Member Info for sageoflondon

Broadly with dividends and new deposits I have annual fresh investment capital of around 10% of my pot - that works in my favour if prices fall currently.

Providing I still get the same overall level of income from my portfolio I try not to worry about the capital movements - more of a problem if the dividends drop where I am paid a dividend. Obviously I do my best to avoid capital losses wherever possible - but it isn't always possible. All of my dividends are re-invested at present anyway so just provide more dry powder to invest at lower prices when the market falls. If anything a fall provides an opportunity to add at a better price.

I always try to have shares that will move in the opposite direction or at least hold so that they will earn me a return whilst the rest of the market dips - e.g. Beazley, IMB, BP, PFC, DEC - most have gone down today though!! Either way they create sales opportunities at decent prices whilst other things become better value. E.g. the ration of say Beazley to Grow is now much more favourable than it was - 1st Sept 2021 Bez to Grow ratio was 35% i.e. Bez share price was 35% of Grows, today that is 74% due to Bez performing better - plus a divi inbetween. At some point I will buy some Grow back. Nothing moves in a straightline!

I'm not sure what you refer to when you say you worry about multiples? The IMB multiple doesn't worry me at all. It's currently paying a yield of 8.57% or enough to double your initial investment every 9 and a bit years and also enough to keep pace with inflation. The free cashflow annually is around 200p per share so it should be able to pay down debt / do buybacks alongside paying the dividend. 2022 p.e is around 6.7 - what would you expect in terms of multiple? It did approx 250p of earnings per share last year on a share price of around £16. That's 6 and a bit.

I would say technology is one of the worst areas for wage inflation at present. All organisations are competing for the same resource - defence, technology, manufacturing, hospitality - they all need architects, engineers, developers, security experts etc. They don't need a union as they just go to the highest bidder. I work for a largish profitable company and we are struggling to compete on salaries for technology staff - they are calling the shots. They want full time from home - no problem, they want extra to come in a couple days a week, no problem etc. 6 months later they move again for more. We don't have that problem in any other part of our business.

I took a decent proportion of my holding off the table here earlier in the late in 2021/ early 2022 at an average of around £8.20 ish. I thought I was getting a really bad deal at the time. I'm not prepared to put more on the table at the moment. Late 2021 I became a lot more defensive in terms of my portfolio. My biggest holding is Imperial Brands at present. It's certainly not ESG qualifying and isn't a growth stock, but it pays an excellent annual return and has decent defensive properties - providing you aren't squeamish about what it does.

Interesting commentary on Twitter from Bill Gurley (prolific Silicon Valley VC investor/ partner / early Uber investor).
He says the following
- An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run. The "unlearning" process could be painful, surprising, & unsettling to many. I anticipate denial. Some thoughts

1) Previous all time-highs are completely irrelevant. It’s not ‘cheap’ because it is down 70%. Forget those prices happened.
2) Valuation multiples are always a hack proxy. Dangerous to use. If you insist, 10*should be considered amazing and an upper limit. Over that silly
3) You may be shocked to learn that people want to value your company on FCF and earnings. Facebook trades at 14 times GAAP EPS and is growing 23%.
4) Revenue & earnings quality matter

The only reason house prices in the UK have increased so much is political will. Without the various tools employed to keep prices high (but to let interest relief, no CGT on main residence, shared ownership, part ownership etc, low rates etc) prices would not have risen as much as they have even with restricted availability. A significant proportion of people own more than one property - if that was penalised more heavily again, then there would likely be more availability for those who only want one house. Once renters outnumber the baby boomer generation (owners) from an electoral perspective all bets are off......do you still think the government will support ever increasing house prices then? If that doesn't happen then will likely continue as it has one way or another - with some blips in the road, particularly if there is a bigger than expected recession, along with even 3% rates. Add a little higher unemployment into that and you get a toxic mix. Might not happen that way. Just thinking out loud. Not relevant to grow either so apologies all.

ps I believe that Rolls Royce 10 year total return is the worst in the FTSE 100 -54.9%!!!!

It's a blunt tool but in terms of decreasing demand - it's still likely to do that. It might also make sure that house price growth moderates, particularly in the UK. I own my house and have shares in another couple of properties but don't want to see my children priced out of the market when they wish to purchase a house in 10-20 years. If the value of my house declines 20% it doesn't bother me a bit - is what it is. Would actually help younger people not yet on the ladder. Not great if you have gone in at the top though.

I think Cazoo now has to prove itself - it won't recover until is shows it can make a sustainable margin - not a profit (just yet) but a sustainable margin - it hasn't done that yet and the used car market has boomed. Into a downturn it looks less likely, we will see.

Rolls Royce has very complex earnings and is heavily reliant on flying hours - dominated by commercial flights. I am not sure those will be returning to their pre-Covid peak for a while - even if they do get there in short order it will take a while for that to come through in earnings. It's a good business but has always struggled to make consistent profits - most of it's engines are sold at a virtual loss, the money is in the servicing and ongoing maintenance.

For my money I don't think interest rates will go to 5% and I don't think the market has that expectation - 2.9% by early 2023 in the US I believe - that looks realistic. 3.5% in 2024....none of that looks outlandish. I think a recession will happen regardless of interest rates. I see the normalisation of rates as a good thing, along with the winding down of QE etc. Rates needed to go up to get to somewhere approaching normal. Always a chance they will go up more than expected, but no one really knows the answer to that.

Even without a recession technology valuations were going to pullback. Some of the valuations were crazy - and not just Cazoo.

I have to say that this has held up reasonably well today given where the Nasdaq ended up. Private equity / VC generally lags the market by 6-12 months as it takes time for valuation trends to feed through, however this has been mirroring more recently. I (personal view) think the Nasdaq is likely to fall a fair bit more over the course of the next 6-12 months. Could well be some bargains at some point. Saying that I can't see Microsoft falling 80% or anything like that. Looking at some of the graphs however - an 80% fall for Microsoft would take the share price back to July 2016, however a 50% fall would take it back to October 2019. If we do have a global recession that the latter doesn't look so far fetched - sales growth certainly hasn't kept up with the share price growth which has gone way ahead of profits / sales growth in many instances.

I agree re the 250p.......but don't think the market will let it get there currently. Company has performed well in a difficult environment. Not many can say that. European opportunity is significant. In 5-10 years we should see a company that is at least 50% more profitable, in all likelihood twice as profitable as it is now. A solid hold for me at present, with a decent dividend whilst you wait for the growth.

19% down now. That's a car crash. Ultimately they floated on Nasdaq as they probably got a much higher valuation given the existence of Carvana in the US and the valuation of that at the time. I couldn't see Cazoo getting a circa £5bn valuation in the UK. Would have been a bit more like £2bn in all likelihood - conjecture though as we will never know. Reporting requirements not any more onerous there than here really - excluding SOX. Looks like a shortage of auditors - i.e. supply chain!!

As I read your last post, I checked the Cazoo share price - down another 17% today. $1.16 a share down from a peak of $13.60. That is an absolute shocker - essentially your investment was wiped out if you went in at the top. Can't recall exactly what it floated at - something like $7.50 ish I think - it was $7bn valuation from what I recall. It could, as you say, go below $1 in which case it may end up getting de-listed.

What you are talking about is investment in operational capability improvement - not the investment / acquisition of new businesses. That will be an ongoing cost, through any period of expansion - so it isn't going to go away, might moderate a little, but given still nowhere near scale will likely continue for years.

Agree re VC and no profit. That shouldn't be the same once these companies float though. If Cazoo can't make money when the used car market is as it has been for the last 12 months or more, it is going to struggle as things normalise. Margins should have been higher than ever. Look at the results of the listed car retailers - Lookers, Vertu etc. Record profits in the last 12 months. I wan't aware that the £124 included investments. Investments in new entities doesn't hit the P&L - Debit Investment / Assets, Credit Cash or Loans etc - shouldn't hit the P&L?

I'm not overly excited by the whole sales growth thing. That's GP, it isn't profitability. It's all about whether a lot of these companies can become profitable at an operating and net level for me and ultimately cash flow positive. Most of our companies will be way off. It's also likely that most (given high GP %'s) have significant operating leverage. That can turndown quickly if turnover turns down. Cazoo has increased turnover massively but it's margins are way down - it made about £124 a car - that's terrible. If that continues it won't exist in 12-36 months. Will be interesting to see how that business does now lockdowns are over. That's just one company but it's not a great shop window for us given its public profile.

The one positive that exists when there is a big market retrace in a particular sector is that there are normally some really good businesses available at a knock down price - the same will happen this time. There should be some excellent opportunities - there have been few good deals available in recent years. The market always overreacts (it isn't there yet in my view), but when it does so there are normally some excellent opportunities to capitalise on that - just have to pick the right ones and have some cash available to do so.

Nasdaq down 13.3% in April. If it's a tech growth stock with no profits then it's hit really hard (i.e. Cazoo down another 8.65%, Ui Path down another 5.61% etc). The bigger surprise is the 'priced for perfection' but profitable Amazon down 14%. Personally I think there is a lot more pain to come with growth, particularly technology led stocks - too many are still priced for never ending growth which simply isn't possible. I think there is further to go in terms of a pullback in this area.

at the right price I would look at Cazoo. It would need to come down to less than $1bn though.