Pullback Shopping List
It’s happening. We’re finally getting a pullback in the stock market. Every pullback presents an opportunity to add to an existing position or a new position if its stock price drops below our estimate of fair value.
Our initial pullback shopping list is companies we already own but we haven’t bought in a while because they were trading at prices far above our estimate of fair value. But now they are trading a price where we think the long-term rewards outweigh the short-term risks.
Stock prices as of March 1, 2022.
The caveat being we’re fully prepared for the stock to go lower. We can’t control stock prices and we can’t control the psychological state of the market. All we can control is which companies we believe to be high quality, which ones we want to own, and the price we want to pay.
Intuit
Intuit hit an all-time high of $694.66 back on November 29, 2021. Since then, the stock is down around 32%.
Our estimate of fair value jumped up to $520 per share when Intuit was hitting its all-time high. We weren’t adding to it for newer accounts or underweight accounts. We were actually trimming it in some accounts that were overweight after its big run.
When Intuit’s stock was trading around $485 per share we started adding it again to new accounts and any accounts that were underweight the position.
Catalysts
Our main catalyst for Intuit is its QuickBooks Online Business. And the secular growth of small businesses moving away from excel and other manual accounting methods to SaaS methods. When a small business switches over to QuickBooks Online, it creates large switching costs with the data trap and the learning curve trap.
QuickBooks Online is also creating a two-sided network effect between small businesses and small business accountants. The more small businesses that use QuickBooks the more small business accountants need to use QBO to win business. And the more small business accountants that use it the more small businesses will adopt QBO to hire a competent accountant.
QuickBooks has a large opportunity with just small businesses in the U.S. but it is also slowly rolling it out to international markets where it makes sense.
Starbucks
Starbucks started selling off before the rest of the market. It hit an all-time high of $126.06 back in July of 2021 and drifted lower ever since. The broad market sell-off pushed Starbucks’ stock price below our $109 estimate of fair value.
We started adding around $96 per share again to new accounts and any account that was underweight.
Catalyst
We own Starbucks because of its unit economics. The pre-tax return on a new Starbucks store is almost double its closest competitor.
McDonald’s data from 2016 Franchise Disclosure Document. Taco Bell data from Pershing Square Presentation “Doppio”. Starbucks and Dunkin Donuts Pre-tax returns are from recent Investor Day presentations.
Now add these returns to a large growing market in China.
Starbucks also has room to increase its sales per square foot in developed markets with:
- Increased and efficient mobile ordering
- Smaller drive-thru and walk-up only stores
- Delivery
Broadridge Financial Solutions
It reached a new all-time high of $184.48 and since then its stock has dropped 23% and is hovering around $145 per share at the time of publication.
We increased our estimate of fair value up to $175 per share after its last earnings report.
Catalyst
And the main reason we own Broadridge is it has a monopoly on shareholder communications. Bull market or bear market, shareholder communications and proxy voting need to go out.
Broadridge is a critical company for the smooth operation of the financial markets with the high volume of trades it clears and settles.
And this dominance in the financial back offices is getting a boost in the trend of mutualization. Financial services companies are offloading their back-office cost centers to a third party, Broadridge, who turns them into a profit center.
Visa & Mastercard
Both companies underperform the broad market in 2021.
And Visa took a big hit when Amazon announced they were dropping Visa branded credit cards in the UK.
We did a deep dive video on this and why it was creating a good long-term risk reward set-up in Visa back in when it dropped below $200. Like I said in that video, what happens to Visa tends to carry over to Mastercard and vice versa.
We were adding to both names before the recent pullback and we’re still adding to these names for new accounts and any underweight accounts.
Both business models benefit from strong networks effects. And to borrow a term from Akre Capital Management, both are bottleneck businesses.
Which is a company that:
- sits atop large, global, secular growth opportunities fed by multiple industries and geographies
- has those opportunities funneled (hence the bottleneck) disproportionately to it because of sustainable competitive advantages,
- and enjoys exceptional economics, often superior to the industries and customers the business serves.
Visa and Mastercard sit at the center of the secular growth in electronic payments. This trend cuts across pretty much every country and every type of retail business. And every up-and-coming fintech/payment company is partnering with them to leverage Visa and Mastercard’s networks to grow as fast as possible. Why compete directly with Visa and Mastercard when you can grow with them.
Our estimate of fair value for Visa is $250 for Visa and $400 for Mastercard.
