Networth Oct 2020

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November 6, 2020
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Update to the post:

I started writing the post last weekend and almost a week has gone by since and what a week it has been! Some of what I say below may already be history, certainly seems to be the case with markets up 7 % for the week! With this note, here’s what I was thinking last weekend!

We are now couple of days away from a historic election in the United States of America, and uncertainties abound.

Covid-19 cases are increasing at breath-neck pace, UK has already announced country wide lockdown, US breached record daily cases, stimulus package deal is in limbo and the biggest uncertainty of all, if election results are not in favor of Trump on Nov 3rd, will he accept defeat with grace or are we looking for a prolonged battle looming ahead!

Markets do not like uncertainty, and it was reflected in the market volatility for the month. In line with the historic trend of higher market volatility for the month of October (see below), the standard deviation of daily Dow Jones Index for Oct 2020 has been 1.23 %, and the impact has certainly been felt in AVI family networth. 

At one point in the month, AVI family networth breached the 80 % threshold only to back to 77.4 % as of this writing. Clearly AVI portfolio also hates uncertainty.

That said, lets get to the networth numbers as they stand at the end of the month of October.

  • Net Worth (as a fraction of FI number) (NW): 77.41
  • Liquid Assets/ Debt Ratio (LDR):  2.073
  • Cash balance/ Two Year Living Expense (CLE): 1.14

And here is the chart tracing the networth progress

Synopsis

  • Month-over-month change in networth turned negative for the first time since March. A result of a brutal month in the markets!
  • Biggest change has been in the checking account cash balance. I was preserving a high balance for an imminent home renovation expense. However, Mr and Mrs AVI failed to reach a consensus on plan of action. Hindsight, the delay was good as the funds were diverted for use in investing into the markets, given the fact that the market downturn offered an opportunity for Mr AVI to put some cash into play.
  • Non-retirement equity portfolio saw a modest gain relative to last month. This was an artifact of cash injection into the markets. The drop in retirement portfolio is better reflection of the impact of market downturn on AVI family investment portfolio.
  • AVI family remains hunkered down with COVID-19 cases growing throughout the country. Beyond regular grocery expense and some discretionary purchases, taking advantage of Amazon prime day, the expense side of the equation was relatively modest!
  • The LDR and CLE metrics, both remain healthy, despite the market downturn, which is a good sign!
  • In my last blog post I talked about our flamingo FI/RE number, and how I would go about calculating it for AVI family. Should we reach this number by just using current liquid assets and should the CLE number remain above the desired threshold even after discounting the outstanding home mortgage, I will feel extremely comfortable pulling the trigger on paying off the house mortgage!

Investments

The month of October was quite active for Mr AVI from the perspective of equity investing. The market downturn offered quite a few opportune entry points into certain stocks that I have had my eye on for some time now. I also unwound a few positions that I have held for quite some time now. The table below offers a summary of all my brokerage activity for the month

Philip Morris International Inc (PM) and British American Tobacco (BTI) are the so-called sin stocks with a high level of moat, a stable product with a shrinking but strong consumer base. These firms face no competition given the super tight governmental regulations that impose barriers to entry, which are seemingly insurmountable for any new comer to the industry. In an ESG and growth-momentum investing world, these stocks, have been laid by the wayside, especially since the March-market meltdown and offer a strong contrarian value opportunity.

BTI has an EV of 74.64 B; produces levered free-cash flow of 11.895 B; offers a healthy dividend yield of 8.1 % with a payout ratio of 73.5 % and is currently trading at less than book value. The fair value estimates that I have range from $41.2 to $44.02. My purchase price offers an upside of atleast 15 % and while I wait for the markets to catch up to my fair value estimates, I can pick up a healthy dividend yield of ~8 %.

PM shares a similar story; with an EV of 138.36 B and it produces levered free-cash flow of ~9.356 B. PM has a dividend yield of 6.7 % with payout ratio currently hovering around 95 %. With cash on hand of ~4.82 B and a healthy interest coverage ratio of ~14.3X, I am not much worried about any imminent dividend cuts. PM is currently trading at about 1.3X book. My estimate for fairvalue for PM ranges between 80.3 and 91.5. At purchase price of ~$73.9, I see an upside of atleast 8-10 %.

Discovery Inc (DISCA) is in my mind a no brainer investment when considering the free-cash flow that this business generates ~6 B. Trading at an EV of ~29.58 B, the stock is trading at an extremely cheap valuation of EV/FCF of ~5. The firm has a healthy gross margin of ~66 % and with all the share buy backs, the company is offering trailing 12-month share holder yield of ~22 %. My fair value estimate for the stock is between $25 and $26. At a purchase price of ~$20, I see an upside of atleast 20 %. The biggest downside to the bet on Discovery is the general cord-cutting trend afflicting the cable industry. I however feel that the high quality content that Discovery produces, and owns, will always find an outlet to reach to consumers cable or no cable. Hence my contrarian bet on the stock.

And finally, I have added to my stake in PVAC. I first purchased PVAC in Nov of 2019 and followed with an article on how badly the stock had performed in Feb of 2020. I could not have been more wrong at the time and the carnage that followed almost bankrupted this company. However, the last minute negotiations between OPEC and Russia on halting production during pandemic and the cash injection by the federal government into the oil sector avoid the calamity. The stock had fallen down to $1.40 before rising back to $17. I had purchased a reasonable chunck of PVAC at the carnage price of $1.40 and shaved off my holdings at around $14. However, PVAC was again down about 16 % on the news that Juniper Capital Investments had made a strategic investment in PVAC, resulting in stock dilution. I read the news as positive, especially the cash injection gives PVAC enough of a breathing space to survive the difficult macro environment for the oil sector. I just could not resist adding to my stake in PVAC. I sure hope I am right this time round!

I also added to my exposure to banking stocks through BAC. I already own significant amounts of JPM, GS and WFC. Of all the banks, Warren Buffet chose to increase his stake in BAC. If any one is a genius in investing in the Financial sector, it is Warren Buffet and when the stock was offered on a platter, I was happy to get some exposure.

Finally, I completely exited out of my position in CC and IVZ and significantly reduced my stake in CRTO and FCAU. These changes are primarily motivated by my desire to focus investments into great businesses selling at a discount as opposed to buying OK businesses selling at a discount.

Below is the summary of some key fundamental variables that I look at for my purchases,

DISCA and BAC are clearly on a buy back spree here with share-holders yield in double digits! And nothing wrong about having gross margin >80 %, also the reason why I was quite happy with the price I am paying for BTI for this to be in my long-term hold bucket!

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Family, Net Worth, Personal Finance, Value Investing
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