Welcome back. Everyone. We're finally add a new year. We're finally in 2023 and I'm excited about the future. Like I said, I had a lot of New Year's resolutions for main things that I highlighted and one of my main goals for 2020, 3 was to strengthen my portfolio.
I called high grading my portfolio which just means I raise the quality of it and part of that is selling off lower quality lower conviction Holdings and concentrating further into higher quality Holdings and I've done that in my Portfolio. I've sold off three different companies. In my portfolio will be going through all three of the sales and seeing why I sold those companies and where I'm putting that money.
And I actually bought into a brand-new company and in the process of doing analysis on my Holdings and looking over the past year, I have to come clean and admit a mistake. I made I made a mistake in my analysis, A year ago, I want to go through how I made this mistake and what I plan on doing in the future. So we'll be talking about that as well. Now, we also have some breaking news, Bed Bath & Beyond is going bankrupt. This should really surprised, no one.
But the problem that I want to highlight with this company that will go into, I want to highlight one of the biggest abuse has one of the biggest misuses of BuyBacks that I've ever seen in a publicly traded company. And it's right here with the example of Bed Bath and Beyond. And then finally we're going to take a look at this new detailed report on Apple's mixed reality headset.
They're coming out with it hopefully by the end of this year is the Prediction. But we have a lot more details on what this actually is. And as someone that's a shareholder of Apple, It's a larger position of mine. I have some opinions on this new product, so we'll be looking at that as well. So, obviously, we have a lot to jump into in this episode a lot to go over.
And let's start off with the portfolio update, and where I got things wrong, I made a mistake like I said, in my analysis will get to that as well. The first one that I want to go over is in the financial category. I sold out of JPMorgan, my entire stake in the company I used to have Dollars left in this investment and around six thousand dollars in gains. So JP Morgan has been a big winner for me.
Basically what I did with this company is I just bought it really cheap during the pandemic lows when everybody was afraid that the economy was going to go in the gutter banks are going to go bankrupt. There's lots of talk about crypto, taking over and somehow beating out JPMorgan and none of that stuff happened Banks were completely fine. JPMorgan recovered, the price went up the price to book right now is 1.5, which I think is a fair value. Ation a reasonable valuation for JP Morgan.
So I don't necessarily think this is a bad holding. In fact, I think Jay P Morgan does have a wide moat, but I also think this company is highly cyclical and I don't really consider a compounder in the same way that I do other companies. It uses a ton of Leverage. It doesn't really consistently grow earnings because it's very cyclical. It's very sensitive to the economy and those are all characteristics that I'm trying
to move away from. So, I took my gains in this company, and I redeployed it into other companies. That I'll go over in a minute but JP Morgan was the first sale and one thing I think is worth mentioning the companies that I sell and my portfolio are incredibly good companies because it companies that I buy are usually really, really good companies. So even the ones that I'm dumping even the stocks that I'm selling are probably going to do
really. Well in fact, I think a lot of them will probably still outperform the market. So I would not be concerned if you're still invested in j.p. Morgan but that is one that I've chosen to exit because I Like other positions more. The next company that I chose to sell is in the consumer category. This one is Church & Dwight, a company that I recently bought into a year ago. It's gone down just slightly, it's held up a little bit better based on my bio and points.
But I've decided to sell this company basically because of the same analysis I've done with my other Holdings. I've looked over every holding and I've tried to assess both the moat and the brand strength, the network effects, and the pricing power, and simply put, when I put Church, Right next to other companies. I own like, Nike Pepsi Estee Lauder even Starbucks. I considered those companies to have stronger brand value and pricing power than Church &.
Dwight Starbucks is Raising prices while growing sales and growing customer volume. Texas Roadhouse is Raising prices while growing the amount of customers that visit their store, that is pricing power. The ability to raise prices without losing customers, but Church & Dwight doesn't seem to have that too. Quite the same extent this year, they've chosen to raise prices but their overall revenue is
declining. And they've had other competitors that I think have a little bit more pricing power like Procter & Gamble. And I think the problem with Church & Dwight for me, is a lot of their brands are secondary there. The second biggest in the market, share, not the first. So even though this company, I think is fine. I don't see any huge problems. I just don't think it's quite as powerful as some other companies, my portfolio. So, I decided to cut this
position. Take the small loss on it. Five hundred dollar loss and move on to other Holdings. And then finally, the last one that you'll notice missing in the consumer category is Target. This is a company that I've been saying for a very long period of time that I'm going to sell. It's not going to be my portfolio forever. When I do analysis on retailers, there's only a couple that I really want to own Costco is one of them.
Amazon is the other. Those are the two retailers that I really like, I sold Target with a 671 dollar gain. I had very little invested in this stock so that Is a pretty sizeable gain. Given the amount of money that I had invested in the company. Now, Target I think is a great company. I actually think it's one of the
better retailers. It'll probably do well over the next ten years, but when I again, assess the moat of companies, the goal here was to high-grade, the portfolio, increased the strength, and durability of it.
And when I assess Target and the motive, it, I don't think it has any significant moat compared to other retailers like Dollar General or Walmart. In fact, I think I think value-oriented retailers, like, Wal-Mart Dollar General and Costco, have a stronger value proposition and a stronger, moat than a company, like Target, Target's a company that you can
get some unique items there. But a lot of, it just depends on the shopping experience because really, you can buy most things at Target at Walmart or Costco or Amazon. So I think that Target lacks the considerable value proposition. Moat that a company like Costco has. So those are the three sales JPMorgan church and white and Target. And I just want to point out. Out that overall you can look at the gains and losses.
I'm taking gains here. I've made money with these companies over the past two years, which has been kind of difficult to do. There's been a lot of people, you can look up online that have been losing money over the past two years. So I'm happy to be locking and gains and actually made trades in different buys into companies that have done well, over the past couple of years. But just as importantly as selling, we have to have a place
to put the money. That's hopefully better than the place, we took it out of. So hopefully the buys that I'm doing are a better. Place for this money to be than the companies. I just recently sold and I've bought a number of different companies with this money. I further concentrated into Microsoft as this company is
sold off. I put 1,000 additional dollars into Microsoft, I realized the companies in the red, I realize it's going down and it looks scary right now, in my opinion, I think that Microsoft is undervalued. And I think right now, basically, all of big Tech is undervalued sighs. I'm not concerned about this seven thousand dollars in the red. I think this is temporary and I Leave that I'll make this money back. You'll be able to follow and see
over the upcoming years. I'll track it either way, but in my opinion it's just a matter of time until the buys I'm doing today. Pay off. I bought a little bit more Vici. That's right. The company has come down in price, its trading around 32 dollars, a share. I don't think it's a complete still right now, but I think it's a better value than it's been over a long period of time and this company I think we'll continue to kick out. Massive dividends.
I think we'll see this number grow over time, it'll Zig and zag and it will wobble around from time. A time. But overall the gains are going to stack up. VG is a company that owns a lot of Vegas. Real estate Vegas is all about odds. And in this case, the odds are highly in your favor that this company will collect 100% of rents for the foreseeable future. And those rents are going to end up in my bank account. I bumped up, my Holdings and Union, Pacific, and Canadian
Pacific, a little bit. These are going down. I'm never going to catch the falling price of a stock, right at the bottom. So I'm not going to be able to time it that way. I expect these to fall down a little bit more, but I'm gradually building my In in these companies. Because again, I think they're duopolies monopolistic companies with Incredible pricing power. Lots of efficiency going forward and the merger with Canadian Pacific. I think will be very good for
this company in the long term. Those are the companies that I've been adding to, but I also introduced a new holding to the portfolio and this is where I can happily admit. That I was wrong about something. I was wrong about MasterCard and visa and ivory purchased an old holding with MasterCard. I was wrong about this company a year ago. In fact, I made a video called Just sold two stocks completely those two stocks.
As you can see, blurred out right, there is Visa and MasterCard but the reason that I was concerned about MasterCard and Visa is there. So many new companies entering into the payments fear a year ago. If you recall the whole fin Tech, boom was just incredible. Every single company was coming out with different fintech products and it may be a little bit concerned.
I thought, what if there's other companies building out these big networks that are going to upend the moat and this big duopoly that MasterCard and Visa Has an on top of all those new fintech companies. We also had reports at the exact same time that Amazon was dropping Visa as a partner saying that they're going to use PayPal and different concerning reports like this. And then while that was happening, there is also news that apple and big Tech. We're getting into payments as well.
Apple pay was taking off like a rocket. So again, all these things swirling around of this fintech explosion. It just may be concerned. I really got scared with MasterCard and visa and getting scared with. Holding is never a good thing. This is one of the difficulties in investing is not getting scared out of good companies. In fact, Peter Lynch, once famously said, the real key to making money in stocks is to not get scared out of them and that is exactly what I did.
I got scared out of these two companies. Now what's happened over the past year with this fintech explosion and all the crypto and everything that was supposed to upend the entire US Financial system, put to rest these companies of MasterCard and Visa that hold this duopoly while we can see what happened. And all of these disruptive companies we can name. PayPal for example, this company is completely crushed, its down 66 percent from its high.
The user ship has slowed for it and it hasn't threatened Visa or Mastercard really at all Amazon quickly, sorted things out and still continues to work with MasterCard and visa. And it's true that big Tech is moving into fintech, and they're building out. Things, like, Apple pay, but Apple pay uses MasterCard, and Visa as part of their Network. In fact, most of the transactions rely on their existing networks Bitcoin, That was supposed to Bend the US
Financial system is down, 61%. There's continually people moving out of exchanges and moving the cold storage and selling out of crypto. And meanwhile, we can look at what's happening with MasterCard and Visa over the past year visas down 3%, a little volatility with the stock but nothing concerning the transactions. For the business have hit record highs.
The revenue has hit record highs of seven point eight billion in a single quarter and we can say the same thing about MasterCard their duopoly and share the market. MasterCard is down. Or percent nearly identical performance to visa and likewise the revenues have hit record highs as more and more people are using their Network every
single day than a year ago. So I concluded that my initial concerns for Visa Mastercard were largely unfounded and unless I see some real compelling data show up in the numbers, I plan on buying back into these companies and really owning them as larger positions because outside of these troubling predictions of their duopoly being broken up.
If you actually look at the numbers for these companies, they are clearly a Compounder, so I decided to buy back in the reason that I chose MasterCard over Visa was basically the flip of a coin. I had to choose one. It's kind of like choosing one railroad over another. I think they're all good options. I had a slight Nuance preference for MasterCard because I like some of the deals they're doing with companies like apple but really I would be just as fine owning visa and I may have Visa
back into the portfolio someday. And in terms of buying back in, I'm glad that in this case, my mistake on MasterCard was not a costly. Mistake because a company's down, a couple percentages from where I sold it. So, I was able to buy back in, without this company racing away. That's all the trades that I
did. I basically sold out a three companies and brought back, MasterCard, and I've up my steak and concentration and to what I consider to be the higher quality, Compounders in my portfolio. One thing that I'll mention is even though this seems like a lot of Trades, it's not a lot of capital compared to my portfolio. The total turnover from this. This trade going on here is around 6% of the Leo. So this isn't any huge massive difference. I've moved around 6% of my portfolio positions.
Out of those three companies into some different ones and hopefully my portfolio will be stronger as a result. Now, moving on, I want to jump into this Bed Bath and Beyond news because I think it's relevant to investors to be aware of both the good uses of capital allocation and the bad uses of capital allocation basically. An executive sits in the role of being an investor on your behalf. If I invest money in a company like Amazon, for instance, let's bring up Amazon here.
We can look at it on qual trim, and we can see that this company makes a lot of different Investments when I invest in Amazon, I'm handing over capital of mine and I'm saying, hey, Andy, jassy, and the executive team at Amazon, you make investments with capital on my behalf, I'm giving you Investments, and you can now invest on my behalf. So you have to have confidence in the executive team to make good. Investments on your behalf that are going to have a high return on investment.
And that's a little bit of your judgment that makes it so that you have a little bit of risk with any investment that is called the agency risk of the executives. Now, some businesses are less risky than others because they do very minimal reinvestment. They basically just run their Core Business and do nothing else.
And those ends are very predictable, both companies like Amazon, it's a little bit more risky, they're making a lot of different Investments and you have to have some level of Faith or some level of research. That the management is going to make smart Investments with your money.
Now we bring up a counter example here, the company Bed Bath and Beyond. And this is a company that I think has made dramatic Miss A locations with their Investments. And this is a huge risk for investors beyond the fact that the retail business is difficult. And I think it's highly competitive and I would avoid investing in a lot of these companies. I think there's going to be swaths of them going bankrupt. I think Macy's will, I think
Dillard's will. I think some of the Companies like Staples, will I think a lot of retailers that we know about are gonna go bankrupt over the next 10 years and it was only really a matter of time with Bed Bath and Beyond. But the actions that these Executives took, I think are not only bad Capital, allocation, I would consider it Financial
malpractice. Now, let me go over the illustration of why I think this company was so egregiously mismanaged and how investors can avoid this in the future. First of all, we have the businesses Top Line. It's been going down for well over six years now and it's going down at an aggressive clip. So this is a company that is getting desperate. It doesn't really know what to do.
They're having to come up with all these different strategies to try to stabilize their revenue because they're losing market share quickly. That's not their only problem, though. They have problems with cash flows. It should have been apparent to this company Bed Bath and Beyond that. Their cash flows were declining over the past five years and especially in 2019. That's what it really. Came apparent that they're having cash flow issues. Now we look at the balance sheet of the company.
What is this company doing there? Minimizing their cash? Balance cash balance? Since 2020 has gone down dramatically to just a hundred million dollars from 1.4 billion so they're very low on cash. Their debt has spiked back up as they're taking out emergency debt. This debt is getting more expensive as SP Global has recently.
Just labeled it as lower credit. So Now their cost of capital is increasing and meanwhile, they still have these price you Capital leases because they are retail business. So they're a heavily indebted company that has far more long-term debt than cash. On top of that they have the ongoing operating expense of capital leases and what is management doing during this dire desperate time in their
business. Well, what they're doing is BuyBacks. That's what this company's been doing for the past decade without any hiccup. Since 2013, they knew that their business was in Decline instead of really working to fix the business instead of bolstering a huge cash pile for rainy day ahead, they reduced the shares outstanding. In fact, they reduced it at an aggressive clip, buying back 21% of their shares outstanding in just the past year in 2019. When it became clear that their
free cash. Flows were going down dramatically. They halted the buyback program for a couple of quarters and then they resumed it buying back shares all through. 2020 and in 2021 they're buying back their own stock using their precious cash balance. That could save them from bankruptcy to buy back their own shares and hopes to boost the stock price their efforts to boost the stock price. Didn't even work.
It's down 24%, just today. So all that money that they bought back was completely wasted and the investors got
burned on that as well. And again I just wanted to go over this because I think it highlights a key risk for the stocks are invested in. That is the capital allocators of the Which are the executives they're in control of doing sound Investments. And if you see a company doing BuyBacks while taking on massive amounts of debts, while the company's fundamentals are eroding, that is a clear sign that the company is very much focused on the short term and
not on the long-term strength of the company. Now, the next piece of news that I thought was very interesting and relevant is Apple's new mixed reality headset.
We've heard rumors of this for a long period of time, but it seems like it's getting closer and closer as we know Apple, rigorously tests all Of its devices before releasing, I won't name any names, but there's a lot of other tech companies that throw products out in the market and they use their customers as the test dummies for it.
This is not the case with Apple. So before they release something, they have to have a good idea that it's very rigorously tested and it's going to have a very good outcome for the general audience. Now, we do have some details
about Apple's, mixed reality. Headsets first of all, the looks of it, they say the headset resembles a pair of ski goggles and we'll use an array of cameras to allow people to Variants both augmented and virtual reality so you can do it both ways, it's going to look like ski goggles. That doesn't really give us a lot of information there but we do get more specifics into how this works.
They say the headset will use motors that automatically adjust its lenses ensuring that the where has the best possible viewing experience a physical dial on the headset will allow users to quickly toggle between complete immersion and VR and the ability to see their surroundings. And Apple has quietly included technology in the latest version of its Ear Pod pros. And Tended to make them work better with the headset and there it is.
There's the motive Apple, always looking to integrate their existing technology and their existing ecosystem into every new product. They're not just going to integrate it with the are pods. It'll be integrated with the iPhone. It'll be integrated with the iPad and with Apple TV plus with everything. All of this is going to work seamlessly together. That's the way Apple does everything they say as of last year the headset used an extended battery pack tethered
by a cable. Well, as opposed to a battery integrated into the headband. The design Choice has been controversial among apples Engineers, given the company's preference for cable free designs. This is something that I can see. Apple getting made fun of having a cord, go down from the headset to your waist and then having a battery pack. There is basically like a fanny pack.
So you have a fanny pack battery which is not the most flattering or seamless design and apple being known for the design. I think this could cause a A little bit of a stir, but you have to consider the options here. Batteries are heavy, having them sit on your head for an extended period of time, causes fatigue on your shoulders and your neck. So they're making judgment calls here.
And at some point there has to be a little bit of give and take, you have to sacrifice some Design Elements to make the product. Actually work, can be feasible in this case. I think, if you have a heavy battery, I rather have that sitting on my waist, then sitting on my head, they say, apple appears to be Getting closer to the launch of the product as of early last year.
Taiwanese manufacturer pegatron has assembled a headset outside of Shanghai, it passed multiple prototype stages and entered production, Milestone known as the engineering validation test. This is where they make thousands of the product to see if it's suitable for mass production. Now, despite reaching that stage, Apple could still scrap elements of the design and the headset all together. Again, they're going to want to come out with a good product.
Apple doesn't want to. Sacrifice its reputation by pre releasing a product before it's ready for prime time, this thing is going to be expensive, all the estimates, I've seen and even the most current estimates are that it's going to be around three thousand dollars or more, and it just seems like, there's no other way to price it lower with the technology, it has the sensors, it has the cost of making.
This is going to be much higher than an iPhone or much higher than their other devices, and that price range does price out most people, but it will still be a nice range for Or people that really are interested in VR and mixed our headset. And I think the route this will take is it will simply get cheaper over time, it will start off super premium and they'll come out with cheaper models over time.
The display in Optics of this device, I think are the most compelling part of it. And I think is what's going to set this above and beyond what metas doing I fully believe. When I look at the differences between Apples, accompany a meta, I think that Apple has a much better engineering design and Hardware team than meta. Mehta has a better social
engineering team. Apple has a better Hardware engineering team, so when I look at the differences between their designs and what they're talking about here, this one seems like a massive step ahead of the Oculus. They say display for each eye has a resolution of 4K combine, they form an 8K image. That's four times, the pixels of an ultra high-definition TV. The displays which are manufactured by Sony will be among the first to use
technology known as Micron OLED. That means the displays are fabricated directly on a silicon wafer. Instead of, on glass, allowing it to be extra tiny and thin. But still contain a high density of pixels. Sounds pretty impressive. When the user puts on the headset will automatically adjust the lenses using small motors so that they match the users interpupillary distance, the space between the users pupils which varies from person
to person. That's important because your eyes need to be perfectly aligned with the small displays inside the headset to give you the largest observable area and filled a view. You, I also think something that they don't mention here as I think the fact that many headsets are not perfectly aligned with your face and eyes, I think that's what causes people to have nausea and people to get dizzy when they use headsets and that's a constant complaint for people using VR headsets.
So if they can solve that problem where people don't get dizzy or don't get nauseous using these, I think it dramatically broadens, the use case and apples headset will also allow people who wear glasses Magnetically clip in custom prescription lenses. So they've solved that issue as well. It uses a number of processors, but the most notable one is called Statin. It's the brains of the headset, it's more powerful than the M2 Chip, and it's custom-made for this headset.
They say in terms of design, it's going to be composed of aluminum and glass. While also using carbon fiber to reduce the size and weight, making it lighter and thinner than the meta Quest Pro. So it'll be more powerful, have better lenses and be lighter and Thinner, as an apple shareholder. I like what I'm reading so far.
And then finally, in terms of content, apple has a significant Advantage here over competitors, like a met as well because they have 30 million developers actively building apps on the Apple App Store. Apple is a money-making machine for these developers. They make a fortune even with the Apple tax included in that. So they're going to be happy to develop on a new Apple device and try to be first to Market, get that first mover's advantage on the new apps.
Apple may also be Adding virtual or mixed reality experiences around live sports they've been buying up a lot of sports rights. They say the New York Times also reported in June that apple is working with Hollywood producers to make content for the headset that will tie into its Apple TV Plus shows so they're they're tying in their ecosystem with Apple TV. Plus it's going to somehow connect with the headset as well. This is where everything ties together with this headset.
It's going to tie into Apple TV, plus it'll tie into their app store, it'll tie into even the The earpods, that's what they're using for audio for the headset. Probably, the earpod pros, everything ties back into the Apple ecosystem. Now, I've said this many times before I'm an apple Fanboy I like basically every product this company comes out with. Sometimes they do come out with flops though. I'll admit it and I think the mixed reality headset is it's a
risky one. I don't think this one is like the next iPhone that just has some small iterations and has very low risk of execution, I consider this to be a very Hi execution, risk release for Apple. Probably one of the more risky ones over the past decade, because there's just so much Tech and so much to consider with a VR headset. I don't think it's been going quite as well, for meta, I think they've had struggles, we've had VR headset, slow down and sales over the past year.
So Apple really needs to nail this and I think they only get one shot to make a first impression. So there is some execution risk, but in my opinion, Even though the stock is trading down a little bit right now, this VR headset is not part of my investment thesis for Apple this company generates. So much cash flow even without this headset that I think it would be completely fine.
So, if they are able to have another success, another big premium item to add to their apple ecosystem of products. I think that's all the better. So we'll see what happens. I'm personally excited about it. I think Apple has good odds of making this work, but it's not something core to my thesis. Now, that's all for this update. I hope you enjoyed the show. Show, and I'll see you in the next one. Show, and I'll see you in the next one.