Investors take ownership
In order to take our democratic capitalism back, we need more leaders. The investor needs to define the parameters of what they will buy, not the market, not the index, and not the "sell-side" analysts.
The Focused Capital strategy seeks to invest in assets for less than their future cash flows discounted back to today.
Below are a series of positions currently in Focused Capital as of the dates referenced (there is no guarantee that these positions will remain in the strategy). Given our thesis that markets are more inefficient than they have ever been,
there is no need to tell our investors if we are long or short. They will know by looking at the company results.
Let's stop looking at only the price movements and start looking at the actual investments that we are making. Inflation returns stocks to their intrinsic values, which we believe are ultimately determined by their intrinsic free cash flows.
At Focused Capital, we view Intrinsic Free Cash Flow (IFCF) as the key driver of both growth and valuation. Basically:
IFCF = Cash From Operations (CFO)
minus Capital Expenditures (CAPEX)
minus Stock-Based Compensation (SBC)
plus Debt Interest payments
IFCF is the relevant intrinsic metric we use to calculate Return on Equity (ROE), which determines how fast a company can grow without debt financing.
ROE X (1 - Dividend Payout) = Sustainable Growth.
If payout is 0%, then ROE = Sustainable Growth.
We believe that IFCF is the real basis for sustainable growth.
This means that when ROE is 10%, then growth is limited to 10% without debt and equity financing. Companies with negative cash flow can only grow by using cheap financing. Inflation ends cheap financing.
Enterprise Value (EV) = Market Capitalization + Debt
Investors that buy any stock assume the debt.
Cosmetics Company - June 24, 2020
- Market Capitalization: $540M
- EV: $3.9B
- Revenue growth: Q1 2020 = -18%, 2019 = -5.7%
- IFCF: Q1 2020 = -$133M, 2019 = -$572M
- Price/IFCF = -4x
Pharmaceutical Company - June 24, 2020
- Market Capitalization: $131B
- Debt: $47B
- Made large acquisition last year
- Revenue growth Q1 2020 = 82%, 2019 = 15.9%
- IFCF: Q1 2020 = $3.5B, 2019 = $6.8B
- Price/IFCF = 10x
(forward looking to account for acquisition)
Restaurant Chain - July 1, 2020
- Market Capitalization: $2.7B
- Debt: $525M (7/1/20)
- Year 2019 2018 2017 2016 2015
- Revenue: $1.6B 1.7B 1.8B 1.7B 1.6B
- Net Income $5M 2M 102M 103M 75M
- IFCF $9M 41M 72M
- Shareholder Equity: -$316M -304M -105M 9.8M $42.2M
- Price/IFCF = 297x
Toy Manufacturer - July 1, 2020
- Market Capitalization: $3.4B
- Debt: $3.2B (7/1/20)
- Year: 2019 2018 2017 2016 2015
- Revenue: $4.5B 4.5B 4.9B $5.4B $5.7B
- Pre-Tax Income: -$158M -417M -501M 402M 501M
- IFCF: $8M -193M -391M
- Price/IFCF = 425x
Consumer Product Company - July 2, 2020
- Market Capitalization: $2.7B
- Debt: $80M (7/1/20)
- Year: 2019 2018 2017 2016 2015
- Revenue: $423M 409M 381M 381M $378M
- Pre-Tax Income: $81M 75M 75M
- IFCF: $45M 48M 31M
- Price/RFCF = 60.2x