The MaM Portfolio: 2024 Q1 Update

Moats and Monopolies

Welcome to Moats and Monopolies! We do things a little differently here. We not only transparently share our complete portfolio holdings each and every quarter for you to learn along with us, but we write exclusively about companies that we own and therefore have a deeper understanding of.

Q2 2023	In this initial share, we discuss our professional background and reasons for sharing publicly the portfolio.
Q3 2023	In this update, we go into more detail regarding our investment philosophy, and the portfolio (as well as our pen name) was changed to Moats and Monopolies.
FY 2023	In this full year review, we benchmark ourselves directly against the S&P500 (spoiler, we beat the market…) as well as ruminate and reflect upon what we’ve learned this year.

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Investment Philosophy in 100 Words

We are long-only and invest in some of the highest quality companies from around the world. We look for businesses that can compound their revenues over time – ideally with high margins. We prefer companies with low capital expenditures and low debt levels. We look for companies with defensible moats and love to see companies with sustainable, monopolistic parts to their businesses. We have no problem paying for quality and believe that the key isn’t valuation but patience – we expect to beat the market by buying better-than-average companies and holding them for longer-than-average periods of time.

Changes

This quarter had meant to be a relatively quiet one; however, 2 things conspired to cause the most changes that the MaM portfolio has ever experienced in a single quarter. One, the psychotherapist her indoors, told a recent story from the addiction clinic in which she practices that led to a realignment of our moral compass and left us no option but to sell out of Evolution AB (OTCPK:EVVTY), despite the fact that we believe it to be a fine company with great potential to outperform. We decided ultimately that gambling would no longer be something from which we could ethically profit.

This caused further reflection and after being prompted by the very same wife that “if you spend so much time obsessively analysing these companies, why pay iShares a fee to choose your stocks?”. Fair enough. Why leave an index to be responsible for a chunk of our invested capital? YTD, 40% of the QQQ was in the red and over 60% was lagging the S&P 500. With that in mind, we decided to sell out of the fund and use the money to invest in what we believe to be the very best opportunities from the Nasdaq 100 that we do not already own (some of which we used to). You can be the judge in the comment section as to whether these moves are accretive to the quality and future potential returns of the MaM portfolio.

Buys

ASML (ASML) – ASML is a vital part of the complex and sprawling semiconductor ecosystem. It is a niche company based out of The Netherlands that design and manufacture lithography machines that literally etch out the blueprints from chip designers using light waves. If it wasn’t true, it would be very difficult to believe that is even possible. What is even better for our portfolio, is that they have a monopoly on this market, being the only company that has ever developed this technology. This leads to industry leading profitability and growth potential. This is a company that several followers have already pointed out, should have already been in the portfolio. Bearing in mind we are in the throes of a bull market, we have purchased a starter position, which we hope to build on future weakness.

Broadcom (AVGO) – Broadcom is a wonderful and diverse technology business that is difficult to summarise in one single sentence, but let’s try: Broadcom has a finger in several software and hardware pies relating to semiconductors, enterprise software and cyber security. Like Adobe, it has been a serial acquirer over the years, and its recent purchase of VMware gives it more exposure to subscription based, recurring revenue, which we like in our companies.

Home Depot (HD) & Pool Corp (POOL) – When one reflects on their portfolio and considers the current challenges in the global economy as well as the potential disruptive effects of AI and similar technological innovations on one’s holdings, it is good to know that there are ballasts – high quality companies that are almost impossible to disrupt or out compete, and that aren’t potential targets for regulatory bodies. With that in mind: in a portfolio designed to focus companies with strong competitive advantages in order for their intrinsic values to safely compound over time, one half of a DIY and home improvement duopoly and a vertically integrated near monopoly on swimming pools are perfect. Articles on both are in the process of being written and one hopes to have them published and available before the end of April; however, there are plenty of good ones to read in the meantime on SA.

Meta Platforms (META) – In our FY 2023 portfolio update, we shared how we had made a terrible mistake in selling out of Meta after a little rise locked in enough of a profit to overlook Zuck’s overspend on a virtual headset world that no one wanted. Fast forward a year and it’s a lean and exciting technology company that is innovating away from social media and even pays out a dividend. Despite the feeling of returning to a lit grenade, the numbers still suggest Alpha is likely from here, given the more prudent management and diversification of the company.

Salesforce (CRM) – Another company that we are returning to. More mistakes made and reflected on. What is important is that the portfolio holds the right companies to grow over the long term, and CEO Marc Benioff had worried us in the past with overpaying actor Matthew McConaughey as some kind of consultant and a lifestyle that was becoming problematic for us. However, credit where credit is due, like Zuckerberg, Benioff has turned the company around, focused (albeit not as closely) on operating more efficiently and also has introduced a dividend. Dividends do not necessarily affect our thesis on a company, but it helps to know that a previously profligate management team is forced to be more reasoned with capital allocation. Salesforce’s dominance in enterprise CRM was never in doubt, neither was its suite of products or opportunity. Now management is understanding the importance of its shareholders, it is a more attractive proposition.

Starbucks (SBUX) – And another company returning to the MaM portfolio, and maybe one that is a little more surprising. Simply, Starbucks continues to grow out its store count domestically and internationally, it continues to be an important global brand and find ways to meet younger generations by adapting its offerings and it’s cheap. At a PE below 25, it is being sold at a multiple not seen for years and although one could argue that its hyper growth days are over, there are international expansion possibilities. Since initiating our ‘hold’ rating last summer, the company has trailed the market by over 25% and declined around 10%. A future updated article (in the next couple of weeks, hopefully), will argue that continued growth and more efficient use of existing locations through drive throughs and automation mean that the current valuation provides a strong opportunity of Alpha, including a healthy starting dividend yield of nearly 2.5%.

Taiwan Semiconductor (TSM) – One of our (many) mistakes over the past few years was to research a globally important but little heard of producer of semiconductors back in 2018 and then slowly watch it’s market cap triple over that period, whilst sitting with hands in pockets. TSM makes around 60% of all of the chips used around the world. If you are looking for a way to invest in the many tail winds associated with digitisation, whether they be in automated cars, connected devices, rising smartphone reach, data centres, cloud computing or (coughs) large language models / AI technologies, then this might be worth a look. Despite a huge climb this year, we believe there is still value here. Oh, and for those future comments regarding China potentially annexing Taiwan and therefore potentially removing TSM from the public markets or something to that effect, remember that if the geopolitical issues in the region do deteriorate, no matter what is in your portfolio, it will crater anyway.

Sells

Apple (AAPL) – Apple is one of the best companies in the world. It sells many of the highest quality and more beloved consumer electronic devices and is slowly moving into subscription based services for its customers. So why sell? Well, we were lucky enough to sell out in the early days of the quarter before the recent drop after reflecting on two things. One its ‘walled garden’ would be increasingly under pressure from regulators, and two, its valuation had touched a PE of 30 and the growth potential was slowing down to a rate that made holding it seem increasingly risky. It is too early to tell whether this was the right decision, but it doesn’t feel like the wrong one and we are comfortable with where funds have been relocated.

Evolution AB (EVVTY) – This was a very difficult decision. We believe that Evolution AB, a little known Swedish company that produces licensable software and gaming solutions for casinos (think live games such as poker and blackjack as well as random number generating games, such as fruit machines). It is incredibly profitable, well managed, is a market leader and has a large and growing addressable market as countries increasingly relax online gambling laws. As mentioned in the article introduction, this is a heart vs head decision. If you wish to take advantage of the opportunity, consider reading our recent article on the company and decide whether your personal moral compass allows for an investment.

Nasdaq 100 (QQQ) – This was also explained in the introduction, but after exiting thematic ETFs linked to Healthcare and India, it was time to cut loose from paid funds and focus on individually picked stocks.

Union Pacific (UNP) – Union Pacific had been on the block for a while. It had delivered us a solid return as it used cheap debt to buy back shares at record amounts and stimulate its EPS and share price as well as its dividend. However, in early 2024, we are at a stage of almost completely stagnant revenue growth, high levels of debt and increased interest rates. It was difficult to see where the next decade of returns was coming from, so it was time to sell and relocate funds.

The Moats and Monopolies Portfolio

6.58% Cash

2.46% Bitcoin

5.99% Microsoft

5.58% Alphabet

5.28% Moody’s

5.11% Visa

4.93% Adobe

4.90% Mastercard

4.68% S&P Global

4.56% MSCI Inc

4.43% Booking Holdings

4.42% LVMH

4.41% Amazon

4.31% Canadian Pacific Railway

3.69% Mercadolibre

3.25% Intuitive Surgical

2.98% Costco

2.84% Linde

2.77% Taiwan Semiconductor

2.54% Games Workshop

1.98% Meta Platforms

1.98% ASML

1.81% The Beauty Health Company

1.86% Starbucks

1.84% Salesforce

1.64% Pool Corp

1.62% Broadcom

1.56% Home Depot

Portfolio Stats

Number of Stocks – 26

Number of Total Holdings – 28*

Median Market Cap (billions) – €241,219

Median Age of Company – 38 years

Weighted Gross Profit Margin – 78.51%

Weighted Levered FCF Margin – 27.62%

Weighted ROIC – 24.06%

Weighted WACC – 13.21%

Weighted ROCE – 1371.32%**

PE on Price – 35.49

FCF Yield on Price – 3.34%

10 Year Revenue Growth – 16.94%

10 Year FCF Growth – 21.14%

10 Year Dividend Growth – 11.18%

* This includes cash and Bitcoin

** This is skewed by Booking Holdings incredibly capital light and profitable business model.

In these charts, we can again see the cost of capital continuing to slowly increase for the companies within the portfolio as a result of higher interest rates, although returns on invested capital are starting to recover after the last quarter. Gross margins continue to improve after further investment into technology and software but free cash flow margins have decreased from new investment into retail (Home Depot and Pool as well as Starbucks). The PE on cost is still skewed by a small number of incredibly expensive companies, particularly Mercadolibre, Intuitive Surgical, and the recently purchased Salesforce, however, free cash flow growth is rising as the quality and growth of the holdings continues to grow and the weighted 10 year revenue CAGR is still above 20%. This is an expensive portfolio that will grow quickly into that valuation. At least, that is the philosophy/strategy/hope/plan.

Benchmarking

Due to the international mix within the MaM portfolio (around 75% is currently US), the MSCI World has always been the benchmark against which we have determined success, whilst terms such as ‘beat the market’ and ‘seeking alpha’ typically refer to the S&P 500 as a proxy. Further, the Nasdaq 100 is overweight technology as is the MaM portfolio. With that in mind, for the purpose of benchmarking, we compare performance against all three.

The line graph above might be difficult to view in either dark mode or on a smart phone, but it shows the performance of the MaM portfolio since we started to share it publicly on Seeking Alpha, benchmarked against these indices: S&P500 (yellow), MSCI World (green) and Nasdaq 100 (grey). The MaM portfolio is the dotted black one that outperformed each of the others this quarter and moved closer to the Nasdaq 100, which is currently winning after the first 4 quarters of the ‘race’.

Final Words and Future Plans

Firstly, we are delighted to share another quarter of outperformance/Alpha with the community. Despite several changes to the portfolio over the past two quarters, we remain resolute in the strategy of holding the highest quality companies for the long term. We have reflected on recent mistakes regarding this, particularly with the sale of Meta Platforms last year and after selling out of our remaining ETF are trying to make amends by restoring previously sold high quality companies to the portfolio.

The market in most sectors where we tend to invest are trading at higher than historical average multiples. The Fear and Greed index, a proxy for investor sentiment, currently has a score of 71, straddling greed and extreme greed, suggesting that the market valuations may be a little high at the moment. The famous (and misused) Buffett quote “be fearful when others are greedy and greedy when others are fearful” is a useful shorthand for holding more cash when the market is frothy for deployment when it is cheaper. With that in mind, we have increased the cash percentage of our portfolio to nearer 7% and will happily go up to 10% should the market continue in this bull market to patiently wait for better entry points and opportunities to average down where available.

In terms of holdings, it is unlikely there will be any many (if any) changes in the next quarter or two; however there are a couple of ‘orange flags’ that have been raised on current holdings that we will monitor.

Adobe (ADBE) – we believe that Adobe is a very high quality company, but there is increased competition against some of its creative products, which makes long term compounding harder to forecast. With the current valuation so high, this is something that we are monitoring. This will be potentially offset by the large $25 billion buyback authorisation, and we feel that there is a very high probability with the size of needle moving acquisition targets now being firmly in the sights of regulators that the company (re)initiates its dividend before the end of the calendar year.

Booking Holdings (BKNG) – again, this is currently a fantastic quality company, but one that is under the potential direct threat of both direct search engine affiliate disruption as well as AI plugins, that could completely circumnavigate parts of its business. No decisions made yet, but we will be monitoring the next couple of quarters to gauge whether the initiated dividend is a distraction from these new existential threats and whether the company can harness its data and utilise this new technology moving forward.

As always, we welcome constructive and respectful conversations ‘below the line’.

Happy Easter! MaM

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.