Dear Smart Investor,
Things are looking up for the NASDAQ composite index (.IXIC: INDEXNASDAQ) after suffering one of its worst declines in 2022.
For the year to date, the tech-heavy index is up almost 12% at its close last Friday.
Yet, despite the positive start, the key areas of focus have shifted dramatically over the past 12 months.
Gone are the days when high revenue growth is rewarded with excessive sales multiples.
Gone are the days when nascent business models without profits are given a pass and valued at the same level as mature businesses, or higher.
Gone are the days when high debt loads were tolerated.
Many will see these as challenges, and rightly so.
But for the Smart All Stars Portfolio, our US-stock service, we ALSO see an opportunity.
The Year of Efficiency
Shares of Meta Platforms (NASDAQ: META) have almost doubled from their low just as CEO Mark Zuckerberg declares 2023 as the year of efficiency.
The social media company is far from the only company tightening its belt.
Fellow tech giants, Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) have also scaled back, reducing a sizable percentage of their existing headcount while cutting back on office expansions.
While the headline on layoffs sounds dire, all three companies actually have more staff compared to their pre-pandemic era.
More importantly, the companies are not pulling back out of desperation.
Microsoft, for instance, has a net cash position of US$51.3 billion which allows it to invest in OpenAI, the creator of the popular ChatGPT tool; the deal is reportedly worth US$10 billion.
Instead, the cutbacks bring a renewed focus on what has always been important for us: the business’s financial position and its ability to generate cash.
As my co-founder David Kuo likes to say, revenue is vanity, profit is sanity and cash is reality.
In other words, when it comes down to the crunch, what you want to focus on is cash.
Debt is like driving an overloaded truck
“With a load like that, there’s no way you’d be able to win in a race with other nimbler trucks.
You’re too heavy to gain speed and too hard to steer. Plus, you have to pay that much more in gas. You wouldn’t even be able to handle the curves.
Who knows when you would topple over and cause a huge accident?”
— Ownday’s Okuno-san on debt
In contrast, companies such as the Walt Disney Company (NYSE: DIS) are scaling back out of need amid a high-interest rate environment.
The House of Mouse is overloaded with debt, as we shared publicly back in July 2022,
As such, its latest announcement came as little surprise.
Disney said it will be reducing its workforce by 7,000 jobs, cutting back on key growth areas such as direct-to-consumer (DTC) marketing while shaving US$3 billion off its content costs.
Such moves, unfortunately, could have an impact on a company’s competitiveness.
This sequence of events demonstrates why we avoid companies with lumpy revenue and too much debt. — this combination can prove to be problematic when operating conditions take a turn for the worse.
Get Smart: Rebooting your portfolio
With interest rates at their highest in 15 years, there is a definite shift in the mood for businesses, especially at tech firms.
Sure, share prices have fallen.
Sure, holding stocks during this time is painful.
Sure, owning up to mistakes can be embarrassing.
But for investors with a long-term mindset, these declines provide a unique opportunity for us to reshape our portfolio to what we want to own, rather than being dictated by day-to-day movements of the stock market.
That’s why, in May 2023, the Smart All Stars Portfolio will be embarking on a three-month process to review all the stocks in the portfolio with a critical eye.
We’re calling it a Milestone Review.
The aim is simple but important: do the stocks we own still deserve a place within the portfolio?
While we are doing this for our own portfolio, we think that this process is important for every investor.
From time to time, you have to challenge yourself on which stocks make the most sense for what you wish to achieve with your portfolio.
Are these stocks aligned with your financial goals?
How do you decide if a growth stock is worth your money? There is no shortage of stock ideas today, but is a particular stock suitable for you? Find out more in our latest FREE report, How To Find The Best US Growth Stocks For Your Portfolio. Click HERE to download the report for free now!
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Disclosure: Chin Hui Leong owns shares of Microsoft, Meta Platforms and Alphabet.
