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Instacart is one of the hottest tech IPOs in 2023. It is expected to go public with a nearly $10B market cap, making its founder almost a billionaire while making many Silicon Valley investors, including Y Combinator startup accelerator, a lot of money. But Instacart wasn't always this hot idea and startup, nor was its founder a successful entrepreneur. Aprova Mehta, the company's founder, is an Indian-born who went to school in Canada as an Engineer and later moved to the U.S. to work for Amazon. He had worked on 20 products and startups in the two years between quitting his job at the eCommerce giant in 2010 and launching Instacart in 2012, and sadly, all had failed. From building an ad network for social gaming companies to spending a full year developing a social network specifically for lawyers, he tried many companies, and none stuck. Instacart's $10B valuation and IPO success is the story of building the right product for a massive market at the right time. Its success sits at the intersection of eCommerce and Gig Economy, and it can be a great investment when it goes public. If you are curious about Instacart, ticker CART, let's research it together.  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. This episode is a mix of interesting investing-related stories and fundamental analysis. But before discussing either, let's talk about the elephant in the room. Instacart's corporate name isn't Instacart. It is Maplebear, doing business as Instacart. When the initial founding team incorporated the company in 2012, they registered it as Maplebear. Don't get confused if you see that name on the company's Stock Card when you research it on StockCard.io (our platform) or if you look it up on your brokerage account. Honestly, I spent an hour trying to figure out why Maplebear but didn't find a good answer. So, that's that! Now, to the real story and the fundamental analysis: The Right Product At the Right Time In a Massive ProductI started this episode by saying that Instacart is the story of building the right product in a massive market at the right time. The online grocery market is rapidly growing, with more than 25% expected annual growth rate until 2030. According to the company's IPO documentation, only 12% of grocery shopping is now happening online, and when you talk about a $1.1 trillion market, even a 1% increase in that rate means an $11B in revenue potential for Instacart. This is the advantage of building a product for a massive market such as groceries, which translates into a significant growth potential. By the way, if you want a list of other online grocery stocks, type it in the search bar on StockCard.io, and under the themes column, you'll find the list. If you are new to Stock Card, we manage a database of more than 500 themes and collections. We've got you covered if you are looking for online grocery, generative AI, EV stocks, or any other theme. Go to StockCard.io and look up the theme you are interested in the search bar. You can also use the screener to make your search even more accurate. For example, what if you look for online grocery stocks with growing sales? Go to the screener tool, put online grocery in the keyword search, and apply any additional filter you want. I just created this screener, and here's the link to it in the show notes in case you want to continue your research or copy the screener to your own Stock Card free account. Back to Instacart, the growth isn't limited to the online grocery market. The company has also realized the power and profitability of the digital advertising business model. Roughly 30% of Instacart's revenue comes from advertising. This is when consumer packaged goods brands pay Instacart to run special promotions, place their products in more prominent sections of the app, and let them run promotions and deals directly to the customers. When I use Instacart to order groceries, I am always shocked by big brands' promotions and deals on the App. For example, there is always a big push by PepsiCo to purchase more of its snacks to get free delivery. Indeed, when you dig into Instacart's IPO documentation, you'll realize Pepsi will invest $175M in the IPO, indicating how important it is for big consumer packaged foods brands to directly influence the consumers' purchase decisions, and the online store is the best place to do so. The digital advertising and the chance to grab shares of consumer packaged goods ad dollars expand Instacart's addressable market significantly. However, the idea of online shopping wasn't new, even in 2012, when the company started its operations. Neither was the idea of online grocery shopping. Before Instacart, there were myriad online grocery companies. Webvan was the most known online grocery company that had raised more than $400M in venture capital funding and operated for three years before it went under when the dot-com bubble burst in 2000-1. How did Instacart succeed when many failed? It's all about timing. The online grocery concept could not have found a strong demand until eCommerce truly gained mass traction. In the U.S., the 2010s decade was when eCommerce started to really take off. Moreover, Instacart could only scale when it could harness the advantages of the gig economy. The gig economy refers to independent contractors hired for a specific task. All Uber drivers and food delivery workers are considered gig workers, and that market also took off after the 2008 financial crisis as more people looked for supplementary income and other means to make any money. The gig economy has risen in the last decade, with a 15% annual growth rate from 2010. Since 2015, three years after its founding, Instacart dabbled in the gig economy. It now heavily relies on its independent "shoppers" who get paid hourly to use the app to do the grocery shopping on behalf of its customers. Without broad acceptance of the gig economy and the normalization of working as a gig worker, Instacart operations couldn't have been as profitable as it is today because it doesn't need to own its own fleet or hire its shoppers, which makes its operations quite scalable. How does building the right product at the right time and in a massive market fair against our usual fundamental analysis framework? Instacart (CART) Fundamental Analysis
Mind you, the main driver of FCF and net income are related to tax credit allowance due to deferred tax assets in Q4 2022. This is when a company has paid too much taxes and can claim them back. In the case of Instacart, it had a much bigger valuation a year ago and is allowed to claim valuation-related tax assets. Looking at the above fundamental, Instacart has chosen the best moment in its operating history to go public and paint a good picture. However, I am concerned about the revenue growth, its business model's unit economics, and whether the expected roughly $10B IPO valuation is justified. Instacart (CART) ValuationAt an almost $10B fully diluted valuation, the company is going public with an almost 4.5X price-to-sales ratio. The 4.5X price-to-sales ratio means it required sustained 35% annual growth in revenue in the next 5 years to grow in that valuation. Historically, looking at it 1H of 2023 vs. 2022, the company achieved 31% growth. It also grew 39% in 2022, vs 2021. So, the recent revenue growth is right about the 35% target it needs to achieve to justify its valuation. However, if you look at the number of orders on Instacart in the first half of the year vs. last year, you see almost no growth. To justify the valuation, we need to see more evidence of such 30%+ revenue growth for a few more quarters to believe the revenue growth is sustainable. So even if the company has had its valuation from almost $40B in 2021 down to $10B in 2023, it isn't undervalued. But of course, companies don't reach their valuation just by growing sales. They become more profitable and generate more free cash flow to get higher multiples. There lies another concern. After deducting the cost of sale, the biggest expense for Instacart is the cost of user acquisition. In 2022, the company spent nearly $650 million on customer acquisition. In the IPO documentation, the company talks about how, before the COVID-19 pandemic, its unit economics wasn't mature. This means the cost of acquiring a new user was much higher than the revenue each user used to generate. During the pandemic, they saw significant organic use growth, leading to higher gross profit per user. There is the risk that people will gradually return to in-person shopping as we move away from the pandemic. I see it in my own behavior. I was 100% an Instacart user during the pandemic, and now less than once a month. Old habits die hard, as they say, and it took me a year to gradually put Instacart aside most weeks, but it is happening. I expect Instacart needs to spend more and more on advertising and consumer incentives and discounts. Even now, it is barely profitable. That's my biggest concern about buying the stock at the IPO. I want to see a few quarters of sustained user growth without a significant increase in user acquisition before jumping in. The advantage Instacart has is its market leadership. Other players such as Amazon Fresh, Uber Grocery, and other grocery delivery companies are far behind Instacart, and although they are gaining market share, as per the IPO documentation, Instacart benefits from a much higher average order value than the competitors. In the online grocery segment, Instacart has the lead over others. Is Instacart (CART) IPO A Buy? I plan to let it go public and see how it can sustain its revenue growth in the coming quarters. There is simply too much of a residual effect from the pandemic on consumer behavior that I would want to see a few more quarters of sustained growth. If you have a different strategy, share in the comments, and if you like an episode like this with a mix of investing stories and fundamental analysis, like and subscribe so I know what you want to watch and listen to more. I'll see you next time! I've read a fascinating study about cloning super investors like Warren Buffett this week. If you copied Warren Buffett's top 10 holdings and rebalanced them every quarter, you could have outperformed the S&P 500 by three percentage points yearly between 2000 and 2019. That's strong evidence that sometimes copying the right investor can be a good strategy. But not every investor is worth that much respect. A better strategy is to find the top investors, aka super investors, and use their top holdings as a source of new stock ideas. That's precisely what we are going to discuss in today's post. There are three stocks that 20 super investors hold the most in their top 10 portfolio holdings. I'll research them fundamentally first and then share whether adding them to our portfolios makes sense too  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. There is no actual definition of super investors. They are the most prominent hedge fund managers or investors we hear from in the financial media. People follow their advice, share their quotes, or read their books and writings. You must already know many of them. Warren Buffett sits on the top of the list as the undisputed super investor with $350B in assets, excluding the value of all the companies Berkshire Hathaway wholly owns. Howard Marks, Bill Ackman, Chuck Akre, Monish Pabrai, and Michael Burry, with a few hundred million dollars in assets under management, are some of the others on the list. Even Bill Gates is considered a super investor because of his $40B+ Bill and Melinda Gates Foundation Trust. In summary, the super investors list is the who's who of investors because they manage a lot of money, influence the funds' decisions, or are known in the media as great investors. I went through the top 10 holdings of each super investor's portfolio reported on their quarterly 13F document as of the 30th of June 2023. The list of top 10 holdings across the 20 super investors includes more than 150 individual U.S. equities. These super investors have a limited number of stocks in common, which shows how hard it is to find the best stocks to invest in now. The most common stocks among the top-10 holdings of the 20 super investors got picked by 7 of them. The second most common stock was picked by six super investors, and the third one by four super investors. It shows that even the top 20 super investors have differing views on which stocks to buy and hold for long. And if it's so hard to agree on the best stocks to hold, the fact that some stocks got the vote of confidence of even a few still confirms those companies' strengths and quality. Now let's talk about the top three stocks most held by super investors and research them one by one. Number 3 - Moody's (MCO)If you are a Buffett fan, you already know this company. He has owned and held it for a long time because of its almost monopolistic power over the credit rating market. A few posts ago, when we discussed Fitch Ratings downgrading the creditworthiness of the United States, we talked about three rating agencies owning almost the entire market, with Moody's and S&P controlling 90% of the market. These credit agencies run a very stable business. Their market isn't growing rapidly. However, their products and services are essential to a healthy capital market. Many banks, governments, hedge funds, insurance companies, and investors use the ratings to assess all kinds of risks and make decisions to invest billions of dollars, lend money to or insure businesses, etc. If you research Moody's fundamentals, you see relatively stable and slow revenue growth in the best of times. However, the company has a solid gross margin above 70%, indicating a real pricing power in the market. It also boasts a 25%+ net profit and solid, free-cash-flow-generating operations. In its latest quarterly earnings call, I listened to the management's plan for the future and was very impressed with how Moody's focuses on future opportunities. It is experimenting with generative AI with Microsoft's help, leveraging its extensive database about companies, countries, properties, and global markets. It is expanding its footprint across the global market, such as Latin America. It is expanding its ratings into tokenized and digitalized bonds and assets. For example, it issued a rating for the European Investment Bank's first-ever blockchain-based bond this past quarter. These are evidence of how Moody's leadership team stays ahead of the curve and focuses on the market's needs. Moody's is a financially solid and well-managed company—no wonder several super investors own the stock in their top holdings. I added the stock to my 2023 Watchlist because the company is overvalued compared to its historical valuation. With more than 11 times the price-to-sales ratio and more than 43 times the price-to-earnings ratio, this is not a cheap stock by any means. The valuation has jumped above its average of 20-25 times the historical price-to-earnings ratio since the middle of 2022 without any significant jump in the earnings per share. This won't be a 10X investment, but buying it at a reasonable price can be an excellent investment for many years. Number 2 - Microsoft (MSFT)The next most held stock by 20 super investors in their top 10 holdings is Microsoft, ticker MSFT. Not only is Microsoft a favorite among super investors, but it is also among the top 25 holdings of nearly 400 ETFs. Let's dig into its fundamentals and see if we should own it as those super investors do.
What a great business! Where do the growth and cash come from? Microsoft Cloud is now a bigger and faster-growing business than the old Microsoft Office and other productivity divisions. The Azure cloud storage was up 18%, and the Cloud services business was up 27%. This is no joke. Microsoft is a $2.5 trillion company, generating double-digit revenue growth in the cloud and AI market that will get even bigger in the coming years. It's a major investor in OpenAI, the developer of the all-famous ChatGPT application, and it has already started offering generative AI cloud services to its customers, such as Moody's. The company's double-down on AI and generative AI will make the cloud business even more prominent. On the valuation front, the stock is priced right where financial analysts expect it to be, with 35 times price-to-earnings and 12X price-to-sales ratios. Once again, just like Moody's, we have a beloved company by super investors and many other investors, which is richly priced. This again goes to my 2023 Watchlist for a chance to buy it at a better price.
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China's Real Estate Is a Huge Problem for Local Governments
China's real estate problem is also a huge problem for local governments because of how these local governments make money. In China, lands in the cities belong to the government. Companies buy the right to build a property over the land from the government for 70 years. Land-use sales revenue and real estate taxes represented 38% of the local government's revenue in 2020. This revenue will decrease if the real estate sector slows down. Some provinces received less than 20% of their annual land-use rights revenue in 2020. The real estate sector's dismay has already created a major budget issue for local governments.
The government is responsible for investing in the local infrastructure and is a big spender and a source of employment for locals, too. Lower revenue means lower spending and lower employment across Chinese provinces.
So, as we discussed, the problem isn't just that Evergrande and Country Garden are running out of cash. The problem can be as big as the middle class losing their wealth, the banking system losing liquidity, and local governments losing revenue. As you can imagine, this is a HUGE and potentially catastrophic problem for the Chinese economy.
The government is responsible for investing in the local infrastructure and is a big spender and a source of employment for locals, too. Lower revenue means lower spending and lower employment across Chinese provinces.
So, as we discussed, the problem isn't just that Evergrande and Country Garden are running out of cash. The problem can be as big as the middle class losing their wealth, the banking system losing liquidity, and local governments losing revenue. As you can imagine, this is a HUGE and potentially catastrophic problem for the Chinese economy.
Why The World Is Worried About China's Real Estate Problems
The International Monetary Fund (IMF) forecasts less than 4% GDP growth for China in the coming years. This growth rate indicates a more than 50% drop in the country's economic growth compared to the past four decades. A 50% drop in a country representing 18% of the global GDP is a big deal. Even more importantly, according to BCA Research, China has been the source of more than 40 percent of global economic growth over the past decade, compared with 22% from the U.S. and 9% from the eurozone. And, of course, China is a major trade partner to the U.S. Japan, Germany, India, Australia, and many other countries.
Bringing it to our portfolios, about 7.6% of the S&P 500's total revenue comes from China, according to FactSet. The tech companies in the S&P500 make 16% of their revenue from China. Semiconductor companies get 27% of revenue from the country. For example, the country represents 20% to 25% of Nvidia's revenue.
The world economy is a massive web of interdependencies and connections. If China is in trouble, so is the rest of the world.
Bringing it to our portfolios, about 7.6% of the S&P 500's total revenue comes from China, according to FactSet. The tech companies in the S&P500 make 16% of their revenue from China. Semiconductor companies get 27% of revenue from the country. For example, the country represents 20% to 25% of Nvidia's revenue.
The world economy is a massive web of interdependencies and connections. If China is in trouble, so is the rest of the world.
How Can We Protect Ourselves Against China's Real Estate Risk
First of all, before panicking and taking your money out of the market in fear of China's threat to the world economy, we must say that there is still hope, and the Chinese government may very well be able to control the situation before it becomes a crisis. These measures include cutting the interest rate, giving mortgage-related incentives, and working with property developers to manage and refinance their debt.
Where there is more risk for individual investors is to invest without considering the hidden risk that may arise from the situation in China. As they say, the blade you don't see usually cuts the deepest. For example, suppose you are pouring money into Nvidia because it is skyrocketing due to the AI demand. As discussed earlier, you must also consider that a possible economic crisis in China is a risk to your Nvidia investment.
In my view, the proper response to the possible economic crisis stemming from China or any other reasons is always the same:
See you next time!
Where there is more risk for individual investors is to invest without considering the hidden risk that may arise from the situation in China. As they say, the blade you don't see usually cuts the deepest. For example, suppose you are pouring money into Nvidia because it is skyrocketing due to the AI demand. As discussed earlier, you must also consider that a possible economic crisis in China is a risk to your Nvidia investment.
In my view, the proper response to the possible economic crisis stemming from China or any other reasons is always the same:
- Invest slowly, steadily, and based on logic.
- Invest in things you have researched well and understand, not on the news's whim.
- Only invest the money you don't need to pay for your food, rent, mortgage, and other immediate needs.
- And always be mentally and financially ready for the risks you may not have seen.
See you next time!
Picture this: You go to YouTube, look up your favorite YouTuber, and he gives you one or two stock picks to feel excited about. Before you close the app, YouTube recommends another video titled "Best Stock Picks This Year," you watch it, adding a few more stock picks to your list. You promise yourself you come back and research them next weekend. But before you go to bed, a quick scroll through Twitter adds a few more ideas to your list, and just about the time you think you can't handle any more stock ideas, a breaking news article on CNBC adds a new ticker to the top. At best, you research a few haphazardly and skip the rest, and at worst, you forget about the list and repeat the same process the next day.
This stock-picking dance happens to all of us more often than we care to admit it. It is quite damaging to our success as long-term investors. In today's blog post, I'll share a process that can help you take control of your stock-picking process. It's simple and effective; anyone can use it, and it puts you in control and it is based on how Warren Buffett recommends you pick stocks.
Let's talk about that!
This stock-picking dance happens to all of us more often than we care to admit it. It is quite damaging to our success as long-term investors. In today's blog post, I'll share a process that can help you take control of your stock-picking process. It's simple and effective; anyone can use it, and it puts you in control and it is based on how Warren Buffett recommends you pick stocks.
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 ?.
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.
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 ?.
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 starting point of this template is how Warren Buffett recommends you pick stocks. After we understand how he does it, I'd share a more practical and useful template you can use to find stock picks according to his methodology but in the modern day and age.
Warren Buffett's Approach: On several occasions, investors have asked what he would do if he had a small amount of money and wanted to make lots of money in the stock market. His answer has two parts:
To pick stocks following Buffett's suggestion, I have devised a framework I call a three-legged stool with a flower vase.
Warren Buffett's Approach: On several occasions, investors have asked what he would do if he had a small amount of money and wanted to make lots of money in the stock market. His answer has two parts:
- Find small companies that most people do not talk about. By that, he doesn't mean penny stocks. But he refers to companies with a small market cap that are gliding under the radar for now and small enough to be able to multiply by ten times or more over the years.
- Research many companies, starting from A and going to Z of publicly-traded companies. He literally means you should start from companies alphabetically and research them all one by one.
To pick stocks following Buffett's suggestion, I have devised a framework I call a three-legged stool with a flower vase.
Market Cap Filter
This typically refers to a company with a market cap of at least $50 Million or above but lower than $10B. Chris Myer, the author of the 100-bagger book, explains this best. Chris has looked through companies created more than 100 times in return between 1962 and 2014 and found the most common characteristics of such companies. The idea is that smaller companies can grow ten or 20 times, still be small, and have room to grow over the year. In contrast, Apple today has a roughly $1Trillion market cap. We can safely assume it won’t go up 10 or 20 times and certainly not a hundredfold. So for us long-term investors buying companies to hold for 3, 5, or 10 years and, in return, expect to get rewarded significantly, we have to focus on smaller companies.
How to find them?
It's one of the easiest criteria to screen for. You go to Stock Card's stock screener tool, and choose the market cap filter, and remove companies with less than $50M and more than $10B in market cap. Please notice this would exclude very good investments such as Airbnb or Nvidia. But, notice, here we are focusing on finding companies that don't trend, and also, we are looking for companies that truly deserve to be held for a decade. Nvidia is a great company, but we all have exposure to Nvidia, either through holding broad market indexes such as SPY or some other ETFs.
How to find them?
It's one of the easiest criteria to screen for. You go to Stock Card's stock screener tool, and choose the market cap filter, and remove companies with less than $50M and more than $10B in market cap. Please notice this would exclude very good investments such as Airbnb or Nvidia. But, notice, here we are focusing on finding companies that don't trend, and also, we are looking for companies that truly deserve to be held for a decade. Nvidia is a great company, but we all have exposure to Nvidia, either through holding broad market indexes such as SPY or some other ETFs.
Revenue Growth Filter
We've often heard that fundamental investing is picking businesses, not stocks. This means we must have a few criteria to differentiate a good company from a crappy one. If there is only one filter we should pay attention to, we should focus on revenue growth or a company's ability to grow revenue. Without revenue growth, it is very hard to attract talent and capital, and the company starts to shrink and decline, especially if the plan is to hold the stock for 3, 5, or 10 years, this criteria becomes super important.
How to find them?
One simple way to look at it is to just look at companies who grow their revenue in the last 12 months. But businesses are like humans, they have good years and bad. You can't just judge them based on one year's performance. You want a company that has been able to grow most of the time, with some flexibility for slower growth in a quarter or two. I prefer looking at the company's annualized revenue growth in a 3-year. On Stock Card's screener, if you choose the "Solid Revenue Growth" filter, it is based on the company's revenue growth in the last quarter over quarter, year over year, and 3-year period. Looking at all three periods, Stock Card allows for flexibility in revenue growth interruptions if a company has a bad quarter.
How to find them?
One simple way to look at it is to just look at companies who grow their revenue in the last 12 months. But businesses are like humans, they have good years and bad. You can't just judge them based on one year's performance. You want a company that has been able to grow most of the time, with some flexibility for slower growth in a quarter or two. I prefer looking at the company's annualized revenue growth in a 3-year. On Stock Card's screener, if you choose the "Solid Revenue Growth" filter, it is based on the company's revenue growth in the last quarter over quarter, year over year, and 3-year period. Looking at all three periods, Stock Card allows for flexibility in revenue growth interruptions if a company has a bad quarter.
Cash Generation Filter
What's the most important reason businesses exist? I wait a few seconds for you to think about this. If you said making money, you are spot on. Yes, businesses exist to make the world a better place, innovate to solve problems, bring a dream to reality, and so on, but at the end of the day, the ultimate goal of any business is to make money.
How to find them?
We can use net income or profit that companies report at the end of the profit and loss statement. However, net profit results from accounting rules that don't always show the company's cash generation power. Instead, free cash flow is a better indicator of a company's ability to generate cash because it excludes non-cash expenses such as stock-based compensation and includes cash expenditure on capital expenditures. It shows the true power of a company in making money.
On Stock Card's screener, if you choose the "Cash Availability" filter, it is based on the company's free cash flow and its growth in the last quarter over quarter, year over year, and 3-year period. Looking at all three periods, Stock Card allows you to filter out companies that aren't truly cash-generating.
How to find them?
We can use net income or profit that companies report at the end of the profit and loss statement. However, net profit results from accounting rules that don't always show the company's cash generation power. Instead, free cash flow is a better indicator of a company's ability to generate cash because it excludes non-cash expenses such as stock-based compensation and includes cash expenditure on capital expenditures. It shows the true power of a company in making money.
On Stock Card's screener, if you choose the "Cash Availability" filter, it is based on the company's free cash flow and its growth in the last quarter over quarter, year over year, and 3-year period. Looking at all three periods, Stock Card allows you to filter out companies that aren't truly cash-generating.
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Those three filters are foundational to your long-term stock screening. However, they are not the only screeners you have to use, but it take the universe of more than 21K stocks listed in the U.S. down to around twelve hundred stocks on the day of recording this session for you.
Now, for the next part of our discussion, let's focus on how you can further narrow down the list from 12 hundred stocks to a few. If it were young Warren Buffett, he would have started researching the full list. But let's accept that with the help of technology, we can be much more efficient than Buffett.
Now, for the next part of our discussion, let's focus on how you can further narrow down the list from 12 hundred stocks to a few. If it were young Warren Buffett, he would have started researching the full list. But let's accept that with the help of technology, we can be much more efficient than Buffett.
Two Additional Filters To Screen Stocks Like Buffett
First off, there are super easy ways to cut things out.
Now, we have a screener that gives us about 100 stocks or so that are worth researching and spending time on. It is very easy to take this screener and make it more personal to your investment strategies. For example, if you want a company to be profitable or rather invest in undervalued stocks, those are additional criteria you can add.
This is the link to the screener I created in this blog post: Click Here. You can save it to your Stock Card account and adjust it to your liking, if you are on the mission to invest like Buffett!
I'll see you next time!
- Exclude stocks that are not listed on Nasdaq or NYSE. There are several other stock exchanges commonly known as Over-The-Counter. Many good companies are listed there, but the actual company does not officially represent the tickers traded on the over-the-counter markets. They tend to be ways for sellers and buyers to trade a stock, and in many cases, they have very limited trading volume. So you may buy a stock, and then you can't find anyone interested in buying it from you when it's time to sell or if you need your money back. You risk not investing in a big company such as Tencent, but then you get rid of many riskier investments. Risk isn't always bad, but trading volume risk is something you can easily eliminate by focusing on more prominent stock exchanges. Doing so brings down your stock list to about 500.
- My goal is to bring down the list to about 100 stocks, which is a great place to start researching them one by one. There is no way you can end up with a final list with this quantitative screening. There are very important factors, such as a competitive moat or management quality, that you'd need to evaluate qualitatively. Let's consider dividend payment. For me personally, if a company is less than $10B in market cap and revenue is growing, there is a lot of room to grow. I prefer the company to reinvest all of its money in its growth and future rather than paying dividends. Narrowing down the list to companies without a dividend cuts it by half.
Now, we have a screener that gives us about 100 stocks or so that are worth researching and spending time on. It is very easy to take this screener and make it more personal to your investment strategies. For example, if you want a company to be profitable or rather invest in undervalued stocks, those are additional criteria you can add.
This is the link to the screener I created in this blog post: Click Here. You can save it to your Stock Card account and adjust it to your liking, if you are on the mission to invest like Buffett!
I'll see you next time!
Michael Burry, the man who foresaw the 2008 housing market crash, has seemingly decided to short the entire stock market once again! Despite his fame, Burry isn't that good at predictions if you follow some of his forecasts in recent years. But he is a very observant investor and makes logical arguments about discrepancies he sees between fundamentals and prices. What signs and signals has he seen this time around that prompted him to take such a daring stance again? And are there reasons to believe him this time and take similar actions to short the market and save our portfolios?
Let's talk about that!
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 a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I also started sharing interesting investing-related stories. The first one was on what happens when the U.S. hit its 2% inflation target. More interesting stories are in the works.
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.
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This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I also started sharing interesting investing-related stories. The first one was on what happens when the U.S. hit its 2% inflation target. More interesting stories are in the works.
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.
Berry shorting the U.S. market is one of those fascinating stock market stories. Whenever he makes such moves, the entire market takes note. But betting against the market isn't anything new for the big short investor. He's a pessimistic investor by nature and has made several bearish predictions since his successful bet against mortgage-backed securities during the great financial crisis.
Michael Burry's Marker Forecast Track Record
In September 2019, Michael told Bloomberg that index fund inflows were distorting stock and bond prices, and when the inflow reversed, the result would be catastrophic. His argument is correct. Over $11 trillion is invested in index funds, up from only $2 trillion a decade ago. The problem with indexes is that the decision is automatic. No one picks stocks, and money, in most cases, automatically flows into large indexes giving the stocks listed in indexes enormous price boosts. However, the prediction hasn't come to reality since 2019. For example, S&P 500 index ETF (SPY) had gone to more than $400 per share, up from $219 per share when Berry predicted the catastrophic consequence of flowing money into indexes.
In December 2020, Burry took it to Twitter (now X.com) to say that Tesla's stock price is ridiculously overpriced. Split-adjusted and despite volatility between 2020 and today, Tesla's stock price is still hovering slightly higher than its December 2020 price.
Burry predicted a stock market crash in February 2021, after which the market went on for a few months of extraordinary rally thanks to the government stimulus and quantitative easing. While he was eventually correct, and we saw the rally ended in 2022, many considered his market crash predictions unreliable.
Michael Burry's attention turned toward Bitcoin in March 2021, predicting a crash that was quite the opposite of Bitcon's rally to above $60,000 per coin price tag immediately after his prediction. Bitcoin price eventually crashed in 2022, but not before many lost faith in Burry's predictions.
A pattern is emerging if we pay closer attention to all these predictions. Burry predicts catastrophic crashes based on logical evidence. But the markets do not necessarily follow his logic immediately. There is a time gap between when he shares his predictions and when they come true.
Even in the case of Burry's bet against mortgage-backed securities, he initially saw the risks in 2005, at least 2 years earlier than the actual price drop.
The secret to Burry's success is that he is patient even if the market takes the opposite direction in the short to mid-terms.
Back to his latest put options, Michael Burry had purchased put contracts with an unknown strike price and exercise date, seemingly betting that the SPY and QQQ (top 100 Nasdaq stocks) would go down in prices at some point in the future. Before his option contracts expire, he has the right to sell his put options at the strike price, presumably higher than the SPY and QQQ price. We don't know anything about these options' dates and exercise prices. He can be quite patient and hold his put contracts for a long time to profit from the eventual crash he predicts is coming. We can simply interpret this move as a way for Burry to protect his hedge fund against an eventual crash.
But Burry isn't the only one predicting a crash.
Other investors seem to agree with Burry and have shared similar bearish sentiments in different ways.
In December 2020, Burry took it to Twitter (now X.com) to say that Tesla's stock price is ridiculously overpriced. Split-adjusted and despite volatility between 2020 and today, Tesla's stock price is still hovering slightly higher than its December 2020 price.
Burry predicted a stock market crash in February 2021, after which the market went on for a few months of extraordinary rally thanks to the government stimulus and quantitative easing. While he was eventually correct, and we saw the rally ended in 2022, many considered his market crash predictions unreliable.
Michael Burry's attention turned toward Bitcoin in March 2021, predicting a crash that was quite the opposite of Bitcon's rally to above $60,000 per coin price tag immediately after his prediction. Bitcoin price eventually crashed in 2022, but not before many lost faith in Burry's predictions.
A pattern is emerging if we pay closer attention to all these predictions. Burry predicts catastrophic crashes based on logical evidence. But the markets do not necessarily follow his logic immediately. There is a time gap between when he shares his predictions and when they come true.
Even in the case of Burry's bet against mortgage-backed securities, he initially saw the risks in 2005, at least 2 years earlier than the actual price drop.
The secret to Burry's success is that he is patient even if the market takes the opposite direction in the short to mid-terms.
Back to his latest put options, Michael Burry had purchased put contracts with an unknown strike price and exercise date, seemingly betting that the SPY and QQQ (top 100 Nasdaq stocks) would go down in prices at some point in the future. Before his option contracts expire, he has the right to sell his put options at the strike price, presumably higher than the SPY and QQQ price. We don't know anything about these options' dates and exercise prices. He can be quite patient and hold his put contracts for a long time to profit from the eventual crash he predicts is coming. We can simply interpret this move as a way for Burry to protect his hedge fund against an eventual crash.
But Burry isn't the only one predicting a crash.
Other investors seem to agree with Burry and have shared similar bearish sentiments in different ways.
Bill Ackman's Market Forecast
Fellow hedge fund manager Bill Ackman is one of those. A few weeks ago, Ackman took it to Twitter (X.com) to explain his firm's belief that the U.S. treasuries were overbought. The evidence that supports Bill's argument when he made the statement was the $14B money inflow into iShares 20+ Year Treasury Bond ETF (ticker TLT) in 2023 alone. How exactly does Bill's bearish sentiment echo Michael Burry's bearish positions?
Bill is predicting that unlike many investors expecting the Fed to start cutting down interest rates, which in turn will boost the stock market prices, the opposite may be true. Bill believes the government's massive deficit would force it to issue more debt, and for the market to buy such debt, the government has to offer higher yields, which in return may mean lower equity prices. In a way, Bill Ackman and Burry agree on the possibility of lower equity prices and are hedging their risks differently but against similar forces.
Bill is predicting that unlike many investors expecting the Fed to start cutting down interest rates, which in turn will boost the stock market prices, the opposite may be true. Bill believes the government's massive deficit would force it to issue more debt, and for the market to buy such debt, the government has to offer higher yields, which in return may mean lower equity prices. In a way, Bill Ackman and Burry agree on the possibility of lower equity prices and are hedging their risks differently but against similar forces.
Morgan Stanley's Market Forecast
A recent market commentary by Morgan Stanley’s Global Investment Committee agrees with these two assessments. In summary, the committee believes that equity investors are too optimistic about interest rate cuts in the coming months, and the bond market doesn't support such a direction. The committee believes that the effect of the COVID-era stimulus has been lingering. Only now and in the coming months will we see the impact on consumer spending and corporate profits.
Cathie Wood's Market Forecast
That's the point that other investors agree with. In her monthly In the Know Updates, Ark Invest's Chief Investment Officer, Cathie Wood, warned investors of a possible hard landing for the U.S. economy. Cathie explained that companies would face pressure on their profits and profit margins for a few reasons, including hoarding the labor force and broad agreements between employees and employers in manufacturing and airline industries to increase salaries in response to inflation and union negotiations. Cathie Wood also believes the prices will start declining, adding more pressure on the company's profit margins. Those will be the reasons to see lower economic growth in the coming months, leading to negative sentiment in the stock market.
The question we should try to answer now is whether there are economic indicators that support Michael Burry, Bill Ackman, Morgan Stanley, and Cathie Wood's stances.
The question we should try to answer now is whether there are economic indicators that support Michael Burry, Bill Ackman, Morgan Stanley, and Cathie Wood's stances.
Recession Economic Indicators
Historically, there are a few recession indicators:
So of the four economic indicators, the yield curve is the only one predicting a recession, and we have seen at least three investors agreeing with the yield curve. It seems most economic indicators do not agree with Michael Burry, Bill Ackman, Morgan Stanley, and Cathie Wood.
What do we do with this contradiction between major economic indicators and prominent investors' stance to protect their portfolios?
- VIX Index or volatility index. The VIX index is based on the implied volatility of S&P500 index options. When VIX goes up, especially above 30, it implies a decline in S&P 500 prices. The VIX index under 20 indicates lower volatility and more stable S&P 500 prices. Currently, VIX is around 17 and doesn't signal a pessimistic sentiment.
- The second recession indicator is negative GDP growth. Both in Q1 and Q2 2023, GDP growth was positive and in the 2% range. There are arguments by investors such as Cathie Wood, who believe the GDP growth isn't real. She argues that GDP growth was up due to higher investment and government spending, not consumer spending. She argues consumers will stop spending in the coming months, and the inflation decline will also reduce the value of overall consumption. Nevertheless, at least nominally, GDP growth doesn't indicate a slowdown.
- The next recession indicator is the unemployment rate. Unemployment typically indicates the start of a recession, and the unemployment rate has remained quite stable in 2023. For example, in the July employment report, the unemployment rate remained stable at 3.5%.
- The final recession indicator we discuss today is the Yield Curve. It measures the difference between long-term and short-term interest rates. When the Yield Curve inverts, short-term interest rates are higher than long-term because investors expect a recession and lower interest rates in the future. Currently, in August 2023, the yield curve is inverted.
So of the four economic indicators, the yield curve is the only one predicting a recession, and we have seen at least three investors agreeing with the yield curve. It seems most economic indicators do not agree with Michael Burry, Bill Ackman, Morgan Stanley, and Cathie Wood.
What do we do with this contradiction between major economic indicators and prominent investors' stance to protect their portfolios?
How To Crash Proof Our Portfolios
First of all, this is a good sign. The market typically goes to the extreme when everyone agrees on the same conclusion. A healthy market results from differences in opinions and the pull and push between these bearish and bullish sentiments.
Secondly, I know these investors all seem smart. But no one can predict the market. As much as it's hard to accept it, even smart investors such as Michael Burry can be wrong or at least be early in their predictions. Bill Ackman is famous for the wrong call he made about Herbal Life, and Cathie Wood, like any other investor, has lost lots of money in the market after the COVID rally came to an end, even though she has a team of smart analysts and they follow a diligent research process. We can't just follow them blindly, they can make mistakes in their conclusions.
Where does that leave us? It leaves us with the old good wisdom we are all aware of:
Those are simple actions but not easy. If the market continues to rally, you'll regret not going all in. If the market crashes, you will regret some of the investments you've made now. Whatever you do, there will be reasons to regret and feel distressed. So, accept that there is no perfect investment decision. There is always risk in investing! There is no perfect investor. Invest slowly, steadily, in things you have done your research or have confidence in over a long period of time.
I see you next time!
Secondly, I know these investors all seem smart. But no one can predict the market. As much as it's hard to accept it, even smart investors such as Michael Burry can be wrong or at least be early in their predictions. Bill Ackman is famous for the wrong call he made about Herbal Life, and Cathie Wood, like any other investor, has lost lots of money in the market after the COVID rally came to an end, even though she has a team of smart analysts and they follow a diligent research process. We can't just follow them blindly, they can make mistakes in their conclusions.
Where does that leave us? It leaves us with the old good wisdom we are all aware of:
- Don't try to predict the market.
- Have cash on the side.
- Don't invest the money you need in the near future
- And don't let the market's rallies and crashes get under your nerves and force you to sell everything or go all in.
Those are simple actions but not easy. If the market continues to rally, you'll regret not going all in. If the market crashes, you will regret some of the investments you've made now. Whatever you do, there will be reasons to regret and feel distressed. So, accept that there is no perfect investment decision. There is always risk in investing! There is no perfect investor. Invest slowly, steadily, in things you have done your research or have confidence in over a long period of time.
I see you next time!
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