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Terry Smith piles into Facebook
Fuzzy Beats
Posted: 02 March 2018 22:18:23(UTC)
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Interesting to see Fundsmith's latest acquisition - a FAANG stock!

It's already a top 10 holding, so a sizeable position has been quickly built.

Given that Mark Zuckerberg has already offloaded in excess of 2.5M shares in February alone, has Terry Smith come late to the party or does "Fundsmith know"?
King Lodos
Posted: 02 March 2018 23:23:05(UTC)
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The numbers certainly fit the criteria: high and growing ROC, margins, reasonable price, etc..

What would bother me is the exodus of the younger generation (although they also own Instagram), current political issues, and competition.

But maybe that's why it's not on a PE 50 .. I think it's a reasonable bet that it's going to stick around – maybe the older generation are less likely to migrate, and that's what makes it investable
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Alan M on 05/03/2018(UTC), dlp6666 on 08/03/2018(UTC)
Fuzzy Beats
Posted: 03 March 2018 00:26:23(UTC)
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Yes the numbers do seem to stack up at the moment.

I still think it represents a volte face on Smith's part having previously been dismissive on such tech stocks.

Terry Smith Interview
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Alan M on 05/03/2018(UTC)
King Lodos
Posted: 03 March 2018 01:44:53(UTC)
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And interestingly not too long after Warren Buffett did the same – avoiding tech stocks all his career, and now piling into Apple.

I don't think there's a timing aspect if valuations are reasonable .. It's whether they'll be good businesses over the next 20 years .. I went with Buffett, and started buying Apple, because the brand has that something that keeps people loyal – and that's a huge deal in profitable sectors, where the threat is that competition squeezes margins until no one's profitable .. I think that's more Lindsell Train and Buffett's philosophy.

I think Smith's looking for a winner, and I think Facebook's got to be a bit of a punt .. Great numbers, but there's no doubt it's got competition and that there must be limits to its growth


That's a good article btw – surprising statement here: Smith says he has “always rather liked Ken Fisher’s approach to this which is: don’t try and predict a bear market because you’ll undoubtedly predict ten out of the last three, or whatever it is. What you should do is wait until you’re absolutely certain you’re in one and then don’t take baby steps – just get out of it. That is what you want to do in life. And I think that’s probably as good a methodology as I’ve ever seen anybody apply actually, in this area”.


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Sara G on 03/03/2018(UTC), gillyann on 04/03/2018(UTC), Alan M on 05/03/2018(UTC)
philip gosling
Posted: 03 March 2018 23:35:14(UTC)
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Who remembers Friends are US? Could Facebook not go the same way? I used to have android phone, Sony PC and Sony Tablet now I have an iPhone, iMac and when my Sony tablet gives up I shall get an iPad even though they are more expensive than their competitors. WhatsApp, FaceTime etc all are means of communicating with friends that seem to be growing all the time. Individual stocks are no longer for me but Fundsmith and LT I have plus Scottish Mortgage so lets see what happens in next 5-10 yerars.
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Hilary hames on 04/03/2018(UTC), Tony Peterson on 20/03/2018(UTC)
King Lodos
Posted: 03 March 2018 23:57:51(UTC)
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Yeah, you've got Facebook, Google, Apple, Microsoft, Twitter, Amazon, Netflix, Tencent, Alibaba, JD.com, Baidu, Snap, etc.. all fighting over the same space.

If history's anything to go by, most of them will fail (but Apple will probably still be top 5) .. If my own experience is anything to go by, I'm still logging onto Facebook daily.

It's an interesting buy .. I hadn't considered it because I'm used to these sites failing eventually, and obviously it can't keep growing its userbase indefinitely .. But if it's here to stay, then it's a good purchase on what may be a durable global advertising platform.
2 users thanked King Lodos for this post.
andy on 04/03/2018(UTC), Alan M on 05/03/2018(UTC)
The Spanish Inquisition
Posted: 04 March 2018 09:36:50(UTC)
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Time to sell Fundsmith methinks. Its so hard to follow ones own advice and do nothing, with FEET and talk of a new fund in the pipeline it sounds like he's trying to keep busy. Has the fund become too large and giving Buffett type problems of finding large enough companies to invest in? If he'd gone heavily into Apple I'd feel happier as this is just such a desirable product on so many levels. Could be proved wrong but this seems an odd investment imho, if it doubles it'll be a trillion dollar company, Apple is almost there already, with governments taking money out of the system with the end of QE is this sustainable?
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Captain Slugwash on 04/03/2018(UTC), dlp6666 on 08/03/2018(UTC), Tony Peterson on 20/03/2018(UTC)
andy
Posted: 04 March 2018 10:20:35(UTC)
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With regards to Apple - I read somewhere (and agree with most of the sentiment) that Apple isnt really a technology company but more a fashion company.

People (myself included) are paying for a brand - and a different presentation style - than can be achieved elsewhere for less. Is Windows 10 much worse than OSX? Well - actually the mac part is a small part of the business now - and the majority is really one product. An Apple watch is the same as an ipod and an ipad as an iphone - just in different sizes.. The tech world is littered with companies that were the place to be - Netscape, AOL, Lotus, Nokia - have all come and passed.

Apple maybe able to find another product - but I am not a fan of it in terms of investments as much as I buy their products.
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King Lodos on 04/03/2018(UTC)
Stephen B.
Posted: 04 March 2018 10:55:13(UTC)
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Facebook is different to most of the others because it has quite a strong lock-in, all your existing data and friends network is there so it's hard to move elsewhere. Even if someone mandated full data portability (quite hard to do I'd think) you could only move yourself, not your friends. It could find itself in a downtrend over time, but I doubt there could be a sudden collapse.

By contrast we can use a different search engine, buy from someone who isn't amazon or watch video from someone who isn't netflix from one day to the next, and although you may like your iphone and have got used to the interface it isn't that hard to switch to an Android phone.
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Sara G on 04/03/2018(UTC), Alan M on 05/03/2018(UTC), dlp6666 on 08/03/2018(UTC), jvl on 11/03/2018(UTC)
Sara G
Posted: 04 March 2018 12:20:39(UTC)
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In many ways Facebook is more like a Tobacco stock than a tech stock - I know people who are literally addicted to it, and there is still room for expansion globally - so a good fit for Fundsmith in my view.
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andy on 04/03/2018(UTC), King Lodos on 04/03/2018(UTC), Alan M on 05/03/2018(UTC), Dennis . on 07/04/2018(UTC)
Fuzzy Beats
Posted: 04 March 2018 14:35:35(UTC)
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I think Terry is attracted to the tremendous free cashflows currently being generated by the company, rivalling that of Google and Microsoft.

With no debt, Facebook is in a tremendous position to embark on more acquisitions or diversify the company.

It has to said though that James Anderson got in rather quicker...
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Sara G on 04/03/2018(UTC), dlp6666 on 08/03/2018(UTC)
King Lodos
Posted: 04 March 2018 16:07:11(UTC)
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andy;58197 wrote:
With regards to Apple - I read somewhere (and agree with most of the sentiment) that Apple isnt really a technology company but more a fashion company.

People (myself included) are paying for a brand - and a different presentation style - than can be achieved elsewhere for less. Is Windows 10 much worse than OSX? Well - actually the mac part is a small part of the business now - and the majority is really one product. An Apple watch is the same as an ipod and an ipad as an iphone - just in different sizes.. The tech world is littered with companies that were the place to be - Netscape, AOL, Lotus, Nokia - have all come and passed.

Apple maybe able to find another product - but I am not a fan of it in terms of investments as much as I buy their products.


Warren Buffett thinks of it as a consumer staple .. I think fashion's a good fit too.

As Joel Greenblatt said (over on Valuewalk) it's cheaper than the market, and growing faster than the market.

I think the reason it's cheap is because people think they need a new iPhone – and tech hardware companies don't tend to stick around long (for that reason).

But if you instead think of it as an ecosystem of products and services, that people don't generally want to leave (very sticky), it could be the best opportunity available today .. Buffett certainly thinks so.

Apple Music's another quiet success .. It's apparently set to overtake Spotify for music streaming .. These are my favourite businesses – iCloud, App Store, iTunes, etc. because they generate constant cash-flow selling data .. What's more, Apple cultivated a userbase who actually want to pay for things .. Windows and Android attract a market who consider paying for things optional – Apple's right to shun them from a business pov

3 users thanked King Lodos for this post.
andy on 04/03/2018(UTC), The Spanish Inquisition on 04/03/2018(UTC), Alan M on 06/03/2018(UTC)
King Lodos
Posted: 04 March 2018 16:22:39(UTC)
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The Spanish Inquisition;58193 wrote:
Time to sell Fundsmith methinks. Its so hard to follow ones own advice and do nothing, with FEET and talk of a new fund in the pipeline it sounds like he's trying to keep busy. Has the fund become too large and giving Buffett type problems of finding large enough companies to invest in? If he'd gone heavily into Apple I'd feel happier as this is just such a desirable product on so many levels. Could be proved wrong but this seems an odd investment imho, if it doubles it'll be a trillion dollar company, Apple is almost there already, with governments taking money out of the system with the end of QE is this sustainable?


Lindsell Train have always been much more Fundsmith than Fundsmith.

You can see on their recent filings – Lindsell Train topped up just one US stock (Dr Pepper)
https://whalewisdom.com/filer/lindsell-train-ltd

Fundsmith did 16 trades over the quarter – which is pretty typical
https://whalewisdom.com/filer/fundsmith-llp

You can also compare their sector allocation over time (near the bottom) – Fundsmith's really rotating a lot, like a hedge fund, while Lindsell Train's quite static.


What it is is they both need medium-term winners to keep performance up .. Long-term, the kind of stocks they both hold tend to do fine, but take Evenlode Income (in a lot of the same stocks as LT and Fundsmith: Unilever, Diageo, Microsoft, J&J), it's on about half the return.

Fundsmith was given a big boost by Domino's .. LT's still getting a huge boost from Nintendo.

I think Facebook is Fundsmith looking for another Domino's – and if analyst estimates of 21.4% growth over the next 3-5 yrs are right, it's a great choice .. Something between a 20-25% annual return
3 users thanked King Lodos for this post.
The Spanish Inquisition on 04/03/2018(UTC), Hilary hames on 12/03/2018(UTC), laang lee on 12/03/2018(UTC)
King Lodos
Posted: 04 March 2018 16:37:53(UTC)
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Sara G;58209 wrote:
In many ways Facebook is more like a Tobacco stock than a tech stock - I know people who are literally addicted to it, and there is still room for expansion globally - so a good fit for Fundsmith in my view.


Just popped up (on my Facebook funnily enough)

Has dopamine got us hooked on tech?
https://www.theguardian.com/technology/2018/mar/04/has-dopamine-got-us-hooked-on-tech-facebook-apps-addiction

It's possible we're actually undervaluing tech when you think of it this way .. I'm obviously pondering buying Facebook now
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Sara G on 04/03/2018(UTC), dlp6666 on 08/03/2018(UTC)
Keith Cobby
Posted: 04 March 2018 17:35:56(UTC)
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He's a bit late to the party. Will stick with SMT.
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Guest on 04/03/2018(UTC), laang lee on 12/03/2018(UTC), Bellabeck on 20/03/2018(UTC)
King Lodos
Posted: 04 March 2018 18:36:41(UTC)
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To play devil's advocate, December was the first time you could buy Facebook for below P/FCF 30 (I think P/E too, but Smith prefers the former).

So as a value investor, Smith bought Facebook a lot cheaper than SMT did .. The price might have been higher, but you never *know* whether fundamentals are going to catch up with price .. Case in point: Tesla.

If you *only* buy stocks when they're below 30, you might get in well after other investors, but there'll be a helluva lot of stocks you avoid that never become cheap
Fuzzy Beats
Posted: 04 March 2018 18:53:44(UTC)
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King Lodos;58227 wrote:

Lindsell Train have always been much more Fundsmith than Fundsmith.


Agreed - the holding in Domino's Pizza is a case in point.

The stock was purchased by Fundsmith on the fund's inception in November 2010. One year later the holding was sold on refinancing concerns which proved to be unfounded. Smith admitted the mistake and duly reinitiated a position in July 2012.

The position was exited again in October 2015 on valuation grounds. The following year the stock rose by 45%.

So much for the mantra of 'doing nothing'....
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Mickey on 04/03/2018(UTC), King Lodos on 04/03/2018(UTC)
King Lodos
Posted: 04 March 2018 19:21:01(UTC)
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And to note Lindsell Train and Fundsmith's buying of Dr Pepper in the recent quarter..

That was all about this:

https://i.imgur.com/ViaVom8.png

A £5bn merger with Keurig ..

That's a merger arbitrage trade – a classic hedge fund play – and something another long-term buy-and-hold investor, Warren Buffett, does a surprising amount of when there aren't great bargains to scoop up.

Very likely Lindsell Train have exited that position in the past month along with Fundsmith – the Dr Pepper fundamentals don't look too compelling.

You should also see how Lindsell Train IT sailed through the financial crisis – buying long-term treasuries .. What really sets LT and Fundsmith apart (imo) is that they're very US hedge-fund-like .. Very unlike the index-huggers and income funds that dominate the retail industry .. They look deeply at the businesses they invest in, but can also pull off some quite shrewd trades, on the rare occasions they present themselves.
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Sara G on 04/03/2018(UTC), Fuzzy Beats on 04/03/2018(UTC), dlp6666 on 08/03/2018(UTC), laang lee on 12/03/2018(UTC), c brown on 04/04/2018(UTC), Harland Kearney on 04/04/2018(UTC)
andy
Posted: 04 March 2018 19:34:09(UTC)
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KL

From the latest LT Global factsheet ...

"Dr Pepper (DPS) was bid for in January. The shares spun out of Cadbury in 2008 at c$15. By December 2017 they reached $90. There was scepticism about the valuation all the way up. It didn’t help that the Cadbury board gave the impression it couldn’t wait to be shot of the asset. If it’d been understood how cheap DPS was in 2008 maybe Cadbury would’ve fought a bit harder against Kraft when that company came knocking in 2009. Nonetheless, a serious industry participant has placed a bid for DPS that initially valued it at c$130 – nearly 9x higher than where it demerged. The DPS brands, the distribution, the resultant cash flows all turned out to be worth much more than stock market investors conceived. Unilever is now trading below the value of Kraft’s opening shot from last year. Do you really feel justified in selling it in this light?"

... will be curious to see if they hold / sell at this point.
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King Lodos on 04/03/2018(UTC), laang lee on 12/03/2018(UTC)
King Lodos
Posted: 04 March 2018 19:55:55(UTC)
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I did read that actually – I love how much they talk up Unilever .. I wonder if there's a bit of anxiety, what with the advent of Aldi and Lidl, and so much grocery shopping going online, that brands lose their foothold a bit.

I'm still buying Marmite and PG Tips though.

I'd be really surprised if the next quarterly filing didn't show at least a cut in the Dr Pepper shares .. I think they tend to sell around a PE of 30 too, which it probably got a little above
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