Market Talk, September 12th 2021
September 12th, Edition 23
Market Talk is where I round up some of the data from public markets over the past week in a bitesize format.
Each Sunday I will share:
• The best pieces of company-related insights I have consumed over the week
• The greatest articles I have read during the week
• One stellar podcast or interview
Coming up this week, I will be sharing a research piece on PayPal on Monday, which will be followed in due course by reports discussing Lululemon, Square, Redfin, and Sea Limited.
In September, I will also be cracking into a soon-to-be public entity in the big data space, Clearwater Analytics. The firm filed its S-1 in late August.
As a side note, during the week I was conversing with several of the readers in the subscriber Discord which led to the ideation of a new segment for Investment Talk.
My recent issue ‘The History of the Frappuccino’ is a style of writing that I much enjoy. It allows me to be more creative and offers a refreshing slice of variety when compared to the typical equity-focused issues that I share each week.
However, that style of issue doesn’t currently fit into any of the segments I currently write about (company spotlight, market talk, equity research, personal writing, guest interviews).
As such, I have created the History of Business segment, which is where I will occasionally look back at founding stories and/or pivotal moments in a company’s lifecycle.
📈 Market Action 📉
Here are your quick updates from the past week for various asset classes.
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
Africa & Middle-East
🛢️ Commodities 🛢️
💷 Major Currencies 💷
FX rates are correct as of the time of publishing.
🔇 US Market Sentiment 🔇
Fear & Greed Index
The CNN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 34 down from 54 last week.
The CBOE VIX stands at 20.95, up from 16.41 the week before.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by Quartr.
🕵️ Company Insights 🕵️
Here, I will share a handful of interesting, company or industry-specific, pieces that I have read over the last week.
1) Peloton: Launching a Private Apparel Brand
Whilst apparel has always been a component of Peloton’s business model (albeit a fractional portion), the business announced this week that they will be launching a private label effort with a focus on higher-quality technical apparel.
The four newly tested fabrics described as “buttery-soft, everyday pieces”, can be found below.
I, for one, like the move. After having sold apparel since 2014, the gear has always been lower quality and targetted towards core Peloton users within the ecosystem. Taking a leaf out of Lululemon’s book, and attempting to appeal to the wider market with premium quality garments, including those who may not even use Peloton’s services, is a smart decision.
Technical apparel is a high margin business, and with the Tread rollout (lower margin hardware), the Bike price reduction, as well as the inflationary cost environment Peloton are under, apparel could offer some support there across a long term outlook.
However, it’s early doors (Peloton only sold ~$8M in apparel last quarter) so I don’t imagine that having any material influence in the interim. What is interesting, to me at least, is that when looking at Lululemon (who acquired Mirror, the connected fitness start-up in 2020), and Peloton (who are now leaning on technical apparel), we have two businesses potentially about to cross paths over the coming years.
In my mind, Lululemon is a leader in technical apparel, with a call option in connected fitness.
Peloton, on the other hand, are a leader in connected fitness, with a call option in apparel.
I guess it boils down to which industry you are most comfortable underwriting. Investors certainly rebounded their optimism, with shares climbing from $96 to $115 on the news.
If you have any comments as to whether or not you like this approach, feel free to leave them below.
2) OLO: Research and CEO Interview
Source: (Stock Market Nerd)
Brad Freeman, over at Stock Market Nerd, compiled this report during the week, which both dives into the fundamentals of Olo, the B2B SaaS company that develops digital ordering and delivery programs for restaurants, as well as including a short interview with the founder and CEO, Noah Glass.
A must-read for those interested in this business.
3) Facebook: RayBan Stories
This week, Facebook unveiled the long-awaited Rayban collab, which features stylish frames partnered with Facebook’s technology capabilities. The glasses, which are available in Wayfarer, Round, or Meteor frames, come with 5-megapixel camera-enabled frames that allow users to store up to 30 videos or 500 photos that remain encrypted on the glasses until uploaded to the companion app.
Users can also listen to music or podcasts and take calls through the open-ear speakers on the side of the frames. Fitted with an on/off button, as well as an LED light that shines during recording, Facebook appear to have met the privacy concerns which were likely to emerge after the launch of the glasses.
Retailing at $299, and catering to those who require prescription lenses, these glasses were not supposed to be related to Facebook’s AR project, and this was referenced way back in 2020. For consumers waiting for those, they will have to wait a little longer. Zuck did state back in Q4 FY20 that:
“In augmented reality, you're going to really need a pair of glasses that look like normal-looking glasses in order for that to hit a mainstream acceptance. And that, I think, is going to be one of the hardest technical challenges of the decade. It's basically fitting a supercomputer in the frame of glasses. So I'm -- I find not a very exciting problem to work on. And I think that once that's achievable, the potential on that is going to be quite big.”
So, this could be Facebook experimenting with the early iterations of how to incorporate a supercomputer into a socially acceptable pair of frames.
4) Apple: Epic Court Battle Breaks Apple’s In-App Purchase Curse
On Friday, Yvonne Gonzales-Rogers slammed down the gavel and issued a permanent injunction in the Epic vs Apple case, handing a major blow to Apple’s app store dominance.
The injunction, which is set to be effective in ~3 months, means that Apple are “permanently restrained and enjoined from prohibiting developers from including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and communicating with customers through points of contact obtained voluntarily from customers through account registration within the app”
In short, Apple can no longer forcibly ensure that developers use Apple’s payments system in their apps, and can now offer in-app links to alternative payments, allowing companies to bypass apple’s 30% commission.
Bad news for Apple, but great news for just about every business that operates an app within the Apple ecosystem that includes consumer payments.
For the user, using Apple’s payment method is still the most seamless transaction method in apps, so whilst investors see this as a win for developers, I am not certain how much the consumer cares about what payment method they use.
This WSJ article is paywalled, but outside of the paywall, it shares a useful 6M video on how Apple creates a walled garden within its app store.
5) Starbucks: The History of the Frappuccino
Source: (Investment Talk)
The history of the world’s most beloved coffee franchise, Starbucks, is a fascinating tale of entrepreneurialism and how one business can imprint a dynamic shift on consumer tastes across a nation, and eventually the rest of the world.
Moreover, it's also a tale that highlights the importance of remaining open-minded and avoiding the narrative of what isn’t broken, doesn’t require fixing.
I decided to write about this idea in this week’s Thursday issue of Investment Talk.
📰 Brain Food 📰
Here is a shortlist of a few interesting pieces that I have read over the course of the week, to feed your mind.
Note, these articles are not numerically listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) An Essay on Investing in Small Stocks
Length: Light Read
It had been a minute since Ian Cassel penned an essay on the MicroCapClub blog. I, for one, had been content trawling through the archives, but a fresh essay is always a pleasure to read.
In this essay, Cassel discusses the prerequisite factors that must be present before taking a position, the difficulty in holding winners and why that is so crucial to long term outperformance, and how his views have shifted over time. A must-read.
“When you find a winner, people will say you are wrong. When you hold a winner, people will say you are stupid. When you get rich from a winner, people will say you got lucky. You tell them you love being wrong, stupid, and lucky.
All my biggest regrets were selling winners too soon. The ones I sold for a 100% gain only to watch them go up another 1,000%. Those are the mistakes that haunt me. Nothing screws with your head more than watching something you used to own outperform the things you own.”
2) Betting on Change
Length: Light Read
Source: (Neckar’s Notes)
I do enjoy the way that Frederik over at Neckar’s Notes writes. In this short piece, he explores the concept of trying to understand change and why that can be so apparently difficult for people to do as they grow along with their lifespan.
This piece will get you thinking, and that is the kind of work I enjoy reading.
“Plus, the nature of innovation changes. Dan McMurtrie said “the nature of progress is ever more trivial nonsense.” As we move up Maslow’s pyramid to tackle ever more marginal problems, he said, signal and noise are getting difficult to tease apart, “because the things that are signal are getting dumber.”
This seems especially challenging inside bubbles when capital is abundant and a wide variety of experiments get funded. What if the future was right in front of you but it looked too silly to warrant much attention?”
3) Interview with Ho Nam of Altos Ventures
Length: Light Read
Source: (Liberty’s Highlights)
Liberty has a habit of creating special edition newsletters, outside of his typical format, and whenever he does they tend to be pretty great. This was no exception.
In the 6th edition of the spin-off segment, Liberty talks with Ho Nam, a co-founder of Altos Ventures, the VC firm.
“I might be delusional but I think it has become easier. Why? Because I feel less pressure to do deals or to perform. So I am more patient. Don’t feel a need to act. If something is not obvious or compelling, then I do not need take action. If it’s obvious, then almost by definition it’s easy.
That said, what I can never be sure about is the outcome. I may feel sure about my decision (with the info I have) but I have no idea what will be the outcome at the end. I am happy to accept what happens. And it’s more opportunity to learn if I get surprised.”
4) Psychology Behind Managing a 20-Bagger
Length: Light Read
Whilst not being an active trader of stocks myself, I do enjoy reading about the process. The folks over at MacroOps wrote this short piece on how return optimising from the point of view of a trader, specifically referencing DOTM option contracts (deep out of the money).
Similarly to those who prefer long term investing, it’s largely a factor of one’s personal needs, personality, and mentality.
“Taking profits sooner on large winners will pull performance forward in time, reduce account volatility and create a smoother equity curve. But it also sacrifices long-term return potential in the process.
Traders with true long-term capital and the psychological fortitude to ride out massive profit volatility should hold and press large winning trades because that will compound capital at the highest rate in the long run.”
🍬 Ear Candy 🍬
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
What Makes Internet Stocks Attractive? A Talk With Dennis Hong (ShawSpring)
Good Investing Talks
H/T to @buccocapital for putting this one on my radar. Here, Dennis Hong (of ShawSpring Partners) takes part in a lengthy interview with Tilman Versch where he lays out his own framework and investing process, as well as laying out the different mental models that the firm utilises on a daily basis.
The conversation is akin to a mini masterclass, with some hilarious discussions filtered throughout. I highly recommend it.
“I want to summarize my little talk again: We’re looking for 5 to 10 stocks and we can buy at a very high underwriting threshold. So, we’re looking for 30% IRR and here internally. We often say we’re looking at a five-x over three to five years. We’re only looking to do this within our universe. Our shopping lists, where the starting hypothesis is that these businesses exhibit ecosystem control or they’re very high-quality businesses. Within these 300 stocks on our watchlist, I think there are three different mental models that we have specialized in.
These are the marketplace business model, the vertically integrated business model and then the cognitive referral business model. All we’re looking to do is generate hall of fame returns on behalf of 15 to 20 partners. Full stop. We’re at nine partners today. We’re trying to boil down the number of variables in this multivariate problem. We call this the investment business. And that’s all we want to do.” - Dennis Hong
You can find the full transcript here.
Host: Tilman Versch
Guest: Dennis Hong
Thank you for reading Market Talk and have a great week,
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