JOHANNESBURG — It was an eventful month on the Biznews Global Portfolio. Strong performances from Tesla, Facebook and Amazon were downplayed by a dip in Alphabet stock. That despite the Internet search giant showing a more than 20 percent increase in second quarter revenues, despite baking in the $2.7 billion fine the EU slapped on them for antitrust violations. The group is still defending itself against the allegations. The portfolio managed to maintain its 31 percent annualised growth since inception in December 2014. As happens every month, the brains behind the portfolio Alec Hogg takes you through the reasons why the stocks held in this portfolio are there to be held forever. – Stuart Lowman
The way that we do our investing, is that we will identify a stock. The intention is holding it indefinitely, so we don’t want to be at the vagaries of the market or the exchange rate, remembering that we are investing in US Dollars, but the returns for a South African investor will be in South African Rand, so we have and you’ll see just in a little while, the way that the Rand has been bumping all over the place in the past month. What we then do when we make an investment, to try and take out the price movement and try and take out the exchange rate, is by investing over a three-month period and that is exactly what we have done with Tencent holding as you can see here. We started buying it two months ago, so this is the final tranche of purchases. We had cash in the portfolio of $28 000 before the purchase of Tencent.
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We’ve invested just under $8 000 in the final tranche of Tencent and the cash holding going forward then will be $20 000, so that’s the change to the portfolio. Of course, the bigger change to the portfolio is what’s been happening to the share prices. In the past month, it’s been a particularly good month again for US stocks and that’s where most of our investment is made. There’s been a lot of volatility on both Alphabet and Tencent holdings. There are big stories on both of those that I’ll take you through and then we’ve also had financial results. In fact, last night we had financial results from Facebook and Facebook in post market trading, the results came out after the market closed. It had gone up to $173, so you would be seeing an even bigger increase in the Facebook return there.
We’ve generated a 33% return as you can see on that investment in US Dollars, that is. It would go a few percentage points higher than that. There’s also been huge volatility in Tesla Motors, big day for Tesla tomorrow. We’ll tell you more about that later. Then we have the financial results coming out tonight from Amazon, which is also trading at an all-time high. It’s quite incredible, just over three years ago we bought Amazon shares at $327 as you can see there and those 50 shares today, you’d have to go and find yourself something over a thousand Dollars a share, $1052 is the current price for that, so it’s a busy period.
We will be having Apple financial results as well coming up, but that’s only on the 1st of August, so lots to discuss in this month’s breakdown of the portfolio, but as you can see, the portfolio as a whole in US Dollars is up 50% and that’s from the inception, whereas the market, that’s the Vanguard S&P 500 Index, an index tracker, is up 20%. So, the share picks have added 30 percentage points to the return of this portfolio since its inception in US Dollars. Of course, we have a nice little booster on top of that through the South African Rand. Our share picks were always the intention to try to find stocks that we could buy into that would do better than the market as a whole.
We weren’t successful in that quest with both Novo Nordisk, although for a long time Novo Nordisk was doing well, then it hit a brick wall with some concerns that came out about the credibility of the company’s financials that they’d been producing. We saw the writing on the wall, got out fortunately before the real troubles began there. Similarly, with Barclays Bank we got out of that one after seeing some big opportunity in it. It seemed to be fulfilling its potential and then we had a shakeup, which really shook our confidence in the reputation of the company, and then we’ve also finally followed Warren Buffett, who lost his patience with IBM.
So, even though we’d loved IBM for a long time, we’ve lost our patience too, but the rest of the portfolio as it now stands is very stable, as you can see the last purchases that we made were Tencent in May this year, but that’s the only additional purchase that we’ve made to the portfolio and it is an intention to find another stock. We can invest the $20 000. That’s in cash obviously and if we find the right kind of share picks, we’re quite happy to release the money that’s tied up in an S&P 500 Index in the index tracker there’s another 25. So, if you like, in practice we have $45 000 available cash for another investment or two until such time as we find something better than what we have in the portfolio and then we can jiggle them around as and when is required, but a wonderful return on investment from Amazon.com has pulled the portfolio up, very, very good movements in Tesla and Alphabet.
In fact, Tesla’s really shot the lights out for us. A thank you, Elon Musk and to the South African born and raised entrepreneur, we have great confidence in him. There are mixed views on him in the United States, as you’ll hear in a moment. Just to put this into perspective, this portfolio (as created in December 2014 in collaboration with Standard Bank on the basis that it’s new Webtrader product) gave Standard Bank online share trading clients the ability to invest in many markets, dozens of markets around the world. It was also a view that we had at that time and retained that view that the South African economy has been poorly managed and consequently, economic growth is going to cause the currency of the value of the currency to decline.
Once again, I’m a little concerned about the Rand/Dollar exchange rate taking a hit. The market has not fully absorbed the change in the interest rate policy by the South African Reserve Bank. You can see on the right-hand side and I just took a quick screenshot there from BizNews’ home page, but you can see on the right-hand side the volatility in the Rand/Dollar in the past month that has been quite extreme. Just round about the middle of July, it cost you over R13.50 to buy a US Dollar and then it went down to below R13.00 later in the month. Now it’s trading, as you can see from that screenshot, R12.91 is the level that it was trading at this morning.
So, with the change in the Reserve Bank’s policy towards South African interest rates, having cut interest rates, that is going to remove a huge incentive for international traders who like to play the carry trades. In other words, they will borrow money in America or the UK where interest rates are much lower than in South Africa and then take that money and put it into South African Rands hoping to benefit from the higher interest rate. That’s what they call a carry trade. That works as long as the risk is perceived to be lower than a spread or the benefit that you can get from the differences in the interest rates.
With the risk in South Africa of poor economic growth and quite a lot of geopolitical risk (as we are well aware at the moment), if you’re one of those traders that are doing the carry trade, when you see the interest rates being cut by the South African Reserve Bank you have to start thinking that perhaps there would be another crack in the currency on the cards.
That really suggests to us at BizNews that, if anything, you need to be looking even more aggressively at investing offshore and that has been reflected in the performance of this portfolio and annualised return since inception on the 5th of December 2014 of 31%, largely due to the extremely good performance of Amazon.com and it’s still my favourite company in the whole world and you don’t have to guess why. Alphabet, because we invested in Alphabet also in 2014, so we’ve benefited from the weakness of the Rand there. That’s more than doubled in Rand terms, the investment that was made and Tesla Motors is next best on the list with a 63% increase, and it just shows you how well that share has performed since we bought in in October 2016.
Alec, a question from Evan: He wants to know, is there a reason why you bought Tencent on the Hong Kong exchange and not the NASDAQ?
I didn’t know it was listed on NASDAQ honestly. I’m so sorry, thank you for letting me know. No, I thought that it was only listed on the Frankfurt exchange and on the Hong Kong market, but if it is listed on NASDAQ then I will certainly recommend that we do the investment there. It’s just so much easier, but Standard Bank does give you the option to invest in all of those exchanges. There’s no mystery to it. I didn’t know. I had a look on my screen and I could only find it on those two exchanges, but maybe Stu, you can just double check that, that it is listed on NASDAQ. If I’ve made a mistake there, well, then if you haven’t bought Tencent yet, then certainly that would be the preferred exchange. It’s just so much easier to trade on NASDAQ than it is on other exchanges.
Although Hong Kong has quite an active exchange as well, but if you wouldn’t mind Stuart, just having a look from your side and seeing, so that we can qualify this.
There is a share code there. It’s TCEHY. That’s on the NASDAQ website.
Well, thank you, that’s fantastic, well there we go. It just shows; you learn something every day. When I did my scanning my knowledge of where the various companies are listed obviously needs polishing up, but when I did my scanning I saw it was on Frankfurt and I saw it was on the Hong Kong market and oh, there’s a long story to the Frankfurt issue, but now that you’ve made me aware that it’s in NASDAQ, go for it on NASDAQ. In fact, we’re already on the Hong Kong market and you can get that through the Standard Bank portfolios so we’re not going to fiddle around anymore, but if you’re coming in from Day one, it’s a pretty good idea. Thank you very much for enlightening me.
There you have the individual performances of the shares and as you can see, the Rand has depreciated by 15% since we launched the portfolio. We think that that 15% at the moment is fairly good value. If you’re an owner of the Rand and you want to trade into another currency (particularly given the stagnation of the South African economy recently and although, in the short-term, money flows to higher interest rates, in the longer term), it will flow to where the economic returns are highest. Therefore, a lot of hot money perhaps coming into the South African economy at the moment or into South African currency will almost certainly reverse in a period of time unless the economy gets the kind of boost that it really requires and this is just a nice breakdown in performance order of the stocks that we hold.
You’ll see, down the bottom, Tencent has done quite well since we first bought in. It’s interesting that we’ve bought Tencent over three months and of course, we did our final purchases as I showed you right in the beginning today and that purchase was at the all-time high price, so if we’d been able to time our purchases differently, that return on investment since we first went in there would be quite a lot higher than 6%.
The Rand of course has also appreciated slightly since we started buying the Tencent shares, so those two issues have come to play there, but in the long-term, the idea, you buy the stock, you put it in your portfolio, you hold it indefinitely. That is still something that we agree with and there, in graphical form you can see what an incredible performer amazon.com is and it’s only just started.
Those are the dividend receipts that we didn’t get any new dividends in this month. We did get a dividend in June, as you can see there, of $107 and those dividends then are added to the cash holding.
Right, let’s get into the nuts and bolts and starting off with the Vanguard S&P 500 Index. This is a reflection of the way the United States stock market has performed and you can see there, in the past year, that the Vanguard S&P has edged higher consistently starting off after the election where Donald Trump surprisingly won the election.
There was a bit of concern, I suppose, from investors in the US on uncertainty about what might transpire, first should Hillary Clinton have been elected and then happiness that a businessman had been put into the White House and the Trump play, as it were, lasted for a good three months after the 8th of November when he was elected to around about the beginning of March and you can see a very good improvement in the overall index of the American stock market, but since then it’s been more a case of the market improving along with the underlying performance of the economy and in the fact that interest rates in the US are not being accelerated aggressively and Janet Yellen had had her most recent monetary policy committee meeting and the economy’s doing well. So, there’s no need to derail that economic growth at this point. This is a historic holding. We started off with a third of the portfolio in the Vanguard S&P 500 Index. It has underperformed the rest of the portfolio as mentioned earlier and as a consequence, we’ve also been selling this down as we found good investment opportunities.
Alphabet was one of our core holdings when we kicked off. There you can see the volatility that’s occurred in this share price in the past month. In the past year it’s pretty steady improvement coming from around the mid-700’s to the mid-900’s today, but it hit 900 at one point after, and there are two classes of Google shares, by the way. We talk about the Class C. This is the non-voting share, so the Class A is the one that has many votes and that’s the stock that is held by the founders of the company and the chairman. The decision there was to ensure that they could continue to control the company even though they didn’t have the majority stake in the economic interest of the business.
It really is the A shares or the other class of shares, I think it’s a hundred times the vote as you do in the C class shares. A similar thing occurs in Facebook, so to give Mark Zuckerberg control there and the Americans seem to be quite happy with this. Anyway, if you have a look at the share price you’ll see the tanking that happened after the announcement by the European Union that it was going to levy a fine of $2.7bn onto Alphabet. That had an immediate reaction on the market. The concerns were that once the EU had touched one part of the Google business, remember Alphabet is the holding company for Google, as on antitrust matters that it wouldn’t stop there and would continue in other ways. The conference call that was held after the financial results, which came out this week, gave quite a lot of confidence initially to investors.
Ruth Porat, the financial director there who comes from Wall Street. She used to work for Morgan Stanley, she understands what investors want to hear, and she has been able to give them that information. Essentially, Google’s saying that it hasn’t made a decision yet. It has time still on how it will respond to the European Union but it looks very likely that they are going to dispute that $2.7bn fine. Even so, they took it upfront. They actually wrote it off against their profits in the most recent quarter, so they’ve made the provision and even with writing off $2.7bn, they still made an operating profit in the quarter of just over $4bn, so it gives you an idea of the scale of the business. Outside of the fine, these were exceptional results. Any way you want to have a look at them, the company is really steaming ahead. It’s primarily an advertising driven company.
Revenues as a whole were up 21% year-on-year. They’re selling at $26bn for the quarter, so it’ll be about $100bn in a year a whole. Between Alphabet and Facebook, they own half of the total global online advertising market. That’s quite an extraordinary statistic that and no doubt, part of the reason why other media companies don’t like them very much. We’ve also found, in the quarter, paid clicks from Alphabet. The way Google works, is that it serves advertising through its own properties and there you would know the Google search engine and YouTube as being the two most important ones and then it also has a network with other media owners.
People like us at BizNews who take some Google ads onto our platforms and in the past quarter, the clicks on Google’s own products were up 61%, whereas on the network partners was only up 9%, so you can see there’s definitely something happening within the whole mix of revenues. Google obviously wants to have the maximum number of clicks going through its own backend rather than with partners because it has to pay partners their share and what was interesting, was the cost per click. Therefore, although the sheer number was up, the cost was down 26% in Google’s case and 11% in the network case. What that’s telling you, is that although Google is creating infinite growth in revenue, it’s still managing to get more traffic through or more advertising sold, if you like, than the price is being reduced. So, as the volumes are growing, it’s a classical economic theory.
As volumes grow, price reduces. This is very dangerous for other advertisers in the online media space because what it’s telling you, is that as Google continues to get bigger and stronger, it’s going to be price competing or its advertisers will be demanding to pay less and less all the time. Now that’s not very good news for the network and its network partners saw an 11% decline in their cost advertising per click. Therefore, although the partners are having a tough time of it; Google itself is benefiting. If you’re an investor in Google, you can be very happy with this. The last point about Google I’d like to mention, that came out in the financial results, is they have been taking this enormous amount of profit that they’re making and generating on an ongoing basis and investing in what they call “Other bets” and those other bets include a company called Verily, which is in the life sciences solutions.
Essentially, they’re looking to find clever ways by using Big Data and tech to address for the pharmaceutical industries doing not very well at the moment in peddling pills. They also have a fibre company with high-speed internet; they have a company called “Calico”, which is investing in extending life of human beings. It has 20 collaborators at universities and other companies and then it has probably the best-known of all, it’s, “Other bets”, is a company called “Waymo”, which makes driverless cars, an area where Google invested long before anybody else thought there was any potential and recently it’s tied up with partners there, Lyft, which is competitor to Uber and even with Avis, the car hire company. Isn’t that an interesting development there?
Soon you’ll be going to Avis, hiring your car and your car will be taking you wherever you want to go when you just type it in. You won’t have to actually worry about the crazy drivers in towns like Johannesburg or elsewhere in the planet. So, moving on from Google, it has come back a little bit in the last day or so as you can see there, down a third of a percent yesterday, but the premarket (and that’s quite interesting), these prices are as of the close last night and then the premarket, you can see just below that, it says $951, so it’ll recover all of the ground that it lost last night. We, of course, for our purposes of calculation, we use the final closing price, which was $947.80. That premarket becomes quite important later on in this presentation. Amazon is an example of where it is, quite important.
Yesterday Amazon closed at $1052 an all-time high in premarket, so after the close, it had gone up to $1061 a share. Amazon has been moving into Southeast Asia for the very first time and this is really relevant because for the first time, we are finding these global giants from the West who are going head-to-head with the global giants from the East and up to now, Naspers has been an exception. It has gone into emerging markets and it hasn’t been scared to take on the likes of Amazon in Europe for instance, but the big Chinese companies and Amazon have passed each other, so for instance, Amazon decided to focus its attention in India when it came to the Asian market.
It didn’t go into China; it left China well alone because there is a company called Alibaba, which Jack Ma runs. What it did in India, was it saw a company in India as a better or as an easier competitor to fight against a company called Flipkart. Now Flipkart has a South African connection as well because Naspers owns 16.5% of Flipkart and it’s the market leader in India, valued, although it’s not listed, but valued at its last fundraising theories at a figure, which makes Naspers’ share worth R25bn. So you’re talking about serious businesses, Naspers owning 16% of it. Amazon is in India, it’s competing with Flipkart, it’s not winning that battle at the moment, but that is only a sideshow compared with the big battle that it’s now sounded against Alibaba and they’re not going to fight each other in China or not yet anyway.
The first battleground will be in Southeast Asia. Amazon has opened up in Southeast Asia, in Singapore. It’s going to be launching two-hour deliveries, so if you live in Singapore and you want to order anything, you’re an Amazon Prime member, you will get that product in two hours. Think of it, you want some Tiger balm because you have a sore you need to rub somewhere. Well, two hours later someone will knock on your door with the Amazon product and deliver it, quite exceptional and the big story about Southeast Asia is that only a fraction, at the moment, the 600-million people who live there and quite a lot of them are pretty well off, only a fraction of their sales of their purchases now are being done online, so there’s a massive opportunity.
Amazon realises this, but so does Alibaba and Alibaba has moved into Singapore a little earlier than Amazon did through its relationship with a company called “Lesado”, which it owns 83% of and as Amazon was making its plans to move into the market as it bought its warehouses and started staffing up, Alibaba put another billion Dollars into Lesado. It’s a fascinating time that we are seeing now with these big companies that are going head-to-head with each other, the big online companies. It just shows you how much of a pie there is to fight over because not only will they be bumping heads against each other, but the big losers in all of this will be the old style, the old economy companies, the Walmart’s etc., who in the past had the market to themselves.
Now, increasingly as the online sale proportion grows, you’ll see companies like Amazon flourishing and the old style companies, you just have to stay away from them. I’ve said it time and again, in this era that we’ve moved into, in the Fourth Industrial Revolution, the winners are going to be huge winners, and the losers are going to be complete losers. So, you need to have your portfolio positioned for this new age. It isn’t business as usual; it’s business very, very unusual.
Amazon’s results, as I mentioned, are coming out tonight. Already some people are thinking that these results are going to be good. As you can see, the premarket up nearly $10 a share in anticipation of that and we’ll watch tomorrow morning, the way the premarket for the next day operates, but the way Amazon has been playing this, they don’t really pay too much attention to the market’s perceptions on results today, but just about every quarterly result that we’ve seen from Amazon over the last couple of years, the share price has risen very strongly as a consequence of the numbers. It’s almost like a reminder of how powerful this company is. It’s the best company in the world in my opinion. It’d be interesting if Alibaba can actually prove that perception wrong.
Alec, just going back to the Tencent question: It’s not a direct listing, it’s actually an American depository receipt, which is a negotiable certificate issued by a US bank, which represents a specific number of shares or one share in a foreign stock traded on the US exchange, so that’s probably why it couldn’t be picked up.
Oh, thank you for that Stuart. Yes, ADR, that’s probably why it didn’t pick up when I had a look at it, but ADRs are, depending on how much trade is done in them, are just as good as owning the shares themselves. Therefore, it’s certainly worth having a look at through the Standard Bank platform. I’m not sure if Webtrader will offer on both markets, so it’s also, it’s worth double checking that too because you don’t always have access to AD’s in the same way as you would have access to all ordinary shares. Thank you for that update, Stu.
Can we move on to Warren Buffett? He’s had quite a nice month, if you like. The share price is up to $173, not a whole lot of, well there’s always news around Warren Buffett, but there’s not a whole lot that Berkshire Hathaway has to report yet.
Their quarterlies aren’t out yet. We look forward to seeing them when they do, but it’s one of those value stocks that we’re glad to have in the portfolio. It has done reasonably well, almost tracking the American market overall and although it’s invested in old economy stocks to a large degree, Buffett has moved into some of the new economy stock. He made a bit of a hash of IBM, he admits, but Apple is one of his, in fact, it was the second-biggest holding, is doing quite nicely. He has about $20bn invested in Apple and that’s another reason why, if the “Oubaas” from Berkshire can find appeal in Apple at these levels, well, it certainly shouldn’t be something to be too concerned about.
The big stake of Berkshire Hathaway as well in American banks or not in all American banks but specifically in Wells Fargo which has had its troubles recently and Bank of America, so as that class of stock improves, you’ll see an improvement in Berkshire, but as you can see at the bottom there at the market cap, $429bn, it takes quite a lot nowadays to move the needle at this very well run, but maybe just growth-anchored stock run managed by the best investor the world has seen.
Talking about Apple, it’s had a very good month as you can see there, moving up from the early 140s to almost the mid-150s and back close to its all-time high, the most valuable stock on earth. Have a look at the bottom market cap of over $800bn – cracking that or getting back into that level again in the past couple of days. Apple’s results will be coming out on Tuesday after the close.
The thing to watch there are the iPhone sales and its progress in China. A lot of what’s going to happen to Apple’s share price in the near term will be determined by the performance of the iPhone 8. It’s anticipated that this will be a diversion from the old iPhones and this is very important in China where there’s a different type of consumer who buys phones there. In the West, if you have an Apple phone, you use the Apple IOS or operating system. Whereas, in China because of WeChat and because of the influence of Tencent, which has got 900 million consumers in its net, if you like. It’s phone agnostic so, the phones in China have to be appealing to the consumer and the consumer wants to be… It’s aspirational product, Apple, so they want to show an iPhone 8 off, if you like, or an iPhone off.
Now, what happened with the iPhone 7 – it looked too similar to the iPhone 8 and as a consequence there wasn’t the kind of sales that had been anticipated. Whereas, the iPhone 8, with a new LED screen and other interesting enhancements is anticipated to give Apple another big kick in the US. Well, the first thing to watch out for is the results next Tuesday, after the markets have closed in America.
Just a question on Amazon. Alan Soul says, “Eye Watering stuff, as it’s on a PE of 197. Any thoughts on waiting for a pullback before he jumps in?
No, don’t. Amazon is one of those that you just don’t get a second chance at it. When you see a pullback that’s the time to top-up your holding. It seriously is the best company in the world. Buffett, in his last annual general meeting in fact, in the last two annual general meetings – if you want to get an insight into what he thinks about it. We’ve done the full transcriptions of the last two AGMs and if you Google ‘BizNews Warren Buffett AGM and Amazon’, you’ll get to see what he said and he could not have been more complimentary. Charlie Munger, his partner, calls Jeff Bezos, (this fellow here). He says he’s in a different league. He’s a different species was the way that he qualified or described him. He’s put this plan together, which he’s been continuously following since 1995, I think it was when they were first created and first listed in 1997.
The idea was always put your customer at the front. Do what you can to serve the customer and that has paid huge dividends for Amazon. All of their innovations are based on how can we make it easier for the customer? How can we make it cheaper for the customer? When you get a situation like that you get the benefits of scale or what they call the Amazon effect. In the US, they talk about the Vanguard effect being the way that Vanguard is now through its massive explosion of exchange traded funds in America and its reducing costs. The Vanguard effect has caused everybody to cut their costs. Well, the Amazon effect is doing exactly the same in retailing and it’s almost like a bulldozer that is riding over everybody else. Please don’t look at PEs when you look at Amazon. What you need to do is have a look in your own spreadsheet at what you think their increase or their growth rate is going to be and then, working that into your evaluations/cash flow.
Even cashflow valuations aren’t really the way to go with this one because they reinvest everything. It’s a big like Google in the early years. You might remember for many years Google lost money. Facebook was the same, it lost money, and then when it kicked out or when it had reached a point where it could start harvesting it made those PE ratios look ridiculous. Amazon’s PE is ridiculous because it can show any profit it wants to and it shows very little profit, hence the inflated PE ratio. I would pay no attention to Pes on that one. I would certainly be paying to attention to revenues, etcetera.
Let’s go to the star of the show for this month, anyway. You can see, there it is, Facebook – it’s had a cracking last month. It’s also going to be even better because the results were released last night and as you can see there, underneath that 165.61 current share price, which is an all-time high. The premarket is saying it’s up another 4% so, the results were very warmly welcomed by investors. They are looking to push-up the share price to over $170 a share when the trading begins in the US today. The numbers are well, they’re just spectacular. Amazon generated 50% more revenue from its mobile phone advertising and mobile phone advertising accounts for 87% of its total sales. It’s a much smaller revenue base than Alphabet. For instance, Amazon’s total revenue was just over $9bn in the second quarter.
Whereas that’s about 1/3 of what Alphabet’s total revenues were but the margins at Facebook are incredible. Also, it’s continuing to grow. It’s now got 2 billion regular users of Facebook. That’s up 17% year-on-year off an extremely high base. The next little step for its revenue generation is it’s going to start monetising Messenger, Facebook Messenger, and WhatsApp, which it owns. Both of those platforms have got more than a billion users each. If you start advertising to them, and given Facebook successes in mobile advertising, you can just imagine. It’s almost like you can double the revenue streams that are going to come through, so that’s low hanging fruit for them. But where their big opportunity lies, that Zuckerberg has targeted is in video, and they’re expecting that they will be able to launch their first scripted video service on Facebook later this year.
That is going to then start bringing them head-to-head with particularly, the television network companies who are already straining, but television still has the biggest slice of media advertising around the world, but falling and falling fast because Alphabet’s YouTube Channel has been grabbing a lot of that. Now, adding to YouTube will be Facebook coming to the same party. I remember Warren Buffett saying at the last Berkshire AGM, the one industry he certainly would not be looking at is television or network television and I can tell you that if you look at Facebook and Alphabet, these giants, are starting to now suck out a lot of the advertising that was previously offered to those networks. It’s not a good place to be if you’re reliant on television advertising so, be mindful of that when you’re looking to invest perhaps in other stock, old economy stocks.
Between them, Facebook, and Alphabet as I’ve mentioned has half of the global online advertising market so, you can imagine what they’re going to start doing to the video market as well. Just one final point on this – Facebook also owns Instagram, which has got 700 million users, incredible numbers. Recently, there was a concern that they might be vulnerable to the recently listed Snap. Well unfortunately, the one that’s vulnerable is Snap because Instagram has made a huge comeback. Stu, any questions on your side?
Alec, after the fast start it looks like things have slowed down a bit. But we do encourage questions. Please just jot them down in the right-hand toolbar and I’ll pass them on.
Perfect, let’s move on, and it’s it lovely to have a stock in your portfolio like this one, which started the year below $120 and now it’s $165, and getting better. It’s even a better performer, Elon Musk has brought the bacon home for us- thank you very much, Mr Musk. As you can see, we bought into this stock October/November last year when it was below $200 a share. It is now $343, in double quick time. The timing was largely due to quite a lot of good fortune. I’ve been watching Tesla for a long time. It started flatlining, as you can see there, from around September on the merger that was being done between Tesla Motors and Solarcity. Solarcity was the company that was run, which Musk had a big share in but it was run by his cousins from Pretoria, the Rive brothers who, like him, are now living in California.
Here was some unhappiness amongst some analysts on Wall Street and they were saying that Tesla was a shortfall. In fact, Tesla, I think, still has the biggest number of short sellers of any stock on the NASDAQ and that’s saying something because there’s some pretty volatile stocks there but you either believe the Tesla story or you don’t. As Elon Musk said, in the short term, when you just look at the production, it is an overpriced stock but he reckons that if you believe the Tesla story then it’s very cheap, from a long-term perspective. Tomorrow a big day for Tesla. They launch their mass market car. It’s hoped by the supporter that the media who are going to be assembled to have a look at the new Model 3, which comes in at about a third of the price. It’s around $35 000 for the vehicle. Remember, an all-electric vehicle, so a third of the price of the existing Tesla motors.
Just to give you an understanding of the excitement that is generated. If you want to get a Model 3, if you want to get your hands on one, you don’t just walk into a dealer and place your order. You have to first of all, put down a deposit and there have been 374 000 people or orders, for these vehicles. Now, this is for a company who, in this quarter, the second quarter, when you take those three months to the end of June, it actually only produced 22 000 cars. So, the Model 3 is to take it into the mass market. It’s to take pure electric cars into the mass market and either it’s going to work spectacularly, which the Tesla fan club believes will happen. Or it’s going to be a terrible failure, which people like an analyst at UBS suggests is going to occur. The UBS analyst said, “Tesla’s shares are only worth $180.” Clearly the Tesla fan club thinks very differently to this.
It is a big day tomorrow and I think if you’re a Tesla shareholder, and hopefully you’ve replicated this entire portfolio, just keep an eye out how the market reacts to the Model 3, which is being unveiled. Outside of that, the suggestions are that when the second quarter results come out from Tesla, which will be very soon, that they will show that the cash burn in the 3 months, from April – June, has doubled from the first quarter. This is not surprising considering that Tesla is now gearing up to produce this new vehicle of its. It’s got enough money in the bank. The share price has been doing well. There’s enough confidence from other very highly rated companies, including Tencent, which has got a stake which bought just under a 10% share in Tesla a few months ago. Tencent, SA connection with Naspers. SA connection with Tesla Inc, who’s CEO or founder comes from the country.
Interesting – all of these little bits and pieces of how the world is so intricately networked. I’m a Tesla fan, as you can imagine. If any company that’s given you a 70% return in less than a year, you’ve got to like the business anyway, before you make the investment but I still think that Elon Musk is the kind of man who only comes around once in a few generations and he has shown it in the way that he’s revolutionising or has already revolutionised the space industry and the solar power industry, and the electric car industry. So, Tesla is our best performer in the short-term and we love it and we’re staying with it.
Here’s one that has been bouncing around recently. The reason why we went with Metro Bank it is the UK’s equivalent of Capitec and if you have a look at the UK banking market whereas South African banks might have been a caught a little off-guard by Capitec’s simple, low-cost service. In the UK, they don’t seem to care that much because the UK banks have had a very rough ride. They’ve ripped off their customers and they’ve been fined heavily over the past few years. They’ve also got into a lot of trouble through lending too much money out, over gearing themselves and then when the Global Financial Crisis came in a number of them, most of them actually had to go to the government to get bailed out. A consequence of that is that they’ve been on their own austerity measures and as a result the service levels, with fewer and fewer people, and with less motivated staff – the service levels have been very poor.
Metro Bank, on the other hand was brought to the country recently, on a few years ago. It was brought in by an American, who did exactly the same in the US some years ago. He did the forerunner, if you like, of a Capitec. That bank was bought out by a big Canadian bank after it had reached just before the Global Financial Crisis. The founder decided to take a sabbatical for a few years and then just saw the opportunities in the UK and created the first UK listed or licensed bank in over a hundred years and Metro Bank was tipped to us by Gerrie Fourie, the CEO of Capitec. When I asked him when they would be coming in to the UK, he said, “Never, because you already have Metro Bank there.” So, any South African knows the Capitec story you’ve got to believe that Metro Bank, if they can repeat it, at the current share price, will be a very good investment indeed.
It’s been bouncing around recently and for no particular reason except I suppose, the Pound has been weak and concerns about Brexit, etcetera. But this is not a Brexit play. This is not a Pound play. This is just a pure Capitec play, if you like. It’s a company that’s disrupting the banking market in the UK and it’s one that as it gathers more and more momentum, it’s sure to gather more and more fans. I think there’s a PE ration there of 873, which also tells you it’s in that build-up stage. It’s in the before take-off, when aeroplanes rush down the runway and then they take off later. We’ve seen that with Google, we’ve seen that with Amazon. Amazon is still in that, they’ve got a very long runway, in that phase at the moment. Facebook as well, well Metro Bank is in that stage right now so, buy your shares, put them in the bottom drawer and don’t worry.
We’ll close off with Tencent Holdings. This is Pony Ma, the same surname as Jack Ma from Alibaba. Unusual that, isn’t it but Pony Ma is the man that was identified by Koos Bekker and Antonie Roux back in 1999. They made an investment into Tencent Holdings of about $32m and it gave them a 50% share in what was then a 30 person, Hong Kong start-up. Well, that Hong Kong start-up has become an absolute giant around the world. As you can see the market cap of it is R2.9tr, the Hong Kong Dollar and the Rand are fairly close to each other. HK$2.92tr well that’s HK Dollars. Just for argument sake, you can translate that into Rand. It has been a phenomenal success and the investment that Naspers has made has transformed its fortunes and being so successful that it’s also transformed the fortunes of many SA retirees because Naspers now makes up 20% of the ALSI 40 Index and 25% of the SWIX.
The SWIX is for the South African register so, if you take the SWIX as a proxy for what South African retirees own in their retirement funds. That money you put into a pension fund every month then you have 25% of your equity assets or of your shares, the slice in the shares invested in Naspers and this is the reason why Naspers has done that well. Tencent, as mentioned earlier, is very aggressive. It’s generating a lot of cash at the moment so, it’s able to go and make some fascinating investments. Tesla is the one obvious one so, there’s an opportunity to get involved in electric cars. It’s also decided in the past week to get more involved in India, well it’s already involved in India, (I’ll tell you about that in a moment) but with a company called Ola, which is the direct competitor to Uber.
What Tencent is doing and Naspers is following it, whether Naspers made the decision or Tencent made the decision, both of them are as one, that they are investing in India in companies that are homegrown and, as a result, they feel will be able to take on the global giants that are coming in. Ola is the direct competitor to Uber and Tencent put $400m into that company in the past week. It’s also invested heavily in Flipkart, (I mentioned that a little bit earlier). Flipkart is the Indian equivalent of Alibaba and a company that’s probably better known in the Western world called eBay. That is the market leader in India and a company already valued at 25bn, and both Naspers, which owns 16%, and now Tencent which has taken a big chunk of Flipkart, are investors in that Indian company. The story for Tencent, the other big story that’s brewing at the moment is that the Chinese government is keep it privatised.
Isn’t it strange that the success stories that you see of the world, the fast-growing economies in China have been a result of freeing up the economy? Promoting entrepreneurship and now privatisation. They’re looking to privatise or doing it very slowly in a typical Chinese way, what they call mixed ownership of the state telecoms company and a subsidiary of the state telecoms company called UNICOM (China United Network Communications), which has listed already on the Shanghai stock market. They’re now asking for partners to come in and Tencent, along with some of the other Baidu and some of the other Chinese giants are looking to put in up to $12bn into this Company. Now, that could be a very interesting play because once these businesses are in there, Tencent, etcetera. There is going to be a way for them to help maybe modernise the state company.
In China, it’s not a bad idea when you are a partner with the government. There we have it. That’s the end of our story for today, Stuart.
Thanks Alec. It looks like the questions dried up like a good old CT summer unfortunately, but thanks for all the insights.
It’s my pleasure and there we have it. Just before I go through these portfolios. If there are any more questions please dot them in quickly. We wouldn’t want to disappoint you but to have a look at this final. The annualised return at the bottom there is 31%. My apologies, I don’t know where that extra 3 came, a bit of fat fingers but it is 31% and we have enjoyed a really good return on Amazon.com, Alphabet and, most recently, from Tesla Motors – they’ve been the out performers. Pretty good or reasonable returns from the rest of the portfolio. Metro Bank – a bit of a laggard at the moment but nothing to worry about. Remember, we just invested the last chunk into Tencent so to already be ahead of the game on Tencent is not a bad result. Our intention here is to have a long-term investment. We really don’t want to sell any of the share picks that we have in the portfolio.
The Vanguard Index Tracker we’d be happy to sell that once we do get a better share pick. I’m looking at a couple of companies now. Unusual businesses, by the way, to see whether they pass the muster for an investment period, which is forever. That’s the way we look at it.
A question coming in at the end here. Paul Jeffery wants to know if there are other new-aged companies you have on your radar?
Paul, yes, I have done quite a lot of work on Netflix. I missed out on Netflix unfortunately, before the financial results. Again, what I like to do is use the products myself and see whether the business model appeals to me because if it does then it might for others. Netflix here, in the UK, the monthly subscription is under £8, which is very reasonable. You can almost rely only on Netflix. What they have in the UK is a relationship with the BBC, sorry not Netflix. That’s Amazon, good old Amazon. But Netflix has got lots of movies on demand and for what you’re paying you can see why it’s become irresistible. Remember, it’s this business model. This business model is one that you need to get your head around, the exponential business model, where the company does vies a way, and I would urge you to and read that interview that I did with Steven Nathan from 10X on BizNews.
His beef with the asset management industry, which is where he operates, is that they have a certain level of fixed costs and once the assets grow beyond that certain level they should, he says, be giving back the benefits to the investors. Like has happened in the US, with Vanguard. As Vanguard got bigger and bigger it cut its costs all the way and refunded that money to the investor so that at the moment, that top holding there, the Vanguard S&P 500 Index – the cost to invest is 0.05%. If you buy that into the S&P 500 Index, which gives you a share of the companies in the US your commission, the fee you pay, is 0.05%. That is a consequence of the massive growth of Vanguard so, that its fixed cost is now a tiny part, its costs are tiny but in SA, says Steve Nathan, the asset management companies have ignored that so, as their assets have grown they’ve just made more and more profit and then disguised the profit by paying their people.
The average salary at Coronation is R4m a year, he was saying, and that is a very short-term approach because once you get international competition they will clean you out. The companies in this portfolio, and a company like Netflix does the other thing. They don’t go with this price (well, it’s what we call oligopolies in classical economic theory) where we don’t compete with each other on price. You’d have a few companies that dominate the market and the consumer gets screwed by all of them, rather than just by the monopolist, if you like. What these companies though, that we like to invest in do is that as they grow like Vanguard, they give back to their customers, which makes them more powerful and they get bigger and they give back to their customers again. So, they keep the profit margins continuously contracting but because the volume growth of their business is so good everybody wins, especially the investors in those companies.
That’s the model that Netflix is following as well. I’m also looking at Alibaba. It is a company, another Chinese company. This one is definitely listed on NASDAQ, which is also a phenomenon, as is Tencent so, there’s another one. It’s almost like if you look at the biggies in the US. If you bought the FANGS, as they call them, Facebook, Amazon, Netflix, Google – if you had bought those 4 you would outperform everybody else’s portfolios because those are the 4 stocks that have dragged the S&P 500 Index higher over the last, well certainly up until when Trump was elected, but over the last 3 – 4 years, going back even further. Now, in China, you have a similar situation there with Tencent, Alibaba, and Baidu. If you just replicate the US example, into the Chinese market and hold Tencent, which is obviously the one that we prefer of the 3 because that’s in the portfolio.
Alibaba and Baidu, and also their relative ratings to the Western world’s big stocks are better. If you can imagine, it’s almost like if you’re having a war because sometimes business is like a war, and you’re coming onto the battlefield with AK47’s and your competitors have all got swords. That’s really what it’s like so, if you’re backing those who’ve got the AK47’s rather than those who are trying to compete with swords. Clearly there’s only going to be one winner in this and there is enough to go around for these giants at the moment. The fun, of course, is going to now start in Singapore where we see what happens when you have this fight between Amazon and Alibaba, and there’s going to be increasingly those kinds of battles but there’s a whole lot of value still available from the old economy companies that are really being chewed up and from the market development and the market growth and parts of the world that haven’t seen it yet.
It’s an interesting time to be alive. It’s an interesting time if you make the right investments that you can have this run with these exponential companies but you’ve got to get your head around things like exponentiality and try and suspend your disbelief at PE ratios because the price to earnings ratios do not apply to these companies. They don’t make profits or they make tiny profits. The profits only come when you’re at the size of Facebook, or Apple, and then those profits are, as you see, the profit margins are really strong and well into double digits in certain cases, between 20% – 40%.
