"If you buy into a leveraged company & it deleverages over the next 10 yrs, your returns would be very poor compared to what you'd expect, they'd be much lower than the business. Let's say you are paying a 5% interest rate on your bonds/loans, you're paying like 4% after tax."
"If you have a company, and they take 3/4/5 years in a row of free cash flow & dedicate most of it, while you own the stock, into paying down that debt, it's the same as if they went out & invested in a project that returns 4% after tax"
"It's hard to think of anything that's as unprofitable as paying down debt. Paying down debt is a very very low return use of cash, except for companies that are super heavily indebted and have incredibly high interest rates."
"The way to avoid that, obviously, is to invest in companies that don't yet have debt. While we own them they might add debt, which could create value because they are not using retained earnings to do this."
"Investing in leveraged companies sounds attractive to people because, they are like 'Oh I'm getting leveraged return on my money'. If they are already at 3x debt-to-ebitda, what matters is 'Are they going to 4 while you are owning the stock or they going to 2?'"
This is something that's not discussed very often.

With leverage, it's always incremental and the timing matters.

h/t @FocusedCompound

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More from @retaox

20 Feb
"This is the key part of Warren Buffett’s philosophy that folks overlook. He talks a lot about return on retained earnings. Whether keeping an extra dollar in a business tends to result in an extra dollar being added to the market cap."
Good read!
"Don’t confuse how fast a car is moving at this instant with how much distance it’s covered in the past hour"
"
The past average is just the past average. It is not the same as what the company will earn on the next dollar of capital it puts into the business.

But it can be used as a guide. Especially for wide moat businesses."
Read 5 tweets
17 Feb
$CVS 2021 guidance -->
Cashflow from operations : $12B
Capex : $3B
Adjusted operating income across segments :
* Health Care Benefits : $5B
* Pharmacy Services : $6B
* Retail/Long-Term Care : $6.5B

3 segments of almost equal size.

Cue the cross selling / flywheel slide.
After Aetna acquisition, leverage ratio is now at 4x. Goal is to reduce it to 3x by 2022.

"We've hit the 2021 run rate and the synergies are fully embedded in the business."
"Millions of new customers will engage with CVS Health for the first time through testing and vaccine administration services. We will use this opportunity to shape a health experience that demonstrates the value we bring."
Read 11 tweets
17 Feb
Complex US healthcare system is complex.

Trying to wrap my head around Pharmacy Benefit Management companies (PBMs).

en.wikipedia.org/wiki/Pharmacy_…
What is a Pharmacy Benefit Management (PBM) company?

These are companies that health insurance providers hire to handle
1) Price negotiations
2) Insurance claims
3) Distribution of prescription drugs.
Who are the biggest PBMs?

These 3 companies combined control more than 70% of market share.
* Express Scripts (Cigna)
* Caremark (CVS Health)
* OptumRx (United Health)
Read 5 tweets
4 Feb
A neat little trick that I've been following lately to save my 'Coffee Can Portfolio' from my myself & my impatience:

I've two brokerages; one for my 'Working Capital Portfolio' and other for my 'Coffee Can Portfolio'. Both are long term oriented, but serve different purposes.
Working Capital Portfolio :

The is where I initiate a starter position in a stock. I initiate starter positions for 2 reasons :
1) Gain further conviction.
2) Wait for a right price on a company with fantastic economics.

I log into this account about once a week.
Coffee Can Portfolio :

Once I've reached the maximum allocation for a particular investment in my 'Working Capital' account, I initiate a transfer of the security to the 'Coffee Can' account.

I log into this account, like never. This brokerage contains my retirement funds too.
Read 9 tweets
31 Jan
From 1960 to 1980 --> Inflation increased from 2% to 13%.

From 1980 to 2000 --> Inflation dropped from 13% back to 2%.

Inflation cycles are much longer and it creeps in on us slowly. It's in best interest of younger investors to study history and learn from the past.
"Stable prices provide a sense of security. They are like safe streets, clean drinking water and dependable electricity. Their importance is noticed only when they are missing."
How bad could it be for stocks in general?

Let's look at history. The Dow Jones Industrial Average was no higher in 1982 than in 1965 and this could very well be attributed to high inflation during that period.
Read 13 tweets
26 Jan
In long term investing, moats are the most important qualitative factor an investor should look for. There are a lot of academic papers and books on moats. It's a subjective topic and these are the ones I look for.
1. Patents : A single patent does not protect the company. The company should have a track record of producing patents for this to be a wide enough moat. If competitors were able to copy the products, in spite of existing patents, then patents are just show pieces. Biotech/Pharma
2. Regulations : In general, regulations are good for existing players in the industry and bad for new entrants. It raises the barrier to entry. Regulations come with extra costs and head aches that deters new players to come in. Tobacco and Pipelines are prime examples.
Read 31 tweets

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