Month: February 2020

Guest Post: Visa By Datascienceinvestor

Title’s self explanatory…

“J” from Datascienceinvestor asked to exchange guest posts, but since I hardly bother to post much myself here these days, I declined, but offered to give him a guest post instead.

“J” asked for suggestions, and since my last post was on the top 5 generals for my new fund, I suggested any 1 of the 5 names and he picked Visa. (TTI’s Top 5 Generals)

So without further ado, go check his site out. I did, and it’s……. different, I guess. Something refreshing for a change. See if you find this useful.

Some of the numbers and figures in the post may be slightly off, that’s not a mistake on the part of the author, but rather, simply cos I’ve been a bit tardy in posting this.

Visa’s share price has risen substantially since the author wrote this. But still, most of the data should be relevant enough.

Stock in focus: Visa

This is a guest post by datascienceinvestor. You can find his blog here.

919) Visa

Visa (Symbol: V) is probably a company that almost everyone knows. For most of us, we utilizes its services in our everyday life. So for the uninitiated, what is Visa’s business?

Visa is a global payments technology company which aims to connect between several groups such as government, financial institutions, businesses and consumers. Its business model is really simple. It simply just manages and operates its electronics payment network (now I may be oversimplifying it here, but trust me it’s not too complicated). And the best part of having a simple business model is that it is also usually a very profitable business model.

In this electronics payment space, there aren’t too many competitors, with the closest competitor for Visa being Mastercard. These two companies enjoy a duopoly status in the electronics payment space and have built such an impregnable moat that it’s very difficult for any other company to take significant market share away from them. With the world moving towards cashless transactions, there are many more good days ahead for Visa and Mastercard.

Now, back to Visa. How has the stock price performed in the past year?

920) Visa share price

Pretty decent, isn’t it? It’s on a constant uptrend for the past year.

How does it compare against the major US indices such as DJIA then?

921) Visa relative performance

Now, the r coefficient for the trend lines for both Visa and DJIA can be seen in the graph above. So what does r coefficient means? r coefficient is used in statistical analysis to explain the strength of the linear relationship between 2 variables. Since we are using price and date as the variables, r coefficient allows us to better understand how the price changes with time. In this case, the higher the r coefficient, the better the price performance. Hence, we can see clearly here that Visa has a better price performance than DJIA. This also goes to show that you will reap in a bigger profit if you are to buy and hold Visa instead of DJIA for the past year.

I like to touch on a bit on Sentiment Analysis here as it is increasingly used in various domains to better understand the effects of people sentiments on various other factors/outcomes. In stocks investing, this area of data science is becoming increasing important. Sentiment Analysis is usually applied in stocks investing to better understand if people sentiments has any effect on stock prices. In this case, I will attempt to try to assign a quantitative value to people sentiments on Visa to see if there is a direct correlation between people sentiments and Visa’s stock price.

In this case, I extracted Visa sentiment data from Sentdex which pulls data from a variety of sources such as Reuters, Yahoo Finance, Bloomberg, Forbes etc and assigns a value to the general sentiment on a particular topic everyday.

Here is the scale, ranging from a value of -3 (strongly negative) to 6 (strongly positive)

6 – Strongest positive sentiment

5 – Extremely strong, positive, sentiment

4 – Very strong, positive, sentiment

3 – Strong, positive sentiment

2 – Substantially positive sentiment

1 – Barely positive sentiment

0 – Neutral sentiment

-1 – Sentiment trending into negatives

-2 – Weak negative sentiment

-3 – Strongest negative sentiment.

To ensure higher accuracy in the data value, I use the Simple Moving Average of the sentiment value across a period of 5 days instead.

Here is how it looks like (as an example)

922) Visa sentiment analysis

Now, let’s take a look at how its sentiment value looks like over the past 1 year.

923) V sentiment value

For most parts of the last year, the sentiments for Visa has been rather positive except for the current period (when its current results missed on revenue expectations– causing the sharpest drop in sentiments in the past year) and the period between Nov 2019 and Jan 2020 (likely due to the looming near term headwinds of 5% increase in tariffs on Chinese imports scheduled on Dec 15 back then).

How has Visa sentiment analysis correlate to its price performance then? Here is the graph.

924) V

The r coefficient for the trend line is a mere 0.0564 which suggests that sentiments has very little or almost negligible effects on its share price over the course of past year. Hence, sentiments analysis can be taken out of consideration when analyzing the various factors influencing the stock price for Visa. This is very unlike some of the tech stocks such as Nvidia which relies heavily on sentiments.

On the fundamental side, Visa’s PE ratio of 36.8X is now higher as compared to the industry average of 32X. Its PB ratio of 14.5X is also much higher than the industry average of 4.2X. Hence, I wouldn’t say that Visa is a value stock right now based on these factors.

However, if you are looking at a stable stock to invest in, Visa could be very well on your watch list. Its debt is well covered by its operating cash flow (coverage of around 76%) and interest payments on its debt are also well covered by its EBIT (almost 54X). Historically, the stock has always been on a steady rise with very minimal occasions when it suffers a great price drop. If you are in it for the long term, you may like to consider either buying on the dips on just simply dollar cost average in your purchases.

Hope this has been informative!

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TTI’s Top 5 Generals

To concentrate? Or to diversify?

This has really been on my mind a lot lately.

Buffett says diversification is just an insurance against ignorance.

Which is really a fancy way of saying that if you’re not entirely sure, or if you think you are sure but am concerned that the world may throw you a curveball, then diversification would help cushion any potential road bumps. But it works both ways. I don’t think it’s possible to get really really amazing returns in the long run if one diversifies too much.

Ackman’s Pershing square has what… $10billion under management? And he holds less than 12 names at any 1 time. And even that is misleading cos most of the capital goes to the top 5 or 6 usually. But he has a return of >50% in 2019 to show for.

Bill Miller really scored in 2019, with a +120% thereabouts, and he’s also rather concentrated. Most funds find it really hard to consistently beat a passive index like SPY cos they really are closet indexers. They can’t deviate too much from the big index constituents, for fear that if they make 1 mistake, their returns would render the year a goner and they’re out of the game permanently i.e. investors say bye bye.

So amongst all the names that make up an index, they have to pick the winners… AND position size it accordingly into the winners such that the overperformance can cover fees and yet, still beat the index. Which is really crazy if you think about it.

At least I don’t have that problem. I just want whatever works best in the long run.

With these thoughts, I’ve decided to set up a new concentrated fund. I’ve already applied and it just got approved and up and running under InteractiveBrokers. Prob going to start off by funding it with $100k SGD first, and scale up with time.

I’m really just curious to see how it’d pan out. I’ve decided to run this under a wholly new fund instead of my existing portfolio, so that the performance results would be separately and accurately tracked by IB, so that I can see how an uber concentrated fund would turn out.

Yep, that’s what I’ve been busy with.

Naturally, the 5 names that I’ve come up with, are already existing positions and/or previous positions that I’m already pretty familiar with. 

For a concentrated fund, I’ve also immediately eliminated ideas that I think may have a favorable risk-reward ratio, but are otherwise small caps or too volatile or dependent on a certain scenario playing out.

I can’t have a company that occupies 20% of my portfolio dropping 30% in 1 day.

So lovely companies that I really like, like ATXI, ain’t even up for consideration.

(Avenue Therapeutics – No Pain, Lots Of Gain?)

It’s up >110% since my post, in less than a year, and I’m still waiting for FDA approval.

Having said that, with the current state of affairs (by that, I mean the amount of liquidity in the system), I’ve noticed that even the big caps can have pretty crazy volatility.

FB was a -7% in 1 night right after it’s earnings release. AMZN “melt-up” almost 10% in a single day after beating earnings estimates, making Bezos a really happy man. I read that he had a paper gain of like $18billion or something in 1 day after earnings release. Mind boggling.

I guess that’s the risk of running a concentrated portfolio. Mark Howards says you can’t have the possibility of outsized returns, without taking on the risk of huge underperformance.

I’ve explored several ways to hedge, but… gee, I dunno. How is it possible to hedge against a -7% or -10% drop in a single day? Probably nothing much one can do. Liquidity is probably the best hedge.

Anyhow, after spending countless late nights and man hours pouring over my positions, I’ve come up with the final team.

Boy, this must be how Pep Guardiola feels at Barca. When you’ve to bench top talents that can stroll into any other 1st team at other clubs.

The benefit of this whole exercise is that it really compelled me to compare. Like really sit down for hours and compare the valuation of 2 companies that are otherwise king pins on their own, and pick 1.

Kinda like having to choose between dating Margot Robbie or Gal Gadot. You pray that you never have to make that choice.

Without further ado… here’s my 1st team that’s going to play against SPY:

  1. Visa (V)
  2. Broadcom (AVGO)
  3. Bausch Health (BHC)
  4. Tencent (0700)
  5. Agilent Techologies (A)

Reserves List:

  1. DIS
  2. AMZN
  3. CTL
  4. NKE
  5. MSFT
  6. FB
  7. ABT
  8. AAPL

Maybe if I’m in the mood for it 1 day, I’d write a thesis for each of the 5 generals. But this post is not for that.

As one can see, none of the above names, even the reserves, are small players. They’re mostly dominant 1 way or another, within their respective industries.

Amongst the 5 generals, only Agilent Technologies is going to be an entirely new position. I’ve owned at 1 point or other, or still currently do, the other names in various position sizes.

But this exercise REALLY forced me to sit down and stare at the names in great detail, and compare really hard. I guess part of the criteria also involves my familiarity with the company. For eg. there’s a real case of AMZN ending up beating BHC or really, all 5 generals… but I’ve decided to go with what the companies that I think I understand better. That’s important because… this isn’t going to be just a buy-and-hold portfolio, come what may.

Which leads me to my next and last point.

The positions will be scaled in and up with options, and I intend to use options to adjust the position sizing accordingly. I think I have a competitive edge in this regard.

So the consideration here is not merely company fundamentals specific, but I do consider other factors like the option premiums available for the company and what I’m going to do with them. (AVGO, BHC, 0700 and A’s option premiums are ok-ish… V’s option premiums are kinda sucky cos of the low volatility)

Which is why I can’t simply run a hypothetical, retrospective study on the 5 names to figure out how the portfolio would’ve done. i.e. I can’t just choose a time frame of say 1 year ago, check the share price then vs now, and calculate the returns.

Cos I think what I do with the options, would feature heavily in the overall performance.

The 5 generals are also not going to be permanently in the 1st team. Otherwise, why have a reserve list?

So there we go. I hope to report stellar results in the long run, in which case, I might eventually tilt towards a purely uber concentrated portfolio. If it goes south, well, at least I’d know how much to diversify again.

So let’s go. Godspeed.

(It’s hard but I think I’d go for Gal Gadot, simply cos I like the alliteration)