WWII 046: Key Takeaways from Sequoia Fund Fourth Quarter Letter, Can Companies Raise Dividends Forever, Snap, Inc. IPO, Starboard Goes After Tribune Media
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Main Topic: This episode is a review of the Sequoia Fund shareholder letter for the fourth quarter of 2016
Ruane, Cunniff & Goldfarb based in New York City is the investment firm founded in 1969 by William J. Ruane and Richard T. Cunniff. For a long time after its inception in 1970, the firm's flagship Sequoia Fund (SEQUX) recorded one of the best long-term track records on Wall Street, and it was closed to new investors from 2013 to 2016.
The history of the Sequoia Fund traces its roots to the late Bill Ruane's lifelong friendship with Warren Buffett. Bill Ruane first met Buffett at a value investing seminar taught by Benjamin Graham at Columbia University in 1950. When Buffett closed his investment partnership in 1969, he advised his clients to invest with Ruane in the Sequoia Fund.
In the 45-year period from its inception in 1970 to 2015, the Sequoia Fund earned an annualized return of 14.65% versus the S&P 500's annualized return of 10.93%
“We are confident that the principles passed down to us from Bill and Rick, which have served Sequoia so well in the past, will continue to serve us well and differentiate us from competitors. We remain resolutely committed to an intense research process that results in a focused portfolio of businesses we understand, managed by people we respect, and held with a long-term mindset. Despite elevated turnover in 2016, our average holding period remains unusual in the investment business. At year-end, Sequoia consisted of 27 securities, 16 of which we've held for at least five years3. By value, more than 40% of the Fund's assets have been held for at least 10 years. Patience allows us to ignore variables we consider unknowable, such as the annual ups and downs of the stock market and the business cycle, and focus our full attention on the questions of competition and competence that determine business performance over time. Concentration ensures that if we answer these questions correctly, our judgments will have a meaningful impact on the Fund's results.”
“We have always believed that if you buy excellent companies at attractive prices and hold them for the long term, you will outperform the market averages, come what may on Wall Street or Main Street. The companies we own today have performed admirably against a tepid economic backdrop. Over the past three years, they have, on average, grown their per-share earnings 10.8% annually, while the weighted earnings of the S&P 500 components grew only 2.5% per year.4 When 2016 results are fully reported, we expect our portfolio will show EPS growth in mid-to-high single digits, versus flattish earnings for the Index. Looking forward, the S&P 500 trades for 17.2x current 2017 earnings estimates. ….We're confident we have a high quality collection of businesses that is worth its premium to the market multiple.”
“Another reason for our optimism is that despite elevated market values, we are finding attractive places to invest Sequoia's money. We made a number of investments in 2016 and one investment in early 2017 that feel promising.”
“Chipotle (CMG) has been a weak performer, down 13% since purchase through the end of 2016. We knew Chipotle faced a long road to recovery after several outbreaks of food-borne illnesses frightened customers away, but we were attracted by the enormous potential of the business, which could grow for many years and generate high returns if the executive team manages the recovery adeptly. Chipotle is making changes to management and its board of directors, including adding a director who played a key role in the turnaround at McDonald's a decade ago. Recently reported sales figures for December showed encouraging gains in customer traffic, but we are watching carefully, as the pace of recovery thus far has fallen short of our initial expectations.”
“At the very end of the year, we found what we believe will be another good use for our dry powder when we joined a select group of investors in purchasing a stake in Liberty Media Group, a John Malone-affiliated company, as part of Liberty's acquisition of the Formula One auto racing business. The deal closed on January 23, and Sequoia purchased 4.7 million shares at a discounted price of $25 per share.”
The recipe for delivering superior long-term performance requires equal parts of picking the right stocks and avoiding the wrong ones.”
Ask JB: Should I put 10% of my retirement fund in the Snap, Inc. IPO
Submitted by a Daniel, a listener of the podcast
“Hi JB, enjoyed your last podcast as usual. I have a question.
A lot of Value Investor pros talk highly on companies that continuously raise their Dividends. Although I prefer companies that does, I think we are giving this "raising dividend thingy" too much of a fuzz. I mean if a company would keep raising dividends soon it will reach a "dangerously" high Payout ratio? And when it happens what then?
People highly regard this "raising dividend thingy" way up the food chain which to me seems insane.
Am I just being too Nerd as I see the "math" vs. "raising dividend excitement" out of balance? I want to hear your thoughts?
JB Says: Hi Daniel,
Another good question!
The key to a company increasing their dividends and remaining "safe" is that they are also increasing their underlying financial performance such as earnings and cash flow. Ideally, the payout ratio would remain the same over the years because even though the dividends are being raised, the performance is also increasing. Increasingly good financial performance is the hallmark of a valuable business, and that is what value investors get excited about.
Alternatively, a company raising dividends without improving performance is giving away a larger percentage of their cash flow and that could become a problem and is something to look out for.
One can never be too much of a Nerd, in my opinion 🙂
submitted 1 day ago by statusfactory
Insiders will control company, five year old company, massive losses, low barriers to entry, don’t know if they will be around in ten years, let alone five, don’t know how the market will value a business that loses so much money.
Compare Snap, Inc.s valuation to AutoZone ($AZO), Cummins ($CMI) and Hershey ($HSY)
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Activist Investor Action Alert:
In this segment I shine the light on activist investors and their targets. In this case, Starboard Value, a well-known and very public activist investor has taken a 6.6% stake in Tribune Media in an effort to unlock what they calculate as a $15 per share gap between the stock price and the intrinsic value of the company.