ThumbTack Fund – New No.1 General

Broadcom (AVGO) has been occupying the top general spot since inception, sitting pretty at the top for the past 14 months.

During my last update, the 5 “generals” list is:

TTI’s 5 Generals

1. Broadcom (AVGO)
2. Alibaba Group (BABA, 9988)
3. Rocket Companies (RKT)
4. Pershing Square Tontine Holdings (PSTH)
5. Still interviewing applicants

ThumbTack Fund Report 8 – What Are These Bots Doing?

Over the past 3 weeks or so, I’ve been steadily taking profit on AVGO, and have cut my exposure by approximately 50%.

With an average entry price of around USD 220, and having sold at USD 460-470, AVGO has returned approximately 110% in the past 15 months, including dividends (less 30% WHT) and option premiums.

Broadcom (AVGO) – Blue line

S&P index – Red line

When compared against S&P, AVGO has done extremely well during this time frame, outperforming S&P even whilst excluding dividends. AVGO is also known to be generous in its dividend payout.

Bear in mind that S&P itself has been on a wild tear upwards all this while.

AVGO continues to be an electric mix of both growth and profitability, whilst generating FCF every quarter, which they deploy (partially) into maintaining their lead, particularly in the semiconductor solutions segment. While AVGO has constantly been in the news every couple of years due to Hock Tan’s strategy of acquisition and successful assimilation, little attention has been paid to their R&D, which itself is a lean and mean growth centre.

Coupled with an exceptional management that’s shareholder friendly, IMO, AVGO remains 1 of the best mix of both growth and diversification. A case in point is their fairly recent acquisition of Symantec in 2019. The market doesn’t talk about it right now… but I remember the share price took a hit when the acquisition was announced back then.

Analysts were scratching their head as to why AVGO would be acquiring a seemingly unrelated business, that has next to no growth prospects. Many were speculating then, that Hock did a “panic buy”, as AVGO failed to gain regulatory approval to buy Qualcomm. (That was despite Hock getting a nice photo op with Trump, just before news of AVGO getting blocked in its hostile bid for Qualcomm broke.) Now, imagine if AVGO had succeeded in acquiring Qualcomm… today, against the backdrop of a chip shortage…. This kinda shows you how Hock sees things a few years ahead of the industry. I don’t believe that he’s just “lucky”. You can’t just get lucky with acquisitions after acquisitions, repeatedly.

Now, a mere 2 years after the Symantec acquisition, AVGO has launched new, innovative products, particularly in the cybersecurity space. Hock Tan is notoriously laser focused when it comes to R&D, as he should be, and as I would want him to be as a shareholder. I think many companies fail to optimize their R&D, that is, make sure there’s an end goal. That end goal surely has to involve monetization for the shareholders.

Let me side track a bit. There’s a local construction company, BBR Holdings, that I wrote about several years back. They branched out into doing all sorts of stuff, with a “Green arm”, exploring the commercial application of solar panels. They had some co-op with the gov and were experimenting with floating solar panels in the reservoirs. After a ton of precious cashflow being diverted to all this, after so many years… the company had a grand total of something like 2 clients, and both are on ridiculously onerous terms that makes it near impossible for the company to turn a profit. (The clients pay nothing for solar panel installations, and they pay for any electricity generated at the normal market rates. It was estimated that the company would “breakeven” after like 10 years of selling electricity at the then market raters!)

This is surely the prime example of diworsification!

So why did I pare down my AVGO stake despite singing praises about the company?

The short answer is: Valuation.

Markets have priced in a very successful AVGO future ahead. I’m very reluctant to sell out completely though, as past experience tells me it’s a mistake to bet against certain businesses that are dominant in their industries and will continue to be in the foreseeable future. Also, it’s really all just about opportunity costs and whether there are safer, more productive avenues to park capital in.

With that, here’s TTI’s new top 5 generals list:

TTI’s 5 Generals

1. Nippon Yusen Kabushiki Kaisha (9101), Mitsui OSK Lines Ltd (9104), Kawasaki Kisen Kaisha, Ltd (9107)
2. Alibaba Group (BABA, 9988)
3. Broadcom (AVGO)
4. Pershing Square Tontine Holdings (PSTH)
5. Rocket Companies (RKT)

Nippon YKK, Mitsui and KKK are the 3 largest shipping firms in Japan. They collectively own One Ocean Network (ONE), in approximately 3 equal parts. Pretty sure most people would recognize ONE’s bright pink containers.

Since I can’t really differentiate and choose between the 3, for my top spot, I’ve decided to buy all 3 over the past 3 weeks or so. I hold long positions in all 3 in the form of both direct equity as well as a structured option position. Amongst the 3, I’ve the greatest exposure to KKK (9107), which incidentally, is the smallest too.

Alright, that’s all I have for this short post.

Stay tuned for more exciting investing adventures in the next episode of TTI!