💼 THP 08/24: Massive Short Squeeze on the Horizon
Adding to a large position in anticipation of a short squeeze, and extended thoughts on crucial strategic changes within Cardlytics
My dear fellow Hermits 👋
Welcome back to 🧙♂️ The Hermit 🧙♂️
ICYMI:
🎧 The Hermit Podcast: Gismondi Interview w/ CEO
🧗 Our Investing Journey: Mozart’s biggest failure
💼 The Hermit Portfolio: July (previous) Update
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Portfolio Overview [±XX.XX%]
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Introduction
As we begin, we'll start by providing a comprehensive review of the full portfolio, including detailed updates on any position changes and commentary on its progress.
In this third installment of the series, our focus will shift to identifying new opportunities. We'll delve into core valuation practices and diversification strategies that guide the selection of companies for The Hermit Portfolio.
As a reminder, this portfolio serves as a precise proxy, mirroring the actual data from the author's seven-figure investment portfolio.
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None of the following should be construed as investment advice. Please consult a financial advisor before making any investment decision. You will find a full disclaimer at the end of this post.
Preliminary Valuation and Diversification Criteria
I've been asked this question countless times:
“Is _______ expensive?” (insert your stock of choice here)
The answer isn't as complicated as people often make it out to be.
A lot of the so-called "mystery" around this topic stems from people trying to justify their job positions. Sure, our perspective is a bit biased as we’ve poured over thousands, maybe even tens of thousands, of financial statements. But honestly, with just a few key data points, you can usually get a pretty solid estimate, especially for companies with stable incomes.
This approach only really works for companies with consistent, steady growth. It’s not as reliable if the company is aggressively pursuing growth by sacrificing margins, has a huge backlog, isn’t making money, or doesn’t have a solid history of profitability. And if we're talking about a company expected to grow at a high rate (like 30%+ over the next decade), these rules of thumb won’t be as useful either.
Using the latest fiscal years as a reference, here's a simple way to gauge if a company is fairly valued:
Revenue Multiple: This can vary a lot, but it’s helpful to compare it with the other multiples to see if the company has strong margins and how those stack up against others in the sector. Generally, the market cap should be between 0.5x and 2x its year-to-date revenue.
EBIT Multiple: This gives you a sense of profitability. For a company to be fairly valued, this multiple should typically be around 10x to 12x its market cap.
Free Cash Flow (FCF) Multiple: Similar to the EBIT multiple, the company’s cash flow should be roughly 9x to 11x its market cap to be considered fairly valued.