It isn’t often we see market actions like we’ve seen over the past few weeks. This is the kind of market where you see almost no correlation with corporate-specific data and individual stock prices. A company like Veeva (VEEV, Financial) - down from $165 per share on Feb.20, 2020- is trading at $135 per share on March 12, 2020 after announcing an outstanding quarter on March 4. For the recent quarter, revenue was up 34% year-over-year and earnings per share beat estimates by 2 cents.
What is one to make from such markets? What protection is there in these conditions?
First, we recommend having confidence in the companies and managements that make up your portfolio. At Nintai, we seek out companies with high returns on capital, equity and assets, high free cash flow margins, deep competitive moats and management who know how to create long term investor value. We can assure you that corporate operations, strategies or management skill sets have not collapsed just because the markets have entered bear market territory or becasue the coronavirus has reached pandemic scale.
We are confident that our investment partners are aware they still own a set of outstanding companies in their portfolios. Each of our portfolios have generous cash positions which provide both downside protection and the ability to add to existing positions as prices become increasingly compelling. In addition, the companies in their portfolios don't have debt that will force them to make desperate - and likely poor - capital allocation decisions.
Occasionally, you hear about investors who became rich by selling at the top, like Joe Kennedy selling after his shoe shine boy recommended Hindenburg. "The moment a shoe shine boy gives you stock recommendations it’s time to get out of the markets," Kennedy said.
However, the vast majority of investors who outperform the markets build up cash as the markets reach rarified heights, take their profits, build up more cash and await the inevitable crash. Yes, it’s the old buy low, sell high concept. It doesn’t take a high ntellectual quotient (IQ), but it takes a heck of a high emotional quotient (EQ) to successfully achieve this model.
Here at Nintai Investments, we might not be the brightest lights on the block, but we firmly understand the concept of holding cash, buying low and selling high. As I’ve mentioned before, we have a tendency to not make our money in bull markets, instead increasing profits by preventing permanent capital losses in bear markets.
Veeva, for example, has no debt and roughly $1.1 billion in cash on the balance sheet. It grew revenue by 25.8%, earnings by 50.3% and free cash flow by 60.4% over the past five years. Management has a clear view on where growth is coming from over the next five to 10 years and are outstanding capital allocators. The fact that the price has dropped by 18% in three weeks would suggest this rapid decrease represents increased value rather than increased risk.
As value investors, regardless of the knot in your stomach and that feeling of flight over fight, we live for moments like this. These are the days that test an investor’s ability to live by value-based credo – buy low, sell high, look for quality and value at a discount to your estimated intrinsic value, be patient and keep your emotions in check.
Our markets have survived a Civil War, the crashes of 1896, 1901, 1907 and 1929, the Great Depression, two World Wars, the Cuban Missile Crisis, the 1973-1974 crash, the technology bubble and the real estate bubble, just to name a few. At Nintai we believe that as prices continue their drop, opportunities for acquiring outstanding companies at a discount to their intrinsic values will abound going forward.
By remaining calm and seeking out investment opportunities, we believe we can provide our investment partners with their best chance at long term market outperformance. As value investors, it’s what we do best.
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