“L’Oreal is a really great business, one of my favourite models. The Dollar share price might not have done that well, i.e. this is a case where the company has delivered and there have been certain currency issues that have weighed (and shareholder issues too), we think that the long term thesis remains intact.”
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To market to market to buy a fat pig US rates heading higher in December has gone to 94 percent, i.e. the market implied Fed rate hike probability has risen to that level. Part of the reason was a couple of solid economic reads yesterday, most noticeably the US retail sales release. Over the years I have become conditioned to seeing the trend rather than the number at face value. Those with short term time frames hang on the exact number, consensus and what the actual read is. That seems like a lot more like coin flipping than trying to be more consistent in the medium to long term.
Medium to long term is also different for different individuals. I speak to clients who are 30, some are more than double that age (and then some), we all have the same objectives in the end. To earn consistent long term returns. At a certain percentage is almost impossible, in other words a range of 7-12 percent year in, year out is more realistic. Ironically one of the biggest swindles of the last generation (and possibly before that) was the Bernie Madoff consistent returns.
It took a committed individual, Harry Markopolos, who blew the whistle over and over again to crack Madoff’s mystically consistent returns. Read the book if you are looking for a real life financial thriller – No One Would Listen: A True Financial Thriller. Forensic investigators can earn good money out of doing this, even internal whistleblowers can earn tens of millions of Dollars working with the authorities. In the end, Markopolos said he gained little satisfaction out of the exposure, he did however feel vindicated that he had stuck to it (and skewered) the SEC.
OK, that is a million miles away from the volatility of equity portfolios. As that wise fellow from Omaha, Warren Buffett, suggests, you shouldn’t be in equity markets if you cannot bear the thought of (on paper) losing half of your capital. You should also own something on the basis that if the market closed for five years tomorrow, you would still own it on the other side, when the market eventually opened. The market and the company are related, they are not one and the same. Miss-pricing by your metrics today does not necessarily mean that you are right or wrong, lots of humble pie and crow maybe eaten in getting to real pudding. The actual meaning of that phrase the proof of the pudding is in the eating comes from multiple sources.
Quick markets scoreboard, we can go on and on forever on this topic. I saw legendary investor (and beater of the S&P 500 for over a decade and a half, in a row) Bill Miller yesterday on the box, he was getting excited about the prospects for some heavyweight technology stocks, such as Amazon and Alphabet. Miller once said that he knew he was wrong when he could no longer get a quote. Meaning when the bids and offers dried up or when the exchange suspended the trading in specific shares of a business. That was when he knew he was wrong. Talking his own book – Value investor Bill Miller says 35-year-old bond bull market is over, stocks should benefit.
Stocks over the seas and far away, in New York, New York, rallied once again, the Dow Jones closed at another record high (up nearly three-tenths of a percent), now just an average day away from 19 thousand. Here it is sports lovers, a whisker away. The broader market S&P rallied three-quarters of a percent on the day, led by big gains in technology names, the same ones that have taken some heat post the Trump shock. The nerds of NASDAQ rallied 1.1 percent, Alphabet up 3 and a smidgen percent, Amazon up over three and one-third, Microsoft up nearly two percent. Apple up one and one-third of a percent. Commodity and Materials stocks sold off heavily across the globe, oil prices added some relief for energy stocks.
That Trump shock is now a week old. If you are looking for some brilliant insight, then the level headed Howard Marks and his brilliant analysis is available on Barron’s here -> Howard Marks on Trump, the Election and Markets. Better still however, it is available for “free” (It cost him loads of time, which is money) on his website -> Latest memo from Howard Marks: Go Figure!. Perhaps I can copy and paste a snippet from this fine piece:
“Here’s what CBS reports one astute observer to have said about this arrangement in 2012:
“The phoney [sic] electoral college made a laughing stock out of our nation. The loser one!
He lost the popular vote by a lot and won the election. We should have a revolution in this country!”
That observer was Donald Trump, responding erroneously to Obama’s 2012 reelection (Obama actually won the popular vote). For some odd reason, those tweets have now been taken down.”
For the record, Clinton (and Obama) won the popular vote. So either way the man with big hair is WRONG. As we have said before, several times, what has happened has happened. Ironically what has transpired post the elections has probably confounded most market pundits, whom themselves have been WRONG. Marks, the man who holds capitalism so close to his heart, near and dear, has more good ideas than most. And to think that Marks and Marx sound the same, yet represent so many different things. One represents utopian theory that doesn’t work in practice (like ever) and the other is tough realism that does not work for many.
Locally markets were a deep mixed bag in Jozi, Jozi. Financials and retailers were having a good old day, industrials were having a mixed old day, commodities were having a horrible no good day. The iron ore price was trashed by nearly nine percent, the price gained over 25 percent last week. Yes, you read that right. So whilst some of the commodity stocks took heat yesterday, their return to good fortune defies speech really. After all was said and done, the Jozi all share closed down 0.61 percent, in another wild day where we were up initially, and then slipped away by the end. The Rand has also gained more ground from the sell off.
There were some new 12 month lows for Lewis, Mr. Price (which recovered off the worst levels), as well as AB InBev (part currency). Bond rate yields fell, which is a good thing, right? The less interest you pay as a country, the more money to go around for spending on projects that really matter. Loads of results still to cover, we will get there slowly over the coming weeks. Most exciting today is the release of the TenCent numbers, which will have a big impact on Naspers. Revenue for Tencent is likely to be around 48 percent higher, according to the WSJ – Tencent Earnings: What to Watch. Late morning, I think normally around 11am our time is when the results are released.
L’Oreal is a really great business, one of my favourite models. The Dollar share price might not have done that well, i.e. this is a case where the company has delivered and there have been certain currency issues that have weighed (and shareholder issues too), we think that the long term thesis remains intact. The group is certainly very focused on developed markets, namely Europe (around 1/3 of sales) and North America (just over one-quarter) and then the various other emerging markets, Asia Pacific accounting for 22.5 percent of sales.
In terms of their various product mix, it is skincare at nearly 30 percent, make-up at nearly one-quarter of all sales and then haircare (shampoo and conditioner) at nearly 20 percent that makes the bulk of the sales. Hair colouring (I could use some, looking a little grey at the edges) accounts for around one-eighth of all sales. E-commerce is a growing segment, yet only accounts for a little over five percent of all sales. In China that number jumps to 20 percent plus of total sales. I suppose it is simple, once you know what works, you can easily buy that time after time.
The company released their 9 month sales update a couple of weeks back, “things” have been a little busy and we did not get a chance to get them yet. Here it is – > Sales at September 30th, 2016. For the quarter it was the L’Oreal Luxe division that did well. Reminder, in case you needed one, here is a great breakdown of all of the brands from the last annual report, separating all of their brands by business segment:
More recently, in the last three months, L’Oreal have acquired IT Cosmetics (make-up) and Atelier Cologne (perfumery), both relatively new and niche businesses added to the 32 brands. Herewith a breakdown of the sales:
Negative headwinds from the Brazilian Real, the Russian Ruble and the British Pound were felt during the quarter. There are persistent negative sales patterns in France. What I find most interesting is that the uber luxury brands, the “Luxe” division grew in the US strongly (market share gains) and a good performance in China, a dynamic luxury goods market in that part of the world also gaining market share. Also Eastern Europe. Surprising here that the core brands are underperforming the luxury.
All in all, we like this business long term. More aspirational consumers around the world reaching for the better quality products. The global markets are split as follows (according to their research, quoted in the annual report), 36 percent skincare, 23 percent haircare, 17 percent makeup, 12 percent fragrances and the balance hygiene products (10 percent) and others. Geographically, sales are dominated by Asia Pacific (36 percent) and North America (24 percent), whilst Europe clocks in at just above 20 percent. Latin America is 10 percent and Eastern Europe is 6 percent. You can quite quickly see that L’Oreal has plenty of room to grow in Asia Pacific and more specifically China, where their luxury brands are gaining huge traction.
Important trends include indie brands (hence the recent acquisitions), organic and sustainability (something that L’Oreal are working hard on currently), active cosmetics (combining healthcare and make-up) and even pro-aging products. The whole idea that you can show your current age and still use cosmetics. The more ideal concepts of beauty, making sure that the products still do their job, yet make you feel comfortable at your specific age. Anyone out there want to elaborate more please?
As we said, the share price has been a downright disappointment for investors, at least in the very short term. L’Oreal are a whole lot less leveraged than their peers and trade at a pretty big discount relative to their historical multiple. The business also has an element of defensiveness too, hair washing and make up application (and removal) and general facial care is hardly going to go out of fashion. As we explained in our view at the half year stage – L’Oreal 2Q & 6 month number – still very profitable, cosmetics and urbanisation go hand in hand. I also think that we are scratching the surface in terms of mens cosmetics. Maybe not the generation of my dad, perhaps not even mine, definitely the one thereafter. It is early stages.
Defensive and growth, this is a good business, the big daddy of the industry. We continue to recommend this stock, we continue to accumulate. Buy.
Linkfest, lap it up
Following on from yesterday where we spoke about making peace with not knowing what tomorrow holds for equity markets and then learning the art of doing nothing. Here is what happens when you get both of these principles wrong – How to become a “2% Investor”. The person in the blog went to cash because he thought Trump might win, so his fear came true. What didn’t come true was what he thought the market would do.
It boggles the mind that $100 billion is spent on cancer research a year. To put that into context, that is the GDP of Kenya and Ghana added together – Investing in a Cure for Cancer: What You Need to Know
Thanks to people drinking coffee for the experience and not only for a caffeine kick, companies are able to differentiate themselves and charge premium prices – There’s been a dramatic shift in why the world drinks coffee
Home again, home again, jiggety-jog. Brait have released results today. We will cover those, there has been a big plunge in the NAV calculation of their UK New Look business. Stocks are up at the get go here today, quite a bit.
Sent to you by Sasha, Byron and Michael on behalf of team Vestact.
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