That Irritating Noise Being Ignored is Sound of Favorite Consumer Companies Signaling Distress
The market is focused on tech, but consumer spending is still 2/3 of the U.S. economy.
I am not a fan of making macro-economic predictions. Some of the smartest people I know who try to do it are basically always wrong. However, as a consumer sector specialist, I am close to retailers and restaurant companies. Their reports provide an important window onto the single largest segment of the U.S. economy. This in turn lets me pretend I have some insight into the macroeconomic state of things. Last year, what we saw was weakness develop in the lower-income consumer cohort. Higher prices (inflation) for basic goods and services were a problem, and any excess monies saved during Covid had been spent. Outside this group, further up the income spectrum, the balance of the country kept spending. Last year’s concern was that weakness would eventually leak into more of the consumer base. This didn’t happen. The 2023 Holiday season was solid, resumed student-loan payments be damned.
2024’s early signals are decidedly squishier. A 1,600-store chain of low-priced discretionary goods, Five Below (FIVE) recently reported that the year had started “soft”. Lululemon (LULU) later said the same thing. Then, last week, retailer Ulta Beauty (ULTA) messaged a deeper-than-expected slow-down in the category. What’s noteworthy about these three retailers is that they all had better-than-expected 2023 revenues. LULU serves a high-income consumer. The beauty category had been among the strongest segments in all of retail. FIVE was seeing accelerating transactions through most of the year. We can add these signals to already entrenched troubles at footwear retailers, home improvement superstores, car wash operators and the sales of discretionary products at mass retailers among others. Worrisome? Maybe rate cuts will save us.
Three Things You Should Do Before Buying a Stock.
In my last two letters I gave three criteria for when to sell, but if you’re an individual investor, how do you know when to buy?
I am a supporter of individual investors doing their own stock picking but oftentimes when people tell me why they bought a stock or – horrors – a cryptocoin – I mostly cringe. That said, I do think individual investors can be successful, provided they can accept volatility and take a long-term view. Peter Lynch advises to “buy what you know” which is a good place to start. I’d counsel a bit more work. To elaborate, here are three boxes I recommend you check off before putting your cash to work in an individual company’s stock. I will illustrate using Alphabet, more commonly known as Google (GOOGL), which I own. Number One: Be able to say why you own the stock in one sentence. “Uncle George told me to buy it” does not count. Here’s a one-sentence thesis for owning Google: GOOGL controls the world’s search giving it unparalleled power to profit off this activity. Simple and clear. Number Two: Review the company’s balance sheet and confirm that it is not heavily indebted. A quick search (using Google) reveals that GOOGL recently had $111 billion in cash and $28 billion in total debt. Check. How much is too much debt? It depends, but if you see debt significantly higher than cash you need to ask more questions. Number Three: Confirm that the valuation is not crazy. “Crazy” is open to debate but if we use the most common metric, price-to-this year’s-earnings ratio (or P/E) it’s easy to compare GOOGL (again using Google, perhaps you detect a theme) to the overall market. Google shares are currently trading at a P/E of 22x vs. the S&P 500 which trades at 21x. GOOGL is trading about in-line with the market, suggesting a not-crazy valuation has been confirmed. Beware P/Es dramatically higher than the market average. Of these three, number one is most important. Knowing the reason you own a stock helps to keep you involved during panics and to evaluate if the situation has changed. Numbers two and three mostly serve to keep you out of trouble.
These three criteria will not ensure a successful outcome for your investment. Rather, I’m suggesting that if you’re not willing to make the (relatively low) effort involved to complete the three steps above, then you should probably not be putting money into individual stocks. Instead, put your savings in the index or confide in a professional advisor.
The (Lost & Found) Importance of Vacation.
I spent the last week near Muscat, Oman.
Since starting my own business seven years ago, I confess that I have taken only a few weeks off. I did occasionally skip a few days’ work here and there, but generally made up for it by working the weekends. Previously, before I was my own unforgiving boss, I was subject to standards of working as a Wall Street analyst. This meant always being on top of what was going on in the markets and constant contact with the office and responsiveness to clients. It didn’t matter whether I was at my desk or with my family on the Riveria Maya. “Checking in” was a part of the deal. It doesn’t sound great, does it?
Near the end of March, in a moment of uncharacteristic largess, I decided to give myself a week of vacation. I resolved to shelve all my projects and ignore the newsfeed. I even went so far as to leave my laptop behind for one night when we stayed in a tent in the desert. (I pretended the sand might be a risk.) My hypothesis: temporarily decoupling my brain from stock price movements should yield some benefits. Besides, the trip to Oman was already on the calendar.
Speaking of Oman, my knowledge of the country prior to this trip was limited to understanding it shared a border with Yemen, which was on my “avoid” list. What I discovered was a modern, developed state in the Middle East with striking geology and friendly people mostly unscarred by the successive waves of conquest and territorial conflict that we associate with the region. The country was bypassed by Alexander the Great, never part of the Roman Empire, only briefly occupied by the Ottomans, and not subjected to the arbitrary borders created by France and Britain in the periods between WWI and WWII that are responsible (in my amateur historian opinion) for much of the current mess in the Middle East. This is an investing letter not a travelogue, so I won’t go into more detail on the onyx, frankincense trees, Wadis, and souks. Suffice it to say that I relearned that getting sand between your toes can serve to unclog your thinking.
Recent Activities & Upcoming Travel
I recently uploaded two new videos to my YouTube channel.
In early March, I again had the pleasure of guest lecturing at a graduate-levels securities analysis course at Columbia Business School. As the guest, I get to talk about whatever I think might be interesting for the students. I interpret this to mean whatever investing question is currently most interesting to me. I ultimately combined some ideas I borrowed from Daniel Kahneman, whose Thinking, Fast and Slow is one of my favorite investing books (even though it’s a primarily a psychology text), and used Charlie Munger’s maxim to “always invert”. The outcome was a talk on improving investment results not by focusing on finding great stocks but instead by adopting stratagem to avoid errors. It should be accessible to anyone (not just MBAs) and I’ve uploaded a 12 minute condensed version you can watch by clicking this link.
Additionally, I recently recorded an extensive discussion with Ben Claremon on his popular Compounders podcast. There were two main topics for our discussion. We talked about how to select stocks and build a portfolio for individual investors. Secondly, we delved into using unit economics to analyze companies. Parts of the conversation were technical but I recommend it if you’re curious about investing in general or want to get inside the industry-specific investment process that I have spent 20 years refining. Here’s the link for the Compounders talk.
For the balance of April I’m visiting the UK twice and will also be swinging by Greece to celebrate the lighting of the Olympic flame.
The blistering travel schedule is not letting up. In the UK I will be visiting friends and meeting with clients. If you’re in London and would like to catch up, please let me know.
Feedback and commentary welcome. Would you like to learn more about how we invest in the markets? Please click here to get in touch.
John Zolidis
President & Founder
Quo Vadis Capital, Inc.
John.zolidis@quovadiscapital.com
Mr. Zolidis has 25 years’ experience as an equity analyst. In 2017 he founded Quo Vadis Capital, Inc., a Registered Investment Advisor (RIA) offering investment management for individuals and an idea service for professional investors. He is a frequent presenter at value investing conferences around the world and a guest lecturer at Columbia Business School. Prior to founding Quo Vadis, Mr. Zolidis was a sell-side analyst following the consumer sector. He also managed money in a buy-side role at a long-short equity fund over 2013-2014. He was named in the Wall Street Journal’s Best on the Street list in 2005. He started his career in finance in 1996 following degree studies in Philosophy at Kenyon College and the University of Oxford. Mr. Zolidis and works from New York, NY and Paris, France or wherever he has his laptop.
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The author of this letter and accounts managed by Quo Vadis Capital have a long position in shares of GOOGL.
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