

I also sold my small AT&T (T) position after what I came to see as a nightmare earnings call on October 24th where it became clear to me that Randall Stephenson is a disaster as both a CEO and a capital allocator. All he does is over promise and under deliver. They are losing huge numbers of profitable subscribers to their DirecTV service while adding a declining number of subscribers to their vastly less profitable over the top streaming service. Tons of debt plus a hubristic CEO in denial at the deterioration of the business are not good omens. Stephenson seems like a guy who thinks he is a genius and is surrounded by yes men but is, as the English say, too clever by half. It is doubtful he can manage Warner Media as well as Jeff Bewkes. He is certainly not John Malone. Nor is he someone I trust as a steward of my capital.

As a replacement for AT&T, I chose Ventas (VTR), the senior housing REIT. This sector has been going through a tough time with low interest rates causing overbuilding by competitors. But a disciplined and experienced management team, an ongoing shakeout from higher interest rates causing less building, and the silver wave of Baby Boomers over the age of 75 coming over the next few years would seem to have them set to take advantage of an up cycle.

Current Watchlist to Put Additional Cash to Work

BlackRock (BLK) – Yields over 3% for first time in years. Likely to continue to benefit from the shift to passive investing and ETFs. 3.24% Forward Yield.

T. Rowe Price (TROW) – The class of the active money managers. Great culture and most of their business is from retirement plans. 2.98% Forward Yield.

Fastenal (FAST) – Good growth and execution, but higher costs and fallout from China tariffs and disruptions to manufacturing supply chains in North America carry potential for short term pain. 3.24% Forward Yield.

Texas Instruments (TXN) – Great management and capital allocation policy, but they are also likely to suffer from ongoing China tariffs and rethinking of supply chains, plus a slowdown in the auto market. 3.40% Forward Yield.

Visa (V) – Big winners in the world of digital payments along with Mastercard (MA). Making hay by partnering with upstarts, not competing with them. Forward Yield 0.73%.

See also:

Fed’s Restrictive Chatter Rattles Stocks – Dr. Ed’s Blog

AT&T Stumbles in Its First Quarter With Time Warner

AT&T Has More Worries Than Tepid Results

“It’s very difficult for companies to earn the same kind of ROEs on acquisitions that they can harvest from their existing operations. The sellers of the acquired company generally have a good idea of what it is worth — and they want to be compensated properly for the profitability and growth potential of their business. Instead of buying growth wholesale (the investment opportunities within a firm’s existing operations), acquisitions carry full retail prices.”
— Josh Peters

Global Warming Is a Real Problem, But The Left Is Wrong About a Solution

The latest IPCC report is the occasion for ever more wailing and gnashing of teeth in the media and on the left. If only they proposed a realistic solution.

Global warming is a real problem, but it is not a catastrophe that should cause authoritarian strictures on people to the point they can’t live full, productive and free lives, nor is it worth paying an infinite cost to remedy.

The leftist program of raising energy prices to the point of great pain is unrealistic and inhuman. It will not happen, because people will not accept the effect on their lives.

If there is a solution, it will be technological, not an attempt to turn back energy usage per person to the year 1900. The real zeitgeist behind the leftist program of deprivation is that mankind should pay a painful penance for their sins against Mother Earth. This is ridiculous. It should be looked at as a simple engineering problem to solve at an acceptable and lowest cost possible.

When the left starts to look at solutions through the lens of real world cost-benefit analysis, I will take their doomsday predictions more seriously. I won’t be holding my breath.

See also:

The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies – Bloomberg

Why China Is Growing More Belligerent – Barron’s

Lessons from Howard Marks’ New Book: “Mastering the Market Cycle – Getting the Odds on Your Side”

“What the pupil must learn, if he learns anything at all, is that the world will do most of the work for you, provided you cooperate with it by identifying how it really works and aligning with those realities. If we do not let the world teach us, it teaches us a lesson.”
— Joseph Tussman

That Was Quick: Musk Reverses Course & Settles With the SEC

Yesterday, the SEC announced Elon Musk and Tesla settled their securities fraud case based on his errant tweet of “funding secured.” I imagine Tesla stakeholders are glad to hear this news as Elon is allowed to remain CEO.

Two new independent directors are to be added to the board, Musk will be required to step down as Chairman for 3 years, and Tesla is creating new processes to vet Mr. Musk’s tweets before they go out. This is all to the good and is perhaps a sign that Elon is growing up a bit. A bit less pointless drama would be very welcome.

It would also be good if he would end his obsession with short-sellers and trying to “burn” them. Such distractions are harmful as they take away focus from his duties running Tesla. Make Tesla successful and cash flow positive and you will take care of that problem and be vindicated. As well, many stories of unhappy endings are there for CEOs of companies loudly focused on “getting the shorts.” Best to stick to your knitting and ignore the noise.

The next task should be finding someone to be COO — on the order of Steve Jobs finding Tim Cook. This would be good for the company and for Mr. Musk. Him burning himself out on operational details is in no one’s best interest. Happily for SpaceX, he has found himself such a person, so it shouldn’t be impossible.

Musk and Tesla: Bonfire of the Vanities

Yesterday’s revelation that Elon Musk has been sued by the SEC for securities fraud based on his errant “funding secured” tweet is a real bombshell. But what is truly damning about the story is that Musk had a deal on the table that let him and Tesla off the hook and he rejected it out of what can only be described as moral vanity. In my previous post outlining my admiration of Musk’s abilities and my trepidation at his managerial behavior, I identified a disconnect at the core of Tesla as an investment.

The fact that he had a very generous deal from the SEC and that he couldn’t bring himself to agree to it for the benefit of Tesla, its employees, its shareholders, and its customers just shows that nothing matters more to Elon than his own ego and sense of himself as never having made a mistake. This is very selfish and poor judgment that calls into question his mental stability.

He may escape this compound disaster of his own making, but in my mind he has further disqualified himself from being CEO of a public company. Either he cannot see that what he did was wrong, in which case he is delusional and should not be trusted in such a position, or he thinks he is above the law and his brilliance excuses his horrible temperament and behavior. In any case, I stand affirmed in my judgment that Elon Musk cannot and should not be trusted with my capital, particularly without some serious adult supervision. He is just too unreliable.

That his fanboys cultists are incapable of seeing his flaws and acting accordingly also brings into sharp relief their own poor judgment. Houdini may escape this trap, but he needs serious help, both psychological and operational. And he needs to be reined in. Those enabling and egging on his aberrant and destructive behavior are not doing him or his company any favors.

See also:

The Importance of Intangible Assets — Bill Nygren

Howard Mark’s Latest Memo: The Seven Worst Words in the World

Beware of Leveraged Loans as the Riskiest Lending Has Migrated to BDCs and Alternative Lenders: Caveat Emptor

U.S. Farm Sector Braces For Protracted Trade Fight

“Investing is the intersection of economics and psychology.”
— Seth Klarman

Sing a Song of Tesla: A Public Venture Capital Play

Tesla is best thought of as a public venture capital play with a visionary CEO who can’t be bothered with something small like managing the business for profits and cash flow. After all, he is in it to Change The World Through Innovation. His habits of over-promising and under-delivering plus his distaste for economic moats don’t bode well for the stock price in the long term. Not to mention his hostility toward analysts asking reasonable questions about the long term viability and funding needs of Tesla the business.

In the end, if it doesn’t generate cash, it’s not really a business. I see his chances of success by this metric at maybe 1 in 8. With his non-business attitudes he should be running a nonprofit with his own money. Luckily for him, there are plenty of sheep willing to give him seemingly unlimited funds with blind faith. Although if you look at your “investment” more as a donation with a call option attached, maybe it can provide psychic rewards no matter the financial outcome. And just maybe the lottery ticket will pay off.

Elon Musk is a brilliant guy and a visionary, although his genius doesn’t excuse him for continually issuing unrealistic guidance that is all but impossible to meet. What he has done with SpaceX is very cool. I hope he succeeds in his endeavors at Tesla. But he won’t do it with my capital.

See also:

Consumer Reports raises concerns over Tesla Model 3 braking

The Last Temptation of Elon Musk

The Information: Oracle’s aggressive cloud sales tactics push away customers

“The optimal payout ratio for a corporation is one that provides for a realistic rate of growth at a high return on equity, with the rest of profits returned to shareholders.”
— Josh Peters