- While they have different strategies, the two women have several holdings in common.
Catherine Wood (Trades, Portfolio), the founder, chief investment officer and CEO of ARK Investment Management, has made a name for herself through investing in “disruptive innovation” stocks. Implementing an iterative process that combines top-down and bottom-up research, her New York-based firm seeks to invest in companies that may benefit from cross-sector innovations like artificial intelligence, robotics, energy storage, DNA sequencing and blockchain technology.
Comparatively, Causeway Capital’s Sarah Ketterer (Trades, Portfolio) seeks to achieve superior risk-adjusted returns by investing in mispriced equities in both developed and emerging markets. The guru’s Los Angeles-based firm, which she founded with Harry Hartford in 2001, looks for potential opportunities among mid- and large-cap companies using quantitative and value-oriented methods. Each stock also receives a risk score based on the amount of volatility it adds to the portfolio. The investment team then enters positions in the stocks with the highest expected risk-adjusted returns that also have a lower price-earnings ratio and higher dividend yield than the market.
While the two gurus take different approaches to stock picking, they still have several holdings in common.
According to the Aggregated Portfolio, a Premium GuruFocus feature, the value investors both had positions in Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial), General Electric Co GE . (GE, Financial), Meta Platforms Inc. (FB, Financial), JD.com Inc. (JD, Financial) and The Walt Disney Co DIS . (DIS, Financial) as of the end of the third quarter.
Taiwan Semiconductor Manufacturing
Ketterer reduced her stake in Taiwan Semiconductor Manufacturing (TSM, Financial) by 3.93% to 4.12 million shares during the quarter, while Wood left her position unchanged at 10 shares. They have a combined equity portfolio weight of 10.35% in the stock.
The Taiwanese company, which manufactures semiconductor chips, has a $742.98 billion market cap; its shares were trading around $142.17 on Thursday with a price-earnings ratio of 32.59, a price-book ratio of 8.92 and a price-sales ratio of 12.28.
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The GF Value Line VALU suggests the stock is significantly overvalued currently based on historical ratios, past performance and future earnings projections.
Taiwan Semiconductor’s financial strength was rated 7 out of 10 by GuruFocus. Although the company has issued approximately 424.2 billion New Taiwan dollars ($15.4 billion) in new long-term debt over the past three years, it is manageable due to a comfortable level of interest coverage. The robust Altman Z-Score of 10.3 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also eclipses the weighted average cost of capital, suggesting good value creation is occurring as the company grows.
The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin as well as strong returns on equity, asset and capital that top a majority of competitors. It also has a moderate Piotroski F-Score of 5 out of 9, meaning conditions are typical for a stable company. Taiwan Semiconductor’s consistent revenue and earnings growth contributed to a predictability rank of 3.5 out of five stars. According to GuruFocus, companies with this rank return an average of 9.3% annually over a 10-year period.
GuruFocus says Ketterer has gained an estimated 185.38% on her long-held investment and Wood has seen a return of around 43.53% on her holding since the first quarter of 2018.
Of the gurus invested in Taiwan Semiconductor Manufacturing, Ken Fisher (Trades, Portfolio)has the largest stake with 0.49% of its outstanding shares. Frank Sands (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio) and Spiros Segalas (Trades, Portfolio), among others, also have significant positions in the stock.
Ketterer entered a 1 million-share stake in General Electric (GE, Financial) during the quarter, while Wood boosted her holding by 22.54% to 55,649 shares. The combined equity portfolio weight is 2.33%.
The industrial conglomerate headquartered in Boston, which recently announced it will be splitting into three separate companies, has a market cap of $113.17 billion; its shares were trading around $103.06 on Thursday with a price-earnings ratio without non-recurring items of 47.76, a price-book ratio of 3.03 and a price-sales ratio of 1.44.
According to the GF Value Line, the stock is significantly overvalued currently.
GuruFocus rated General Electric’s financial strength 3 out of 10 on the back of low debt-related ratios and an Altman Z-Score of 1.44 that warns it could be at risk of going bankrupt. The ROIC is also being overshadowed by the WACC, meaning the company is struggling to create value.
The company’s profitability scored a 5 out of 10 rating as its margins and returns are underperforming a majority of industry peers. GE is supported, though, by a moderate Piotroski F-Score of 4. As a result of revenue per share declining in recent years, however, the one-star predictability rank is on watch. GuruFocus says companies with this rank return an average of 1.1% annually.
GuruFocus data shows Ketterer has lost an estimated 8.04% on her investment so far, while Wood has generated a 3.23% return.
With a 1.54% stake, Andreas Halvorsen (Trades, Portfolio) is General Electric’s largest guru shareholder. Other top guru investors include Hotchkis & Wiley, Richard Pzena (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio) and Nelson Peltz (Trades, Portfolio).
In the third quarter, Wood trimmed her Meta Platforms (FB, Financial) position by 27.4% to 210,084 shares, while Ketterer increased her holding by 9.11% to 257,700 shares. The gurus have a combined equity portfolio weight of 2.14% in the stock.
Having recently changed its name from Facebook, the Menlo Park, California-based social media company has a $921.65 billion market cap; its shares were trading around $331.32 on Thursday with a price-earnings ratio of 23.64, a price-book ratio of 6.94 and a price-sales ratio of 8.48.
Based on the GF Value Line, the stock appears to be modestly undervalued currently.
Meta Platforms’ financial strength was rated 7 out of 10 by GuruFocus, driven by a comfortable level of interest coverage and a robust Altman Z-Score of 18.01. The ROIC also exceeds the WACC, suggesting the company is creating value as it grows.
The company’s profitability fared even better with a 9 out of 10 rating. Despite recording a decline in its operating margin, Meta is supported by strong returns that top a majority of competitors as well as a moderate Piotroski F-Score of 6. Steady earnings and revenue growth contributed to a five-star predictability rank. GuruFocus data shows companies with this rank return, on average, 12.1% annually.
GuruFocus estimates Ketterer has gained 2.45% on her investment since the second quarter of 2021, while Wood’s has returned roughly 18.86% since being established in the second quarter of 2019.
Baillie Gifford (Trades, Portfolio) is Meta’s largest guru shareholder with a 0.28% stake. Fisher, Sands, Chase Coleman (Trades, Portfolio), Dodge & Cox, Segalas, First Eagle, Steve Mandel (Trades, Portfolio) and many other gurus also own shares of Meta Platforms.
While Wood reduced her stake in JD.com (USB) by 61.76% during the third quarter to 2.4 million shares, Ketterer curbed her position by 33.71% to 1.03 million shares. Together, the gurus have a combined equity portfolio weight of 2.09%.
The Chinese e-commerce company has a market cap of $113.50 billion; its shares were trading around $72.98 on Thursday with a price-earnings ratio of 29.62, a price-book ratio of 3.41 and a price-sales ratio of 0.84.
The GF Value Line suggests the stock is fairly valued currently.
GuruFocus rated JD.com’s financial strength 7 out of 10 on the back of adequate interest coverage and a high Altman Z-Score of 4.21. The WACC, however, supasses the ROIC, suggesting issues with creating value.
The company’s profitability did not fare as well, scoring a 4 out of 10 rating. Even though returns top over half of its industry peers, the operating margin is underperforming versus other companies. JD.com also has a moderate Piotroski F-Score of 6, meanings business conditions are stable.
According to GuruFocus, Wood has lost an estimated 16.90% on her investment. Ketterer has gained approximately 77.23% since the third quarter of 2019.
Of the gurus invested in JD.com, Coleman has the largest stake with 3.29% of its outstanding shares. Chris Davis (Trades, Portfolio), Dodge & Cox, Philippe Laffont (Trades, Portfolio), Halvorsen and Fisher also have significant stakes.
During the quarter, Ketterer decreased her Walt Disney (DIS, Financial) holding by 14.68% to 461,244 shares. Wood increased her position by 158.44% to 393,879 shares. The two gurus have a combined equity portfolio weight of 1.92% in the stock.
The media and entertainment giant, which is headquartered in Burbank, California, has a $284.59 billion market cap; its shares were trading around $156.57 on Thursdaywith a price-earnings ratio of 143.64, a price-book ratio of 3.22 and a price-sales ratio of 4.24.
According to the GF Value Line, the stock is modestly overvalued currently.
Disney’s financial strength was rated 4 out of 10 by GuruFocus. As a result of issuing approximately $11.2 billion in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 2.25 also indicates the company is under some pressure. It is also struggling to create value since the ROIC has fallen below the WACC.
The company’s profitability scored a 7 out of 10 rating. Although margins are declining and returns underperform over half of its competitors, Disney has a moderate Piotroski F-Score of 6. Despite recording losses in operating income and declines in revenue per share, it also has a one-star predictability rank.
Ketterer has gained an estimated 36.77% on the investment since the first quarter of 2020 based on GuruFocus data, while Wood has lost 12.5% since the second quarter of 2021.
With a 0.61% stake, Fisher is Disney’s largest guru shareholder. Other top guru investors include Laffont, Daniel Loeb (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio).
Other common holdings and portfolio composition
Additional stocks that both gurus held as of Sept. 30, 2021 were Baidu Inc. (BIDU, Financial), Takeda Pharmaceutical Co. Ltd. (TAK, Financial), MercadoLibre Inc. MELI (MELI, Financial), Pinduoduo Inc. PDD (PDD, Financial) and InMode Ltd. (INMD, Financial).
Wood’s $41.63 billion equity portfolio, which is composed of 298 stocks, is largely invested in the health care and technology sectors.
Ketterer’s $4.44 billion equity portfolio, which is composed of 81 stocks, is heavily invested in the technology, industrials and consumer cyclical sectors.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com.
Will There Be War Over Taiwan – The Next Spy Thriller
I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.
The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.
Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.
It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).
These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.
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One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.
I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).
In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.
Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).
In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).
On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.
Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).
So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.
Crypto Minsky Moment Now Happening
During the second half of the twentieth century, economist Hyman Minsky provided a set of guidelines to identify what makes financial markets fragile and economies unstable. It is the midpoint of 2022, and a crypto Minsky moment is underway.
Investment professional Paul McCulley coined the term “Minsky moment.” He did so when describing the dynamics of an earlier financial crisis, the Asian Debt Crisis of 1997.
Minsky actually died in 1995, and so was not alive either to witness for the 1997 Asian currency crisis, or to see his name used in a catchphrase for economic instability. Nevertheless, the term “Minsky moment” has stuck.
Here are three facets of the crypto Minsky moment that is ongoing.
1. At the beginning of 2022, Bitcoin BTC was trading at $47,743, and closed on June 30 at $19,986, down 58%. The market value of Bitcoin comprises the lion’s share of the entire crypto-market; therefore, as the value of Bitcoin goes, so goes the value of the entire crypto asset class.
2. Hedge funds are shorting shares of Tether USDT , a stablecoin that is not so stable and beginning to wobble. Notably, Tether is the major “coin of the realm” for the inter-crypto market, the exchange of one crypto-asset for another. Another stablecoin, TerraUSD, did worse than wobble: it collapsed in May.
3. The crypto-lender Celsius is now fighting for its life.
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In February 2022, Bitcoin was trading in the neighborhood of $44,000. At that time, I warned that crypto-investors needed to pay attention to how the issues Minsky studied applied to cryptocurrency markets. Now that these markets are experiencing a Minsky moment, let me just recapitulate in hindsight what I warned about in foresight.
Minsky’s framework features about a dozen major components. Below are six that just leap out.
1. Fringe finance: This was the term Minsky applied to what Paul McCulley — and now the rest of us — call “shadow banking.” Shadow banks are financial institutions that operate outside the central banking system, and do not have the central bank as their lender of last resort. Crypto-markets are a perfect example of fringe finance, as they operate at the fringe of the global financial system.
2. Speculative and Ponzi finance: Minsky warned about debt finance in which the source of the funds for making interest payments and repaying principal is price appreciation rather than cash. Prudent debt finance, Minsky was very clear to say, is based on hedge finance, where cash generation, not price appreciation, provides the funds for borrowers to fulfill their obligations to lenders.
Minksy warned, very loudly, that when market participants are gripped by euphoria, they shift from hedge finance to speculative and Ponzi finance. The stability issues associated with Tether and TerraUSD UST stem from the riskiness of the portfolios which back the stablecoins they offer, or in the case of TerraUSD offered. The concern is that these portfolios are weighted towards speculative and Ponzi finance. In 2021, a group of entities including Tether reached an $18.5 million settlement with the office of New York States attorney general. The office had accused these market entities of making several public misrepresentations regarding the dollar reserves which back them, especially the Tether stablecoin.
3. Asset pricing bubbles associated with financial innovation: Those wondering what an asset pricing bubble looks like need only look at Bitcoin’s history. Those wondering what financial innovation looks like, need only look at how DeFi has evolved to produce assets like Tether and lending institutions like Celsius.
4. Excessive leverage: Celsius has an assets-to-equity ratio of 19-to-1, much higher than 9-to-1 for the average North American bank in the S&P 1500 Composite index. Assets-to-equity is a standard ratio measuring leverage: the higher the ratio, the higher the leverage.
5. Bank runs, beginning with the commercial paper market: Tether is concerned about a run on its stablecoin, as investors rush to sell their Tether coins en masse. There are rumors that the assets backing Tether include highly risk commercial paper issued by Chinese entities. Tether denies the rumors, but that has not stopped hedge funds who are shorting the Tether to express their concerns that this is the case.
6. Too big to fail: Minsky asserted that during a financial crisis, governments would engage in what he called “contingency socialism” and rescue firms that are too big to fail. At this stage, there appear to be no firms large enough to qualify as too big to fail. TerraUSD certainly did not so qualify.
I am not saying that cryptocurrencies have no fundamental value, and in fact I believe that they do. Economists call the concept “value in use,” which they contrast with “value in exchange.” The problem is that there has been a large gap between crypto value in use and “crypto over-value in exchange.”
Crypto investors might believe that they are making bets on crypto-fundamentals; and indeed they might be doing so, to a small extent. The thing is to a large extent, most of what they are betting on is sentiment. Minksy warned that euphoria will surge during economic expansion, at least until the Fed raises interest rates to address inflation. Then investors’ sense of euphoria collapses, and with it asset prices.
As Yogi Berra once said, and might have said again in connection with Minsky’s perspective and crypto markets: It’s deja vu all over again.
Crypto euphoria is in a state of collapse, which is why crypto markets are experiencing a Minsky moment. Down the line, a crypto phoenix will rise out of the ashes, with less euphoria, similar to the way that the dot-com sector emerged from the dot-com bubble. Until then, investors of all stripes would do well to pay attention to what Minsky taught.
Stock Market Investors: Don’t Fear Inflation – Embrace It
The inflationary trend is now self-perpetuating, but that doesn’t mean investors cannot earn excellent returns.
Start with today’s inflation:
The three underlying causes are:
- Too much money
- Too low interest rates
- Inflationary actions/reactions being taken by businesses, other organizations, employees, consumers, investors and Wall Street
Number 3 is the reason an inflationary trend is so hard to stop. It’s a chain effect of “sellers” pushing prices up at least in line with cost increases and “buyers” attempting to hold back the inevitable.
Therefore, don’t expect this Fed to subdue inflation with a “soft” landing. Inflation well above the Fed’s 2% target likely is here to stay and even increase until the Federal Reserve and political leaders accept the need to take drastic, unsavory actions.
Okay, that sounds dire and distressing. So, where does the happy investor part come in?
How investors can win from the inflationary growth periods
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Remember, inflation is rising prices. On the surface, that means company revenues and earnings get an inflationary boost, producing stock price gains for investors.
However, industries and companies get affected differently. Therefore, succeeding in the coming inflationary bull market means adjusting strategies and expectations for the altered environment.
How to adjust strategies and expectations
The conditions to understand and accept are:
Inflation – Expect a rising cycle of higher highs and higher lows as organizations and consumers get into the swing of it
Interest rates – Realize they are still well below the level capital markets would set without Federal Reserve interference. So, consider this a bonus inflationary period where the Fed says it is tightening, but it actually is only reducing the loosening already in place. In other words, there is a long way to go before conditions truly get tight.
Economic growth – Until there is a recession, “real” (inflation-adjusted) GDP growth will remain positive. That means “nominal” (not inflation-adjusted) growth will be increasing at a higher clip as prices rise.
Company growth – Here is where things get interesting. An inflationary environment creates winners and laggards. Therefore, do not expect yesterday’s winners to be tomorrow’s in this new environment. Most likely, a significant shift will occur. And that brings us to…
Company stocks – As the financial, economy and business conditions transform, so, too, will Wall Street. Expect to see new strategies, selections and valuations based on inflation-based rationale. And that means the biggest change ahead is probably…
The shift to actively-managed funds from index funds
The inflationary growth period will push “outperformance” to the top of investors’ wish lists. No longer will matching the whole market’s middle-of-the-road results be satisfactory. As active managers charge ahead, investors will begin jumping aboard.
Skeptical? Don’t be. The combination of new, different and outperformance will be like meat to today’s malnourished investors. It’s a bull market cycle driven by extraordinary conditions that will replace the worry refrain of inflation-interest-and-recession (Oh, my!)
Note: Like many stock market periods, the reasons and results come from a combination of conditions and actions – not one simple explanation. Therefore, be sure to read my previous article, “Exceptionally Good Conditions For Stock Bull Market Launch In July.” In it I list four actively managed funds in which I have invested.
The bottom line: Multiple conditions build inflation trends, so ignore simplistic commentaries
Many (most?) media reports link simple explanations to results. Ignore them. They are written by reporters on a deadline with no time for analysis. Just think back to the gyrating explanations for each daily (or intraday) stock market move. The reason cited is normally a coincidental occurrence. For example, “8.6% inflation!” Or, “Consumer sentiment at a new low!” Or, when a simple reason is lacking, something like this from The Wall Street Journal (June 27) – (Underlining is mine)
“U.S. stocks slumped Tuesday, giving up early gains and falling for a second consecutive day as investors parsed fresh economic figures for clues about the pace of monetary-policy tightening.”
No, the market didn’t fall because investors were parsing for clues about anything. In fact, most short-term market moves are noise, often reversed a day or two later. A better short-term period to watch is a week, because the weekend market closure has day traders sitting on their cash.
Instead, follow economic, business and financial developments without trying to tie each to a stock market move. A beneficial approach for linking everything together is quarterly analysis. Why wait three months? Because each quarter contains all the earnings reports (and management outlooks), followed by the quarter-end reporting and analysis from active managers. Moreover, examining a trend quarter-by-quarter does away with all the in-between gyrations that can produce more uncertainty than understanding.
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