The market’s reaction to the election has been overwhelmingly positive. This is not surprising. The market normally rises following a presidential election due to the resolution of uncertainty. Further, some of Trump’s proposed policies are perceived to be friendly for stock prices. Investors expect lower taxes at the corporate level and less regulation. Other policies are less likely to help, notably tariffs. The retail companies I follow are already indicating that they will raise prices for consumers as part of their response to import tariffs.
Risk is now elevated. Stock prices are now higher for many companies (with the important exception of those in industries perceived to be on the losing side of proposed Trump policy changes). Expectations for the coming Trump economy also appear to be high. The combination of higher prices and high expectations equals higher risk. I think this is a time to be a bit more cautious about putting new funds to work.
In this context, a bearish market strategist’s call about next year is interesting. If you have been reading my letters, you know that I am not a big fan of economists’ predictions. It’s not out of a lack of respect for the discipline. It’s just been my experience that when it comes to economists, the smartest people I know are basically always wrong about the future. I don’t think it’s entirely their fault. Economic models can’t predict external shocks like armed conflict or pandemics, nor can they forecast transformative innovation like the internet, the iPhone, or AI. I think the place of macroeconomics is to help us better understand what is happening now, provide principles to evaluate policies, and to explain the past. Macroeconomics’ usefulness as a forecasting tool on which to base investment strategy appears to be limited, at least as far as I can tell.
Nevertheless, I think it’s worth considering Peter Berezin from BCA Research’s opinion as he is making a call that separates him from the herd-like behavior normally exhibited by Wall Street economists. I won’t get into the details of his research here. Instead, I will summarize why my current thinking about next year is mostly constructive: We know that the consumer (whose spending is 2/3 of the U.S. economy) is holding up reasonably well, that inflation has been become less of a headwind, and that interest rates are falling. Employment is very good, and confidence is solid. Conditions are not recessionary today. I have also observed that economic growth creates its own momentum and has a self-perpetuating character. For Mr. Berezin’s bearish call for a recession next year to come to fruition something would have to provoke a change in the current direction of the economy. At least that’s how I see it. Could a combination of policies including higher import tariffs and lower taxes do the trick? I think it’s a tough call to make. We will see.
Warren Buffett’s Berkshire Hathaway invests in two of our portfolio companies, Domino’s Pizza (DPZ) and Pool Corp (POOL).*
Last week, Berkshire Hathaway disclosed new stakes in DPZ and POOL, two stocks we have owned in client portfolios for over five years. We like Domino’s for the company’s franchise model (Domino’s locations are mostly operated by independent franchisees who put their own capital into the business with the parent company just earning a high-margin stream of royalty fees) and the business’ ability to grow as franchisees add locations. As an aside, we also like Domino’s Chinese franchisee, DPC-Dash, which is an independent company and trades on the Hong Kong exchange. You can watch a short video of an investment presentation I gave about DPC-Dash by clicking here. Lastly, our investment is also based on the observation that pizza appears to be a food with near-universal appeal that sells well in nearly every culture and market.
Unlike Domino’s Pool Corp. is not a household name. However, the business is easy enough to understand. POOL distributes and retails supplies and accessories for mostly residential swimming pools. If you have a pool or know someone who does, then you know that maintaining it requires a constant stream of chemicals and attention. Once the pool is in your yard, it’s not usually possible to avoid spending this money. (How many stinky green pools with lily pads growing in them have you seen?) Pool Corp.’s business is supplying these non-discretionary supplies for maintenance as well as selling equipment for new pool installations. During the pandemic, the installation business took off, but it has since been soft as higher interest rates have hurt housing turnover and fewer new pools are being built. I view this air-pocked in market growth as temporary. I am confident that the number of installed swimming pools will continue to grow over the long-term. The investment case is that POOL will continue to take share in the stable service business while operating in a market that has long-term growth tailwinds.
Last month I wrote about Facebook (META) and how it screened very well using a simplistic intrinsic value calculation, which is one measure of valuation. (The basic idea of “intrinsic value” is that if you add up all the future cash flows a business is going to produce you can use this to determine whether a stock’s price today is attractive.) Intrinsic value is supposed to be among the criteria to evaluate stocks that value investors use, most of whom want to emulate Berkshire Hathway. Interestingly, when I run our intrinsic value screen on Berkshire’s new positions in DPZ and POOL, they do not fare well at all. The stocks are not particularly cheap on other traditional measures either. (Email me if you’d like to see a comparison of META, DPZ and POOL valuations in excel.) So why then is Berkshire getting involved? Can someone please ring up Warren and ask? I’d really like to know.
Travel update: In October I hit the middle of the country with stops in Chicago, Green Bay and New Orleans. During my NOLA visit, a friend took me out fishing in the Bayou where the Mississippi meets the Gulf of Mexico. (It was worth it just to have an excuse to say “Bayou” which the internet tells me is a mash-up of Choctaw and 18th century Louisiana French words.) We had a good day and caught the limit of speckled trout and red fish. Looking forward, in early December I will come to New York City to attend an analyst meeting with Tractor Supply Corp. (TSCO). I will not go fishing. I will spend most of December in the city and out on the East End of Long Island. If you’ll be in NYC or out East in December and would like to catch up, please get in touch.
*This is not a recommendation. Please consult your advisor for investment advice tailored to your risk tolerance and investment profile.
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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 META, POOL, DPZ and DPC-Dash.
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