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  • Chris Mayer

Anything Happened

”Anything can happen, but it usually doesn’t.”

— Robert Benchley


It’s been a rough stretch. It feels sort of like the 2008 crisis, except compressed into a month. And it’s worse in some respects. At least 2008 was a financial crisis. We’ve had lots of those. We have a deep well of experience to draw on.


In fact, when I underwrite a business, I like to look back and see how it did during the GFC. It’s a way to test the resilience of a business. I figure if the business survived that catastrophe intact, it can handle anything.


But a pandemic? That’s new. I didn’t underwrite a crisis where things would just stop… flights, hotels, restaurants… a near total collapse of demand. This leads me to say perhaps the most obvious thing I’ve ever said in print: No business can survive for long without revenue.


And to compound matters, there is the Saudi-Russian oil spat, which cast the price of oil to its lowest level in 18 years.


Sheesh, so much for Benchley’s comment – it looks anything did happen!


I am hanging on to my stocks. And I have taken my licks. At this point, an unblemished portfolio is only for saints and dreamers. As I write, I have 13 stocks in the Woodlock House portfolio. All but two were in the portfolio last year.


I have 25% in cash, which came from inflows and arrived on March 1. Lucky timing. I felt like some old-time general watching his troops buckle under heavy fire and suddenly the cavalry arrived.


I have been slow to put this to work, nibbling at those 13 names here and there. (To stick with this analogy, I think of Prescott at Bunker Hill, who supposedly said: “Don’t fire until you see the whites of their eyes!”) I’m not trying to time a bottom. I always put cash to work slowly. You just never know what opportunity might open up.


My guess is this is a great time to put capital to work, even if it doesn’t feel great. You buy something and the next week you’re down 20% already. Other activities in life don’t usually give you such negative feedback for doing something right. You strike a golf ball well, you often get the result you expect. Not so as an investor. It is easy to feel dumb in this thing of ours.


Which reminds me of what a friend of mine said tongue-in-cheek:


“It's easy to feel stupid in these markets. I sometimes wonder about the intellectual capital, experience and judgment we have accumulated over our careers! What is it worth today? Panic has been the best strategy for three weeks!”


Ha!


Anyway, based solely on how I’ve deployed capital so far this year, I have shown a preference for European shares, in particular UK-listed shares. Not because of some great macro call, though I think it is easy to make the case these markets were less frothy than, say, the S&P500 or NASDAQ. It is just I like the businesses I own that happen to be there and they are cheaper.


One example is Next, Plc (NXT:LSE). The stock was £73 per share in December. It’s £39 today. Next is a retailer of clothing, mainly. In addition to its stores, it has a thriving online business.


Historically, this is a business that gushes free cash flow – about £500 million pounds last year. That’s after capex and working capital. True free cash flow. The market cap is about £5.2 billion today. Next earns relatively good margins and good returns on capital. And it has a strong balance sheet. It is growing. I consider it a quality business, one that has undergone a serious transformation in recent years.


I also really like the CEO, Simon Wolfson. I regard him as an excellent capital allocator and talented strategist. This is where I am grateful to have invested with strong managers. Wolfson is one of the best I follow. His presentation this week was masterful. Other CEOs could learn a lot from him. Wolfson walked investors through a detailed stress test, which included a few different scenarios where sales drop as much as 25%. He showed how Next could survive a substantial drop in sales – and comfortably, at that.


The shares rallied in relief, up 17% or so that day. The anecdote tells you what kind of market we’re in. Forget the “beat and raise.” Survival is key. Balance sheets and cash flow are the focus. I am comfortable owning Next and bought a little more.


I think we will see many such “relief rallies” as CEOs assure investors they can survive – and show them what steps they can take (or are taking) to do so.


We will see.


Thank you for reading. I know this is a short note. And I really didn’t feel like I had anything important or pressing to say, but I wanted to carve out some time to write. I am writing this partly for my own benefit. It feels good to do something “normal”! And partly because perhaps there are readers out there who might appreciate hearing from me – if only out of curiosity. It’s a busy time with so many stocks to consider now and much to think about. Still, I will try to write again soon.


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Published March 20, 2020

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