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Blog For The Week Ended January 12, 2018

Summary

Introduction to my new blog content and format.

My weekly observations on business, finance, and investments.

Introduction: To regularly and systematically share investment and business ideas with followers, I have decided to write a weekly blog to be shared on Fridays or over the subsequent weekend. I’ll try to keep it brief - about one page. For efficiency and engagement I will use bullets and short sentences, sometimes like a morning trading note. Blog inclusions may be links to more complete published analysis, summaries of investments investigated and analyzed, and commentary from third-party sources I find interesting.I will try to be candid with readers, but some investments will be described on a no-names basis. This blog is not intended to be comprehensive of every investment, analysis, and project.

This blog will be the first time I am going to be sharing on a regular schedule - I expect there to be a development curve as I strike a balance on content and find a tone. These blogs will be shared on CCM’s blog page via Medium (medium.com/ClarendonCapMgmt), Seeking Alpha (seekingalpha.com/author/carlos-sava-cfa), and announced via Twitter (twitter.com/ClarendonCapMgt). If you are not currently following me and CCM on these platforms, I encourage you to do so. I am also considering recording short videos (5 minutes or less) instead of the blog as an alternative some weeks. I would love feedback and engagement. Get in touch with what you find good or helpful, what I am missing or not considering, and general comments on the blog and any investment ideas.

Commentary:

  • Tesla (TSLA) announced production delays in its all-important Model 3, now targeting weekly production of 2,500 autos per week at the end of Q1 and 5,000 at the end of Q2. Simply, Tesla again announced delays in rolling out the car I have seen to be as much as 75% of the extraordinarily high value of Tesla.
  • Seagate (STX) may own $7 billion of Ripple XRP cryptocurrency. Ripple XRP was down significantly since the Monday announcement. I have concerns over cryptocurrencies, especially Bitcoin and some of the smaller more speculative ones. If there were a single cryptocurrency, Ripple is the one most closely aligned to Seagate’s storage business, has had the greatest appreciation, and is described as a bridge currency to others and is a payment network. I hope Seagate considers monetizing this holding soon. Like other cryptocurrencies, the price is highly volatile. The volatility is shown with a one week top tick to bottom of 51%.
  1. The most succinct and argument against Bitcoin is summarized here by Charlie Munger (www.cnbc.com/2017/12/22/buffett-partner-charlie-munger-says-bitcoin-is-total-insanity-avoid-it-like-the-plague.html). Buffett reiterated this in an interview with CNBC this week, predicting that it ‘will end badly.’
  • Berkshire Hathaway (BRK.B) promoted Greg Abel and Ajit Jain to the Board of Directors. I suspect Abel to be Buffett’s successor, but Jain is a good insurance policy (bad puns may also be part of these blogs).
  • S&P returns factor analysis report: www.valuewalk.com/2018/01/sp-500-return-2017/ This article, using research from Credit Suisse, looked at various factors attributable to S&P 500 returns. I’ve highlighted the low PE as a general proxy for what CCM invests in and, the small factor as CCM also looks at small-cap companies - although this emphasis has shifted to small become more important to us over the past couple of years.

Cumulative ’08-‘17

 ’12-‘17

S&P 500

126.2%

141.6%

Low PE

146.0%

146.1%

Small

168.0%

132.2%

  • Target (TGT) announced preliminary results from their holiday season and increased guidance. “For fourth quarter 2017, the Company expects Adjusted EPS of $1.30 to $1.40, compared to the prior range of $1.05 to $1.25.” Using a recent price of $76.50 and the midpoint of full-year guidance - $4.69 trailing adjusted EPS - the PE would be 16.3x. The better than anticipated results come as a surprise to me, but they are maintaining their loyalty from their core demographics. The CAPEX plans to improve stores, the development plan of smaller footprint stores in urban areas, and the heavy reliance on groceries are long-term concerns/challenges to me.
  • Industrial Logistics Properties Trust (ILPT) is an upcoming IPO - Decided to pass. While the Hawaii exposure is interesting, the valuation at mid-point of the range is not compelling, and it has a complex organization and ownership structure.

Thanks for reading. Carlos Sava, CFA, CPA