1/

I’ve been re-reading through Joel Greenblatt’s class notes from his lectures.

Highly recommend for anyone who hasn’t read them. Thanks @FocusedCompound for making it easily accessible.

focusedcompounding.com/wp-content/upl…
2/

In lecture 3, Greenblatt discusses why value investing works. He brings up the mean reversion of ROE.

Which is something I think most investors don’t consider.
3/

The reasoning for ROE mean reversion is pretty simple. High ROE companies attract competitors that eventually take profits away.
4/

Low ROE companies spend their time improving their business models, creating new products, changing cost structure etc. to improve ROE whilst facing minimal competition.
5/

Of course you could pick a $GOOGL or $FB that maintain the ROE over time. A company with sustainable competitive advantages.

But that’s obviously hard too find.
6/

A company is more likely to improve their ROE than to maintain a high ROE for decades.

The typical response is ‘we live in a new world’, SaaS companies are different. Which could be partially true.
7/

But reversion to the mean has proven true through every cycle, geography, market-cap and industry throughout industry.

It’s the reason a diversified portfolio of ‘value’ works and usually outperforms. Even if that hasn’t been true for the past 10-15 years.
8/

Admittedly I’m a sucker for a sustainable ROE, high quality company with great management and a long runway. And it’s always worth looking for those companies. They just require better analysis.
*correction* Richard Pzena is making a presentation to the Greenblatt class. So it’s not Joel bringing up those points.

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More from @frankinvesting

Jan 19
1/

Value of $TCEHY gaming business.

As of Q3 2021, 24% of total revenue came from domestic gaming & 8% from international gaming, so 32% overall.
2/

Tencent’s LTM revenue is $87b, therefore $27.8b came from gaming.

If we look at the $MSFT acquisition of $ATVI for $68.7b as a guide, they are paying 7.6x revenues for the gaming business.
3/

$TCEHY gaming business at 7.6x sales is worth $211 billion.

Tencent’s gaming business is a faster growing & higher quality business compared to $ATVI with a much lower customer acquisition cost and incredible exposure through WeChat & QQ.
Read 7 tweets
Jan 15
Thread/ Special situation $DTY

Dignity is vertically integrated funeral services business in the UK. Stock price is down ~80% from all-time high.

Previous management made bad acquisitions and increased prices as volumes declined.
1/

Thanks to Simon Caufield and his presentation at MOI ‘Best Ideas’ conference @manualofideas @JMihaljevic

Also thanks to @bkaellner for putting this list of companies together, so I could filter straight to the small-caps.

2/

UK value firm Phoenix took advantage of beaten down stock price in 2018 and & have played an activist role.

They have increased their position twice, now owning ~30%. The CIO of Phoenix, Gary Channon is temporary CEO at $DTY currently. Old management has been replaced.
Read 11 tweets
Jan 13
Thread/ $TCEHY back-of-envelope valuation.

Since the IPO in 2004, Tencent has returned ~45% annually to shareholders, turning $1 into $553.

Let's have a brief look at what returns could look like moving forward over the next 5yrs...
1/

Let's start with a base case.

@JordsNel from Vineyard Holdings put in the hard work with his deep-dive that I highly recommend. He shared the est. global industry 5Y growth rates weighted against Tencent's revenue (see below).

Jordan's weighted avg. growth rate was 14.6%
2/

Let's round that up to 15% which is still conservative considering China's CAGR in each industry is likely to be above the global avg.

Additionally the capital allocation from Pony Ma & management + the dominant market positioning is likely to lead to much higher returns
Read 8 tweets
Dec 31, 2021
1/

My largest position in my portfolio is a ~45% weighting in an Australian micro-cap. The company is Kelly Partners Group $KPG.AX

Here is a brief introduction to my highest conviction idea..
2/

Kelly Partners is a specialist chartered accounting network founded by Brett Kelly in 2006. They listed on the ASX in 2017 and now have a ~$200m market cap.

Since 2006, revenues have compounded at 32%. The business has doubled in size on average every three years.
3/

Founder & CEO Brett Kelly owns 50.4% of Kelly Partners. The partners, management and board of directors make up another 8.9%. So overall, the insider ownership is 59.3%

Management are aligned with shareholders and incentivised to create long-term value.
Read 10 tweets
Dec 25, 2021
Thread/

$TCEHY announced that they are giving shareholders their ~18% stake in $JD as a special dividend, which is a 3% yield. Shareholders receive one JD share for every 21 Tencent shares they own.

Here’s why this is even better than it might seem at first glance…
1/

This one off special dividend could potentially be the first of many for Tencent over the long-term. I have seen some commentary online calling this ‘a move out of the $IAC playbook’..

More specifically it’s a homage to the great Barry Diller.
2/

The idea of this is pretty exciting for $TCEHY shareholders. But probably even more exciting for $PROSY shareholders.

Just to give some context for those who are unfamiliar… Here is the Barry Diller & $IAC playbook in a nutshell:
Read 12 tweets
Dec 24, 2021
1/

$BABA in their most recent investor presentation reported the China cloud market size in 2020 at $32B of which they have a market share of ~30% which equated to $11B in revenues FY21.

Now here’s where it gets pretty crazy …
2/

They estimate the China cloud market size in 2025 to be $154B which is a 37% CAGR.

If $BABA maintain ~30% market share that will be $46B in revenues from the cloud business in FY25. Over 4x the current revenue for Alibaba cloud.
3/

Western cloud businesses like AWS and Azure are valued at ~15x sales or more by most analysts.

An equivalent multiple to $BABA cloud in 2025 would give a value of $693b which is over double the current market cap for Alibaba.
Read 4 tweets

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