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Did you know New York Stock Exchange traders have a long-standing tradition of celebrating each year's last trading day with a song that goes back to the great depression in the 1930s? The song’s lyrics are pretty interesting. Their main message is to encourage traders to look into the future because things will surely improve in the new year. It goes like this: Wait till the sun shines, Nellie And the clouds go a-drifting by We will be happy, Nellie Don't you cry… It gets even more interesting when you hear the NYSE floor traders sing it (watch here). There is something positive and encouraging in hearing fellow investors’ message of a better future. Listening to the song has made me wonder how we all can turn 2024 into a better year for our portfolios as the NYSE traders' song promises. In other words what should our New Year investing resolution be. What Is Your Investing Resolution?I’ll let you in on my 2024 investing resolution: Getting 1% better at investing every day.
Why did I choose this as my resolution? Because working on ourselves and our skills is the only thing in investing that is under our control. We can’t predict the market. We can’t forecast the macroeconomic factors. We can’t even precisely calculate the fair share price of the individual stocks we own. That’s depressing, I know! But we have another choice! We can focus on the only thing in the stock market under our control: ourselves. Fascinatingly, getting 1% better in investing every day compounds our skills by 37 times in 365 days! The power of companding is amazing! By learning a new investing concept each day, researching a new stock every day, and learning about successful investors’ approaches to managing their money throughout the year, by the end of 2024, we will be 37 times better at investing. That’s my 2024 investing resolution. What’s yours? You can fill out this one-question form to officially commit to it. Remember than sharing resolutions increases the chances of reaching them. By the way, it takes a few seconds after you click for the resolution form to load on Stock Card’s website. When you share your investing resolution, we keep it on your account. We will check in with you regularly in 2024 to support you with resources and keep you accountable throughout the year so you can make your 2024 portfolio the best one yet. Happy New Year! Only a few years ago, Uber was losing a couple of billion dollars each year, had billions of dollars in debt, and needed an actual path to profitability. I thought Uber was going bankrupt. But things have changed! DRASTICALLY! Uber is profitable and generated almost one billion dollars in free cash flow in a quarter. The company is also expected to join the S&P 500 index on December 18th, 2023, and things are looking GOOD on the financial statements. What changed? Is Uber a buy now? Let's talk about that! A YouTube video and podcast audio version of this post is available on Saturday 12/16/2023. 📺 Watch | 🎙️ Listen |💻 Read I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with past blog posts on How to Invest Like Buffett? How to Invest Like Charlie Munger, or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. Uber is now a much different company than just a ride-sharing business. It offers a variety of rides, ranging from riding with your pet to riding on a 2-wheeler and tricycles in certain markets. It delivers food to your door and works with businesses for their travel needs. It has entered the advertising market and divested from unprofitable technology development units. It has a rational and steady CEO, while its CFO is leaving, and it is expected to join the S&P 500 index thanks to becoming a GAAP profitable and free cash flow generating enterprise. Uber's Fundamental Strengths
Let's break down Uber's fundamental strengths: Uber has transitioned from losing almost $5B in negative free cash flow in 2019 to generating nearly $1B in free cash flow in the latest quarter. Free Cash Flow is calculated by taking net income, adding non-cash expenses such as stock-based compensation and interest expenses, and removing capital expenditure. It's important because it indicates whether the company's business model is profitable regardless of its interest costs and long-term investment. With that financial metric, Uber is now a nicely profitable company. Why? What has changed? Tracing back free cash flow to its components and comparing it with last year's same period reveals a big jump in cash from operating activities, and if you trace that back through its elements, you see a jump in net income and accrued insurance reserves. Putting cash in reserve for possible future claims against your operations is likely a one-time activity; you add it back in free cash flow calculations. If we put that aside, most of the free cash flow change is from net income. Let's trace that back to its component, too. Two factors impact positive net income: higher revenue and lower sales, marketing, and general and administration expenses. Those are good signs! The cost-cutting makes sense and is easy to understand. The company eliminated unnecessary operations, cut back its headcount, and reduced its marketing and advertising expenses. Why is revenue up by almost $1B in Q3 2024? Understanding that should give us a good sense of where the company is headed. The company has had a few quarters of steady double-digit gross booking growth. Although the growth rate has slowed down, it is still double digits. Can Uber maintain its topline growth? According to the company's CEO, the growth is thanks to a strong travel season because travelers are among the most steady segment of Uber's customers, and the strength of the travel segment has even surprised Uber. CEO Dara Khosroshahi talks about how future growth comes from international expansion, subscription to the Uber One program with 15 million members who use multiple Uber products more often than others, and the introduction of new products such as Uber for teenagers. Like most other tech companies with direct access to customers, Uber has also entered the advertising market and is now generating revenue from ads, aiming to reach $1B+ in ad revenue. On the profitability side, Uber is relatively cost-effective at its core because it doesn't own its taxi fleet, making it easier to scale and grow efficiently into new markets. The company should be able to maintain its lean operations as it grows its business. The latest earnings report talks about leveraging machine learning to price its trips better, onboard drivers faster, and grow profitably. Moreover, the company has been cutting down on the monetary incentives it has historically paid customers to use the platform. It now plans to transition to nonmonetary incentives, such as upgrades, instead of giving deep discounts. Uber's CEO correctly explains that the company has to learn to operate lean and grow to keep its profitability when the demand curve goes through a downturn. To better understand if the company's growth and profitability are sustainable, I went back to a few quarterly earnings reports in 2021, when the company hit a new high, and then in August 2022, when the company hit a new low stock price. I'm impressed with the leadership's steady focus on their plan and quarter-after-quarter execution of what they explained they plan to do. They divested out of the cash-burning autonomous driving and drone delivery business. They sold their less profitable businesses in Asia in exchange for equity ownership in the acquirer company, as good examples. It has more than $8 Billion in cash and cash equivalent, vs. $10+ Billion in total debt. However, the company has taken steps to reduce its high-interest debt, such as a 7.5% $1B convertible senior note due in 2025 by raising $1.5B in low-cost convertible notes in November 2023, effectively strengthening its balance sheet. Uber's Fundamental RisksOn the risk side, Uber is still a highly indebted company with almost $10B in debt, as we just talked about. Even though it is profitable, its debt affordability factor is above five times. It means the debt is more than five times the company's EBITDA at this point. Additionally, the company has always been fighting regulatory backlashes in several markets. For example, this year, Uber and its competitor Lyft were forced to pay drivers $328 M in a wage disagreement settlement. You also see the impact of such regulatory backlashes on the company's financial statement in the form of one-time payments and reserve allocation for future lawsuits and settlements. However, you can see the company has broadly been able to grow and overcome its regulator challenges through lobbying and settlements. The world workforce likes the flexibility and ease of being independent drivers for taxis and delivery services. When customers, in this case, drivers, push for it, there is growth even if regulators push back. Assuming driverless taxis and drone deliveries are the future, by divesting from that business, Uber may soon get disrupted by new competitors such as Tesla. In a way, the company is sacrificing future market leadership over today's profitability. But at the same time, with today's profitability, there is a company that can lead the market in the future. While technological competitive advantage is a concern, Uber seems on the right track. We are down to valuation assessment. Since Uber has recently become profitable, its PE ratio is extremely high, above 100 times. Its forward PE, which takes future earnings to calculate the ratio, is still high at above 50 times. The price-to-sales ratio is hovering near four times, indicating investors believe Uber will be much more profitable and a bigger company than it is right now. The primary ride-sharing market is expected to grow by 7% and food delivery by 22%. Combining the two, Uber operates in a market with an average rate of 15% annually. With that growth rate, Uber would take ten years to grow its revenue by four times. So, for the valuation to make sense, Ube needs to keep growing topline and profit simultaneously. This is an over-optimistic valuation. What's Verdict? Is Uber A Buy Now?
Honestly, I'm very impressed by Uber, mostly because I had no idea this company was on such a nice fundamentally strengthening track. I'm worried about its debt and valuation, but I appreciate its ability to keep growing, and the CEO has proven himself to be a reliable leader. Would I buy it now? I don't think so. There is too much good news compiled about Uber now: the recent profitability, the news of joining S & P, and revenue growth that has even surprised the CEO and his team per their confession during the latest earnings. I want to buy Uber when no one is talking about it. For that reason, it goes to my watchlist. Last week, when I broke down the fundamental reason behind Affirm's 100% stock price jump, I told you that in 2024, I plan to revamp my portfolio and only hold a maximum of 20 stocks. That makes some very conservative in saying yes to stocks with lots of debt or high valuation. If Affirm made it to my 20-slot portfolio, last week's episode is a good next post. I'll see you next time,
Look at Affirm's stock price chart! 30 days ago, it was $20 per share. Now, it is $42, 102% higher. Let's move to the right of the chart and look at the Analyst price target. Their average price target is 50% lower than its current price. So, who is right? Is Affirm 100% better fundamentally than where it was 30 days ago, or are the financial analysts right about Affirm and the stock being overvalued? Let's talk about that! I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with past blog posts on How to Invest Like Buffett? How to Invest Like Charlie Munger, or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. Affirms Fundamental StrengthsLet's break down why Affirm stock is up more than 100%. Looking at the stock price reaction to the latest quarterly earnings report, I highly doubt the jump is purely fundamentally driven. One reason for this is explained by the fact that Affirm is a stock held by Roundhill Meme ETF, meaning it has a significant portion of its outstanding shares shorted, resulting in a possible short squeeze in the last few weeks. But, there was positive news from the earnings report that triggered the short-squeeze. So what's happening there?
Affirms Fundamental RisksShopify not wanting to deal with underwriting BNPL loans on its own is a segue to assessing the risk of investing in Affirm.
Is Affirm stock A Buy?Affirm certainly has a great story to tell with its Affirm Card and its focus on giving consumers this new form of payment card instead of any debit and credit card. And the BNPL market is definitely expected to grow significantly in the coming years. What would I do? If I only want to invest in 20 stocks maximum, which is my goal for 2024, I must make relative judgments about which stock deserves a spot in my portfolio. With that goal, purely from a valuation point of view, I would rather invest in a company like PayPal, with a significantly lower valuation at this point and a steady free cash flow and positive earnings, who, by the way, happens to have a bigger market share in BNPL segment than Affirm. If I want to take consumer delinquency and credit risk and bet on the BNPL market, I prefer PayPal over Affirm. There is a fundamental analysis post on PayPal that you can read after this post. If you have read until this point, it means you have a curious mind and want to do your own research. So continue your fundamental research on Affirm on Stock Card: StockCard.io/AFRM. If you end up there and want unlimited access, use promo code "welcome" to get 20% off your annual VIP subscription. I'll see you next time,
This week, we said goodbye to Charlie Munger, Vice Chairman of Berkshire Hathaway and the long-time partner of Warren Buffett. His one-line witty comments gave us thought-provoking laughs, and his speeches taught us to think independently and intelligently. To celebrate him, I want to summarize how Charlie Munger used to invest and break down his mental tricks and approach to picking long-term investments. That's the first part of today's post. The second part of this post is for those of us who want to get practical and put our learnings into practice. I'll use Charlie's investment approach to screen for stocks that meet his criteria. Let's talk about that! I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett? or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. All Good Investing Is Value Investing On many occasions, Charlie has made it very clear that to him, the only intelligent way of investing is to pay for something less than what it's worth. This doesn't mean he would go after beaten-down stocks or actively search for the dip. However, it means Charlie wouldn't invest in the best companies in the world if he could not invest in them at a reasonably fair price. A good example is Berkshire's investment in Apple (AAPL) when it was able to buy the stock during the first quarter of 2016 at around $30 per share, and the stock price now hovers around 200 per share, representing 400%+ return on initial investment, excluding all the dividends it has paid Berkshire. This was about when the broader market started comparing Apple to IBM as the iPhone sales growth slowed. Charlie and Warren invested in Apple at around 11 times the price-to-earnings ratio and 2.5 times the price-to-sales ratio, which turned out to be an extremely reasonable price for a dividend-paying company that went on to become the largest public market holdings of Berkshire's portfolio in 2023. Charlie's most important stock-picking trick is to focus on valuation rather than paying too high a price for even the best stocks. Avoiding Portfolio Ruin by InvertingCharlie followed another fascinating and unique mental model that helped him avoid the most common investing mistakes. He calls it the inversion approach. He tells a fascinating story about his time in the Air Force. He was a weather forecaster to help pilots avoid bad weather. To solve the problem of how to save the pilots from bad weather, he used to ask himself the easiest way he could kill those pilots because of bad weather conditions. The answer was freezing conditions and fog. And he focused all his efforts on avoiding fog and freeze. He used the same "inverting" methodology in his investing. He asked himself how he could ruin his portfolio in the stock market. And the answer was to invest in companies that can easily go wrong or lose companies. Some good examples are companies that make no money or free cash flow or need the stars to be aligned to become a home run. Charlie would religiously avoid losing companies, even if he had to sit on his hands and do nothing. Understanding the Market's Natural RhythmBerkshire Hathaway's stock has dropped by over 50% at least three times during Charlie's life, and those drops never worried him a bit. If you want to generate outsized returns in the stock market, you better be able to handle a 50% drop with grace, and it should not impact your investment decisions. According to Charlie's teachings, there are two groups of good investors in the world:
If you want to follow Charlie's steps, you need to figure out which camp of the good investors you belong to. Those who know they can't tolerate a 50% drop and accept the slow-steady return of the overall market. Or those who understand and are not phased out by a possible 50% drop. Charlie Munger Stock ScreenerIn the first part of this post, we talked about how Charlie Munger invests. Now, in this second part, I want to get practical and look for stocks using Charlie's investment methodology. I'll use Stock Card's stock screener tool under the tools section of the website. You can use Stock Card or any other screener.
When combined with the other criteria, we should get a list of high-quality companies that are undervalued and are experiencing a temporarily undervalued stock price. At first glance, 28 companies meet the criteria now. I return to the screener to add a few more filters, exclude companies not listed on the Nasdaq or NYSE stock exchanges, and remove all those tiny public companies with a market cap lower than $50M. I'll save the screen as "Charlie Munger Stock Screener" if you want to get the list now or continue your research. If you liked this post and the screener we built together, I recently recorded an ETF screener demo video that you may also find interesting and helpful as the next post to read. Otherwise, I'll leave a link to post where I talked about the 6-step process Warren Buffett uses to research stocks. That's also a good next post to read to continue your education. I'll see you next time!
What do you think is the worst investment mistake you can make in 2024? There is always the common mistake of not investing based on facts, following your fears and the market's excitement, or gambling in the market when you should focus on your long-term goals. Yes, those are all mistakes. But, they are not specific to 2024. There is one fundamental change in the structure of our economy and capital markets that creates a unique opportunity in the market. Not recognizing opportunity and adjusting your investment based on it is the worst mistake in 2024. Howard Marks, the co-founder of Oaktree Capital, a $160B asset management firm, is the first person who brought this mistake to my attention, and since then, many top investors have discussed it. Let's talk about that! I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett? or how to Find the Highest-Returning Stocks? Remember, this content is for education and sharing ideas and not advice to buy or sell any securities. Sign up for a free account on Stock Card to get notified of these blog posts, YouTube videos, and Podcast shows every week. We only ask your name and email address when you sign up. The Market's Structural ChangeBefore we get to the worst investment mistake you can make in 2024, let's discuss the structural change in the market and our economy that can cause us to stumble and make that mistake. The most prominent change in our economy and the stock market in the last year or so has been the rapid interest rate hikes by the Fed. We all know that! The interest rate hikes swept the stock market out of cash, created a massive scare, and shifted investors away from risky, high-growth stocks. But the stock market wasn't the only one that structurally changed. The bond market was also drastically altered due to the interest rate hikes. The First Part of the Worst Investment Mistake in 2024As the rates went up, so did the yield on new bonds issued by the government and corporations. For example, the 10-year treasury bond yield rate reached almost 5%. You may have heard that bond prices move in the reverse direction of interest rates and yields. As the interest rates and yields go up, the price of previously issued bonds at lower yields goes down because investors now have the option of buying higher-yield bonds. That's what happened in 2022 and early 2023, and it is part of the context we need to know to discuss the first part of the worst mistake we can make in 2024, which is ignoring the bond market and staying invested in the stock market only. Sure, the stock market is more fun, and there is so much to do and learn. But, when you can buy government-issued bonds at 4% to 5%, such a return on investment is comparable to an average return of the stock market, especially if you consider that for the capital gain on your government bonds, you don't have to pay state or local taxes. Even if the bond prices go down, you can hold on to your bonds until their maturity date, and you'd get paid all your money and cash in all your interest checks, too. Let's continue with the context and discuss the structural changes in the capital market further to get to the second part of the worst investing mistake in 2024. It's no news that in recent weeks, and after several interest rate hikes, the dust is settling, and things are changing. The new economic data, such as the inflation figure, showed the Fed's efforts to bring down inflation are starting to pay off, and there might be no need for additional rate hikes. The interest rate may stop at its current level and gradually even come down. This means the yield investors expect from future bond issuances can go down, and the current higher-yield bonds will be more in demand and higher in price. We already see early signs of that change. Short to long-term treasury notes and bonds' yields are going down, and the price of already issued and circulating bonds are going up. Buying bonds now may be a good strategy, assuming that the interest rates hang around at the current rate and then decline gradually. You get paid a higher yield, and the value of your bond can go up because the demand for your relatively higher-yield bond can go up. Ignoring the bond market, especially not investing in some high-yield treasury bonds with 4.5% to 5% yield now and in early 2024, can be a terrible mistake you can make. The Second Part of the Worst Investment Mistake in 2024But that's not all! There is even another part to the worst investing mistake. If you take investors' overall sentiment about the Fed's future actions and the broad consensus that the Fed stops to hike rates now and combine it with the fact that the stock market has had a relatively great year, with the Nasdaq being up by more than 30% YTD in 2023, you could assume that the effect of high-interest rates on the market has already been felt. Things are going to be great from here. However, it is very unlikely that the Fed will return to zero interest rate anytime soon. This means the cost of borrowing money for individuals and corporations will stay high compared to the last decade. Despite popular opinions, the effect of higher interest rates on individuals and, more importantly for investors, the impact on corporations' borrowing costs is only starting to appear in the market now. It will be even more prominent in 2024. There lies the context for the worst investment mistake you and I can make in 2024. There is a highly insightful podcast episode on Oaktree Capital's website in which Howard Marks, co-founder of Oaktree, and his Head of Performing Credit, Armen Panossian, discuss this topic. I leave a link here, and I highly recommend you listen to it. But let me break down what I've learned from that episode and my other research on this topic. While the bond and stock prices immediately saw the impact of higher interest rates in the form of lower prices and a "risk-off" period in 2022, the effect of the higher cost of borrowing capital will only show itself at company levels starting from now. Howard Marks argues that when interest rates hit zero during the low-interest period, especially during COVID-19, companies borrowed many short-term loans to finance their long-term projects at an attractive low-interest rate. As those short-term, low-cost funds dry, companies will look for new financing or refinancing their existing loans. Only then will we see the widespread impact of higher interest rates on companies, corporate bond rates, and companies in distress who cannot afford to pay their loan interests. There are many companies with solid market demand and long-term positive outlooks that will have to borrow money at higher yields due to short-term financing gaps. These companies tend to get lower credit ratings and have to pay much higher yields, and are commonly called corporate junk bonds. According to Howard Marks, the credit market (bonds) will generate stock market-like returns at a 10% annual return rate or higher in the coming years. This high expected return from the bond market is thanks to long-lasting higher interest rates and the massive expected need for refinancing commercial loans by companies in the new higher-interest rate environment. Therefore, the worst investing mistake you can make during 2024 is assuming that the impact of high interest rates is broadly over and forgetting about high-yield interest rate opportunities in the bonds. How To Find ETFs to Avoid the MistakeOf course, buying individual bonds may not be as convenient for many of us retail investors. Still, you can easily find a few high-yield corporate bond ETFs or even focus on a broad bond market index ETF and enjoy a better return in your portfolio. If the worst investing mistake in 2024 is ignoring the bond market, and especially not considering any high-yield corporate bonds. You and I need to figure out how to find high-yield corporate bonds to invest in. Generally, investing in individual corporate bonds requires a significant amount of capital. They are rarely available at small denominators for you and me to buy them directly from our brokerage. But luckily, there is an ETF for that. Some ETFs exclusively focus on high-yield corporate bonds. I'll show you how if you go to your Stock Card account now. Under the tools, pull up the ETF Screener, and under the general filters, look for the Fund Manager's strategy. You can see we have grouped ETFs into corporate bonds and high-yield corporate bonds. Use this filter, and add a few other ones that make sense to you. For example, I always look for ETFs with more than 1 year of investment history and more than $50M in assets under management to filter out new and operationally unstable ETFs. There are other good filters to play with, too. For example, pick low-fee ETFs or filter out high-risk ones. Those are ETFs that borrow a lot of money to boost their return or have a high turnover of assets You should try it for yourself and find your own High-Yield Corporate Bond ETFs to invest in. I saved this one I just created and here's the link so you can have a starting point for your research. Now, let's wrap up today's episode. Final ThoughtsThe most important lesson we have to learn from this episode is that the market cycles bring new opportunities, but we must educate ourselves. What worked for our portfolios in the last decade may not work in the next decade. Talking about our portfolios and higher returns reminded me of another post in which I talked about Rule 72 and how you can use it to double your portfolio faster. That's a good post to read next and continue your investment education. I'll leave a link to it here. I'll see you next time!
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