This post is about the performance of my “Fun Fund.” I am going to discuss the performance of this actively managed investment account in the recently ended second quarter of 2020 and share some thoughts on a few positions.
As a reminder, most of the prior posts about this account (which is really just a small Roth IRA that I am fussing around with) are located on this page.
The second quarter of 2020 just wrapped up and this annus horribillus (I think I remember that from junior high Latin due to some decidedly low-brow humor) is over 50% complete! They say not to wish your life away, but in this case I think we can make an exception.
Let’s Burn This Candle
My performance last quarter in the Fun Fund was pretty, pretty, pretty meh. As I shared in my last post about this account, I sold a portion of a couple of positions in April. I haven’t done anything else since then. As a result, I have rolled with over 30% of the account in cash during the May and June rally in stocks.
Considering the cash drag, I did aiiight last quarter: +16.40% Of course that’s not so great compared to:
While the S&P 500 romped to a 25.82% gain, the QQQ (not pictured because it is too sick) put up a 36.05% gain. Sick!
This is what the stocks I have in this account did:
Comments on Some of My Stocks
Conagra brands is now my largest position (after cash). They have benefited from the pantry stocking trend and forced dining at home due to covid. Don’t you have to like a business that thrives during a worldwide pandemic? Perhaps it is good to be properly labeled a “staple.” They would also argue that some of the initiatives following the Pinnacle foods acquisition are starting to bear fruit.
Viacom has roared back from the (very low) lows, but I am well underwater on the position. I did note some potential support for the thesis that the larger, post-merger VIAC will be able to enjoy the benefits of scale in negotiations to extend licenses for the content of the combined company now in the fact that they were able to get some seemingly favorable deals with a couple of distributors.
The most obvious of these was probably getting their cable channels on YouTube TV. I did not double down at $10. I am still not sure about their streaming strategy. I get selling content as an arms dealer, especially if the IP reverts to you and you are getting paid cost plus (is that an infinite ROIC? Thx NFLX), but I don’t know about so many different streaming “brands.” I have been trying out CBS all access and pluto TV. I actually think I might keep CBSAA after the trial ends, because of the Trek content and local live programming including the local news.
EBAY was an almost perfectly timed purchase. In this account, I got it right near the lows back in March ($30 is my basis). The only problem is that I was just starting to buy into the position and it “ran away from me”, so I didn’t get the amount I wanted. Still, it has grown into a better than 5% position. [I was also buying it for my HSA and have a much bigger position there with like a $35 cost basis]
I “plan” to write a post at some point about ebay, but basically it is obviously cheap (or was when i was buying it). I also think the quality of the business is superb. I believe EBAY was profitable from the first quarter of existence and EBIT operating margins are really like ~30%. It may not be a fast grower (prior to covid) and a lot of $$$ in silicon valley has been aiming to take them out since the 90’s. There are seemingly more people burning cash trying achieve scale and take out their moat now than there have been in many periods since the 90s, so it is not without risk (but otherwise I would have been paying 30x EBITDA instead of 6x).
I will save additional thoughts for a dedicated post, but real high level, I had Baupost and Elliott endorsing my conclusion that it was cheap (with their $$) and then Pat Dorsey (though he has since sold out), and the accounting figures saying it was a quality business. The clincher for me building some conviction was the signal from Jeff Sprecher, CEO of $ICE, seemingly leaking an (opening round, imop) offer to buy ebay for ~$50 bucks (for just the marketplace business) with apparently absolutely no reciprocation (thus the need to go public). I think he’s a smart executive and sharp entrepreneur and capital allocator. He looks like the real deal and he was begging for them to call him back to open bidding at ~$50 (by my math). I also like the fact that Pierre Omidyar is still involved with the company (on the board and owns a shitton of shares personally and via his foundation, which just released the white paper on google anti-trust violations/theory). So, I thought it was attractive in the mid to low $30s.
EBAY is also really benefiting from the covid sales. Talk about an anti-fragile business; it is basically just the global swap-meet with amazing, swap-meet/lease this stall returns (with the added benefit of earned reputation tracking and a quasi-clearing function where eBay will get involved if you get ripped off) and you can buy surgical masks, used toys for your kid, or book a vacation rental property through the site. I don’t have an opinion on new CEO yet. They also don’t compete with the people who do business in their marketplace unlike some other companies who shall remain nameless.
One thing I do not like about the company is that they report adjusted earnings backing out stock-based compensation. What kind of 1996 Silicon Valley BS is that? Probably can’t infer too much from that, but it’s not a good thing and throws a little shade on my “Omidyar is tending the store” point.
Turning to US Bank (USB): I also got lucky and bought this position back near the lows in March (also did not get the full size in place). Cost basis is ~$30 on this one as well. I understand the reservations about banks given the economy and how Japan 2.0 in the U.S. is a foregone conclusion, but I think a lot of that (along with a huge hangover/PTSD from the GFC) is priced into the banks. Unlike my other bank, WFC, USB has really executed without missing a beat since before the financial crisis.
It is large enough to get a seat at the table for the Zelle payment network/app/venmo killa’ that the big 6 banks have put together and also to benefit from the scale of tech spend and all that other nice economies of scale stuff. Most importantly, it is headquartered in Minnesota. Just a joke, but for some reason there are tons of good businesses HQ’d up there.
The business mix/structure of USB and Wells are better than the other big U.S. banks in my opinion. I don’t like investment banking as an equity investor. As a partner in a private investment bank? Sure. But as the silent, money, minority, partner with all those smart (maybe ruthless) people looking to take their fair share of the upside (or more) and avoid their share of the downside? I’ll pass.
USB also has a payments business that outside analysts say is “moaty.” I’m pretty sure, however, USB management opined their core banking was more defensible in some presentations I watched last year. If you have a Fidelity cash back card, USB’s subsidiary Elan Financial Services is the issuer. USB also has a big corporate trust/custody business.
Anyhow, USB seems to be a great bank and I understand why Buffett and Munger own it. I am looking to buy more USB on weakness (which, shouldn’t be a shocker if it comes, given a 10x levered financial institution in this covid-19). I sort of like Wells more, but in this account I am capping myself at 10% at cost for position sizes and I’m “all full up on crazy here” (WFC).
Due to the business mix and the distribution/money gathering networks, I would probably only buy WFC, BAC, and USB among the big U.S. banks. I am also watching the Canadian banks, but it seems like real estate is still stupid up there and there is likely to be some pain to come.
TL;DR
In conclusion, I did ok last quarter in this account but the ~30% cash was a pretty big drag. I am not trying to make some big macro market call (thankfully my trend + value account gets most of my market timing demons out, in a systematic way), but I just don’t like to buy all at once and prices have just really ripped, considering what is going on. I feel like I will get a chance for some more bargains. If not I will just put the remaining cash into SCHW, USB, and TD.