Podcast Summary
Preparing Portfolios for Unprecedented Times: Experienced investors like Arif Karis from Ensemble Capital Management prepare their portfolios for various scenarios during crises and make tactical changes to ensure resilience. Confident in their positioning, they emphasize the importance of emotional preparedness and long-term survival and growth.
During unprecedented times like the COVID-19 pandemic, experienced investors like Arif Karis from Ensemble Capital Management prepare their portfolios for various scenarios and make tactical changes to ensure resilience. Arif, who manages a $1 billion portfolio, shared his experience of following the pandemic's impact in China and Italy and how his team was prepared for the market's reaction. Despite the large and fast drawdown, Arif expressed confidence in the positioning of the companies in their portfolio. In the second half of the show, Arif pitched Intuitive Surgical as an intriguing medical technology stock. Overall, the episode emphasized the importance of being emotionally prepared for market surprises and positioning portfolios for long-term survival and growth.
Focusing on a company's resilience during crises: During crises, focus on a company's income statement, cash flows, balance sheet, and access to capital to assess resilience. Betting on undiscovered trends isn't necessary. Understand the resilience of sectors like ecommerce, and consider larger companies' advantages in accessing capital.
During times of crisis, having a long-term focus on the resilience and competitive advantage of the companies in your portfolio is crucial. While it's natural to consider secular trends when investing, it's not necessary to bet on undiscovered trends. Instead, understanding the resilience of a company's income statement, cash flows, and balance sheet, as well as their ability to access capital during a liquidity crisis, can help investors make informed decisions. For example, the ecommerce trend, which has been around for decades, has seen accelerated growth during the pandemic. By focusing on the resilience of companies in this sector, investors can make informed decisions and weather market volatility. Additionally, during a crisis, larger companies may have an advantage over smaller ones due to their greater access to capital. Therefore, it's important to assess the resilience of individual companies and adjust your portfolio accordingly.
Capitalizing on well-known trends for outsized returns: Effectively capitalizing on trends by creating value for customers and stakeholders can lead to high ROIC and long-term growth in large markets, but investors must be prepared for unexpected events and adapt accordingly.
Well-known trends can still offer investment opportunities for outsized returns, even if they're widely recognized. Companies that effectively capitalize on these trends by creating value for customers and stakeholders can generate significant returns on investment (ROIC) and potentially enjoy long-term growth in large markets. However, understanding secular trends and their potential impact is crucial. The financial crisis of 2008 served as a reminder that investors must be prepared for unexpected events, such as pandemics, and be ready to adapt their models accordingly. Despite the challenges posed by the current crisis, understanding the lessons from the past and the actions taken by central banks can provide valuable insights for navigating the future.
Preparing for the new normal: Understanding the macro context in a capital abundant world: Shifting focus towards productive uses of abundant capital and adapting to the new normal, which could last several years, is crucial for value investors.
The world is facing an unprecedented situation with the COVID-19 pandemic, and the response and recovery will vary greatly between different societies and economies. It's crucial to be prepared for continued challenges and adapt to the new normal, which could last several years. As value investors, understanding the macro context is essential, even if we're more micro-focused. The abundant capital available today means the focus should shift towards finding productive uses and talent to make that capital work effectively. The negative yielding sovereign debt is a clear indication of the shift from a scarce capital world to an abundant one.
Finding Talented Management Teams for Outsized Returns: Identify competitively managed companies creating value for customers, stakeholders, and the world, ultimately rewarding investors as shareholders.
In today's economic climate, where central banks have driven the risk-free rate to nearly zero, investors can no longer expect to earn returns without taking on risk. Instead, the focus should be on finding talented management teams running companies that can generate outsized returns by investing and reinvesting capital in productive opportunities. Intuitive Surgical, a company that makes robotic surgical systems, is an example of such a business. It offers minimally invasive surgical procedures, improving patient care and reducing complications. The company's success is evident in the dramatic increase in procedure count from around 100,000 in 2012 to over 1.2 million globally today. As investors, our job is to identify these competitively managed companies that create value for customers, stakeholders, and the world, ultimately rewarding us as shareholders with a portion of that value.
A strong network and understanding emerging technologies: Having trusted individuals and resources can introduce you to innovative ideas. The potential of a technology and its business model can be evaluated based on its impact on surgeons and patients.
Having the support of trusted individuals and resources can help bring even the most unconventional ideas to fruition. The speaker, Stig Brodersen, shared how his engineering friend introduced him to Intuitive Surgical and its innovative surgical robots in 2012. Initially intrigued but unsure due to the company's high valuation and seemingly limited application, Brodersen followed the company's progress and was impressed by the potential of their fourth-generation machine, the da Vinci Xi. This machine expanded the capabilities of surgeons, enabling them to perform procedures that were previously impossible. The financial model of Intuitive Surgical, reminiscent of the razor blade model, also caught Brodersen's attention. The company's revenue came from selling the surgical robots at a high price and then generating recurring revenue through the sale of disposable instruments used during surgeries. This business model, combined with the incredible value Intuitive Surgical brought to surgeons and patients, convinced Brodersen to invest in the company. The story highlights the importance of having a strong network and the ability to identify and understand the potential of emerging technologies.
Intuitive Surgical's high-margin consumables business model: Intuitive Surgical's annuity model generates 60-70% gross margins on robots and 80-90% on consumables, providing significant revenue and growth potential from captive customers in a large, untapped global market.
Intuitive Surgical's business model is built around high-margin consumables sold to captive customers who have invested in their expensive robotic systems. This annuity model, as the speaker calls it, allows Intuitive to make significant gross margins, estimated at 60-70% on the robots, while hospitals pay upfront for the robots and continue to purchase consumables at an 80-90% gross margin. This model, combined with the lack of competition in soft tissue surgery and the large, untapped global market, made the speaker confident in investing in Intuitive Surgical. Additionally, the company's approach to identifying new procedures and instruments based on demand from their user base was impressive to the speaker and added to their growth potential. With a current market size of around 1 million surgeries per year and a potential global market of 300 million surgeries, Intuitive Surgical's growth opportunities are significant.
Intuitive Surgical's 20-year head start in robotic surgery: Intuitive Surgical's 20-year lead in robotic surgery gives them a significant advantage in capabilities, know-how, and relationships, making them a formidable competitor.
Intuitive Surgical's competitive advantage comes from its 20-year head start in robotic minimally invasive surgery. Starting as a spin-off from Stanford Research Institute, Intuitive Surgical initially focused on developing a remote telepresence surgical device for the military. Although the project didn't gain much traction, the technology was adapted for surgery, and the company found success in the niche markets of prostate and uterus removal. With a focus on safety, reputation, and relationships, Intuitive Surgical built a strong moat around its business, racking up a safety record of over 100,000 procedures and training thousands of surgeons. However, when they introduced the da Vinci Xi machine in 2014, targeting general surgery instead of niche procedures, larger medical device makers like Johnson & Johnson and Medtronic took notice and began investing in their own robotic surgery initiatives. Intuitive Surgical's long-term focus and 20-year head start have given them a significant advantage in capabilities, know-how, and relationships, making it a formidable competitor in the market.
Intuitive Surgical's Lead Over Competitors Amidst COVID-19 Challenges: Intuitive Surgical remains focused on extending capabilities despite COVID-19 challenges, not prioritizing dividends or buybacks, and expects demand for its services to recover post-pandemic.
Intuitive Surgical, with its 50,000+ robots in the field and a mission-driven focus on surgical robotics, holds a significant lead over competitors Medtronic and J&J. However, the COVID-19 pandemic has caused a significant reduction in surgeries and Intuitive Surgical procedures, leading to a backlog of needed procedures. The recovery is expected to be slow, with Q2 and Q3 likely to be terrible quarters. Despite this challenge, Intuitive Surgical remains singularly focused on extending its capabilities and is not prioritizing capital allocation for dividends, buybacks, or earnings per share like larger companies might. Instead, it's continuing to invest in its core value proposition for customers. In the post-COVID era, the demand for Intuitive's services will need to be made up, and the backlog of procedures will need to be addressed. The long-term impact of COVID-19 on what constitutes "normal" is uncertain, but most procedures are expected to recover.
Extending core value proposition: Identifying companies that can extend their core value proposition without reinventing it ensures a stable and sustainable business model with consistent free cash flows
Intuitive Surgical's competitive advantage is expected to widen due to its ability to extend and expand the value proposition of its core business without having to reinvent it. Buffett's philosophy of investing in businesses that don't need to be reinvented is simplistic but essential in understanding the sustainability of a business. Intuitive Surgical, Google, and Netflix are examples of companies that have extended their core value proposition and technology capabilities, creating new growth opportunities while keeping a fair share of the value created for their employees and shareholders. The key to a successful and attractive technology investment lies in identifying companies that can extend their core value proposition without having to reinvent it. This approach ensures a stable and sustainable business model that generates consistent free cash flows for investors.
The Internet disrupted traditional media businesses: Companies that adapt to global, virtual networks and invest in content and scale can capture larger, more profitable markets.
The Internet revolutionized the media industry by changing the way media is delivered, consumed, and value is created. Companies like Netflix understood this shift and disrupted traditional media businesses by moving from a regional, wire-dependent model to a global, virtual network model. This required heavy investment in content and scale to reach billions of customers with diverse viewing habits and languages. Companies that failed to adapt, like See's Candy, missed out on capturing larger, more profitable markets. Investors should look for companies with management teams that focus on competitive moats, maximizing return on invested capital, and reinvesting excess cash flows in broader, global scale opportunities. Global scale companies like Netflix, Mastercard, Booking, and Google have a long runway for growth, which is an essential part of their valuation and value creation.
IFlex Stretch Studio Franchises: Profitable Opportunity in Growing Health Market: IFlex Stretch Studio's affordable assisted stretching franchises are gaining popularity in the rapidly expanding health and wellness market, with over 200 licenses awarded. The Mayo Clinic supports the benefits of stretching and the company's revenues are growing, making it a profitable investment opportunity.
IFlex stretch studio franchises are gaining popularity with over 200 licenses already awarded, offering professional assisted stretching at an affordable price. The health and wellness business is rapidly growing, and prime regional developer opportunities are in high demand. The Mayo Clinic supports the benefits of stretching, which can increase flexibility and improve joint range of motion. Investing in iFlex could be a profitable opportunity, as the company's revenues are growing, the capital expenditures are reasonable, and the addressable market is massive. When it comes to valuing the company, a bottoms-up evaluation analysis is used, with a probable range of around $700 per share. Intuitive Surgical's focus and 20-year lead in the market make it difficult for competitors to take significant market share. The penetration of the available market for robotic surgery is still in the mid-single digits for Intuitive Surgical, indicating significant room for growth. Additionally, public.com offers a high-yield cash account with a competitive interest rate, providing another financial opportunity for investors.
Stock market vs economy: The stock market doesn't directly reflect the economy's conditions, but rather investor sentiment, monetary policy, and earnings expectations.
The stock market and the economy are not the same thing. While the economy represents the sum of all goods and services produced by Americans, the stock market reflects the value investors place on the earnings of listed U.S. businesses. The current economic situation, with high unemployment and a struggling economy due to COVID-19, may leave one confused as to why the stock market is rising. However, it's important to remember that the stock market doesn't directly reflect the economy's conditions. Instead, it can be influenced by various factors such as investor sentiment, monetary policy, and earnings expectations. The current market volatility may present opportunities for long-term investors to take advantage of potential bargains. For more insights and investment ideas, visit Ensemble Capital's website, interestinginvesting.com, or follow them on Twitter @intrinsic_inv.
Understanding the Differences Between the U.S. Stock Market and Economy: The Shiller PE ratio, which measures stock market value against past earnings, can indicate if stocks are overvalued or undervalued based on other assets and growth potential. The stock market looks forward, while the economy looks back, and the Fed's bond-buying program impacts stock prices, creating an unusual market behavior despite economic challenges.
The U.S. Stock Market and the U.S. Economy are not the same thing. The Shiller PE ratio, which measures the price of inflation-adjusted earnings over the past 10 years, can indicate if the stock market is overvalued or undervalued based on the opportunity cost of other assets and the growth potential of U.S. equities. The stock market is forward-looking, while the economy is backward-looking. The Fed's massive bond-buying program has significantly influenced the market, making stocks more attractive compared to bonds and driving up stock prices. This intervention and manipulation make the current market behavior seem unusual, despite high unemployment rates and economic uncertainty.
Investing in equities as a form of 'sound money': In the current economic climate, relying on traditional valuation metrics for investing may be challenging. Instead, consider a momentum-based approach to navigate the market.
The current economic climate, with the increasing money supply and the fixity of shares outstanding, has led many investors to view equities as a form of "sound money" compared to the volatile fiat cash. The speaker argues that the Fed's actions of printing money to service dollar-denominated debt are causing bond yields to decrease and the money to bypass the general population. As an investor, relying solely on traditional valuation metrics may prove challenging in this environment, as economic calculations are difficult to make with interest rates pegged to zero. Instead, a momentum-based investing approach, which focuses on price action and statistical volatility, may be more effective in navigating the current market conditions.
Volatility driven by currency crisis and credit contractions: Investors should employ a momentum strategy with a focus on valuation metrics during extreme market volatility caused by currency crisis and credit contractions.
Investors should expect extreme volatility in the markets due to a major currency crisis and contractions in credit in the system. These contractions are being driven by issues on company balance sheets and adjustments in the derivatives market, particularly in the oil industry. As a result, there is a surge for dollars, making this a difficult time to navigate. A momentum strategy with a focus on valuation metrics is recommended for investors. For those interested, a free subscription to the TIP Finance tool with a momentum tool is available by asking a question on the Investors.com website that may be featured on the show.
