It's been six months since I started The Twenties Trader website and newsletter service at the end of February 2021. It's been an amazing journey so far, having researched some fantastic businesses, found new opportunities, introduced hundreds of private and institutional investors to my research and most importantly, meeting some fantastic private investors who enjoy the craft as much as I do.
In this review, I will detail some of the wins and losses across this time period alongside improvements I plan to make to the ongoing service.
Reviewing The Twenties Trader Free Service
I started writing research on quality businesses in February to help investors attain a holistic picture of said business from their history, their recent performance and their financial metrics. By covering a business’ whole story in an article and not just their numbers, I felt that I could really unlock whether a business has a competitive advantage, what its opportunities for growth are and importantly, whether various data points can be used to ascertain whether customer uptake for a company’s products and services are increasing.
One of my favourite methods of understanding customer uptake is to go 'kicking the tyres'. This is a finance term coined by Peter Lynch, who would go and road test his investments (for instance, by staying in La Quinta Inns in the US as they expanded in the 1990s). The writing I publish is often road tested. It may sometimes look a little strange lifting your dinner plate up to see whether there is a Churchill China logo underneath, or looking at the bottom of your friend's kettle to see whether the safety filament is made by Strix versus Otter Controls, or popping in to your local Warhammer shop to quiz the clerk on recent performance (and find out whether Kevin Roundtree is correct with his ‘outrageous customer service’ claims), but I find that it is an extremely helpful way to gain real-life insights into a company. When I visited Wingstop’s first London franchise whilst preparing the article for Wingstop in February, there was a queue out the store and round the street and the in-store experience was infectious. Now, there are 10 franchises in the UK and Wingstop still remains one of the most in demand franchises globally due to its best in class franchise economics.
When you can’t quite replicate your in-store research widely enough, the internet can become your research library. Whether looking at Google trends, public data sources, corporate read across from big businesses or channel checking of large retailers (as I did with Fevertree in the article here) there is a vast array of information we can use as retail investors to sharpen our edge.
So, of my free research, what has been correct and what hasn’t worked as well?
The Good Calls
Commentary: Pleasingly with the free research articles that I have provided on my website across the six month period, the good calls seem to outweigh the bad. Looking at the positive calls, three great quality LSE Aim businesses top the charts (Gamma, Focusrite and Strix) and you would be able to see that each of the businesses have commonality in their quality financial metrics (operating margins, ROCE) alongside low debts and strong competitive moats around their business models. However, the stand out performer was Pool Corp, which has all the similar aspects of quality but that has also benefited from a powerful trend in the underlying consumer, with pandemic-driven pool installations on the rise. The best lesson here is twinning a quality business with a powerful trend based tailwind, which can really pay off.
Looking at the negative calls, I am also very pleased that my analysis of Avon Rubber (now Avon Protection) and Asos both saved me money by avoiding the stock but also hopefully informed investors of potential risks too. Both of these companies were avoided by looking at their financial metrics (poor operating margins for Asos (compared to its peers) and declining return on capital for Avon, alongside a dwindling spend on its own R&D and risks that further contract delays would impact the business, which pushed the shares down even further). The real lesson here is to try and find shares that have best in class financial metrics. If the company lags behind its peers or has declining returns on capital, there could be trouble ahead.
The Bad Calls:
Commentary: ‘Being pessimistic is rarely profitable,’ is a quote I recently read on twitter, which probably sums up these calls very well and certainly shows reason not to bet against the market. In my sphere (quality businesses) I rarely look at companies that I would define as 'utter rubbish', thus any negative views on generally good businesses can backfire. The case for Domino's Pizza (DPZ), the US global franchise owner, was probably one of my worst calls ever! In fact, I wish I had bought the company instead of talking myself out of it. In my article for Domino’s Pizza, I fawned over the supply chain and 66% return on capital metrics. However, the 4.8x EBITDA leverage felt unnerving and hearing of the board’s intentions to increase leverage over the next few years put Domino’s outside of the box of my comfort level. I wrote the article on March 3rd 2021 when Domino's — a quality compounder and once the cornerstone of Terry Smith’s quality Fundsmith portfolio — was down by around 26% from its recent highs on fears people would stop eating pizza after the pandemic, which is usually a great entry point into these sorts of quality compounders. The strength of Domino’s business model has been rewarded, and arguably, the business can take the level of debt with steady franchise payments from franchisees. Also, with sustained inflation seeming likely, it could be that the debt balance’s future value is significantly reduced. The main lesson here is to be cautious on betting against quality companies, as they often have a resilience to bounce back.
The grey area is probably best summed up by the articles written on Best of the Best and Kape Technologies, which have both had very interesting stories so far. As for Best of the Best, my article with a neutral stance attempted to provide clarity and an overview of the business. I ‘kicked the tyres’ on BOTB too, playing the game to understand the model. I highlighted some of the significant risks and provided a bull and bear case of financial estimates. Unfortunately, I think even my bear case estimates, which expected revenues to fall 34% in 2022 and bounce back in 2023, may have been too positive.
In the case of Kape Technologies, the share price has continued to rocket since the Webselense acquisition and is up 44% since I poured cold water on the shares. I’m going to leave this one in the grey however, as I have since been mailed by a couple of ex-Webselense freelancers who attest to some questionable practices at their prior employer — I believe more time is needed to see if Kape works out.
Since starting the premium service six months ago, premium subscribers have been privy to weekly Patreon updates, which cover companies within my research universe (global quality businesses) and their related news, corporate updates and analysis. Six monthly newsletters have also been published for subscribers, which include an industry analysis of sector peers. So far, I have covered Luxury Fashion, Vision Care, Audiology, The Great Outdoors, UK Video Gaming and most recently the Pet Care Sector. This peer analysis compares companies in a given sector and aims to pick a 'winner' and a 'runner-up' within each sector. Alongside the peer analysis, newsletters contain macro economic updates, details on my portfolio activity and my current portfolio holdings.
So what are the results of the winners of the peer analyses so far?
Newsletter Peer Analysis Winners (no dividends included):
Luxury Fashion (March 7th): A global luxury fashion brand +46% (5 months)
Vision Care (April 4th): A global vision care specialist +12.7% (4 months)
Audiology (May 9th): A global disruptor in the hearing care market +14.7% (3 months)
Outdoors (June 8th): A fast growing boat builder +9.7% (2 months)
Gaming (July 11th): A small cap games developer and publisher +0.6% (1 month)
Pet Care (August 13th): A global animal health business (no data yet)
Thankfully the results so far speak for themselves, with no losers picked during the period. The S&P500 (my personal benchmark) is up 15% since the first newsletter in March, therefore, most of the early picks have comfortably outperformed the US index during their respective time periods. These companies are all quality growth businesses, of which you can buy and hold for a long period of time and thus compound results over time. Sticking to quality has also resulted in the lower risk of poor performance from potential blow ups. If you would like a preview copy of one such newsletter, please email me at the firstname.lastname@example.org for a free copy.
Also in these newsletters, I talk about my recent trades and conviction holdings, which I do not share elsewhere. There has been quite some success in these picks this year and I will share a couple of examples below.
Costco Wholesale +38% (March 9th)
An example of a successful Twenties Trader portfolio update this year was the disclosure of a new holding in March. On the 9th of March, premium subscribers were informed of the Costco trade with the below detail:
So, the first trade I made during the last few days was to initiate a new large position in Costco Wholesale. Costco is a ‘wonderful company’ — rhetoric often used by Warren Buffett to describe companies that have the world at their feet. Mr Buffett is in fact a major shareholder in Costco and has been for many years. Costco has been on my personal watchlist for a long time, and with a 20% fall in the stock, it felt like a good opportunity to buy.
Costco has a unique business model, and I believe it has a significant growth opportunity ahead of itself in the coming years. Costco's model is to sell premium quality goods to customers at its warehouses at a very low-profit margin. This may sound counterintuitive to us as investors who seek large profit margins, however, Costco’s loyalty membership scheme is where the bulk of its profits are derived. Over 60% of Costco’s operating profit is provided by membership fees. Offering memberships is essentially costless to Costco, which allows the warehouse business to focus on providing goods to customers at prices they would unlikely receive elsewhere. This business structure creates significant barriers to entry, as competitors are unlikely to be able to offer better value to customers than Costco. Additionally, Costco’s customers have paid for their membership to shop so are likely to remain loyal.
Costco has an enviable track record of growing not only warehouse units but also ‘same-store sales’ at each unit it builds. Costco currently has around 850 global stores, with around 540 in the USA. In my opinion, Costco’s biggest future market is China, where it currently only has one warehouse (opened in late 2019).
The Costco growth story is underpinned by unit growth, a quality consumer offering and its loyal member base. Whilst there could be further declines ahead in the shares, I believe Costco has a bright future and is well worth a look in this recent pullback.
Axon Enterprise +32% (March 20th)
A second example is the addition of another portfolio conviction holding Axon Enterprise in late March:
The next purchase was the largest outright purchase during the month with Axon Enterprise added to the Personal Portfolio. Axon is a leader in law enforcement equipment and services, primarily in the USA. Axon has three specific business lines: tasers, body cameras and its cloud-based data capture solution, Evidence.com. Axon, formerly named Taser International, started business with its first product, the Taser. Tasers are still a major revenue source today, and the market for non-lethal law enforcement equipment is growing. Axon has since made the pivot to body cameras and software and is currently the largest supplier of police body cameras in the US.
All the footage captured by Axon body cameras is uploaded to the Evidence.com cloud, where law enforcement bodies and legal representatives can access the information and data for a fee. Axon has also integrated some clever technological advancements to its hardware, such as the location of any Taser discharge being uploaded to Evidence.com alongside the data stream of body camera footage as soon as the Taser is removed from the officer's holster.
The addition of Evidence.com now makes Axon an ecosystem company, where it can sell subscription services to customers that have already purchased hardware. The cloud data platform serves a real need for the safe harbouring of law enforcement data, and once a particular agency is using the service I would very much doubt they would find reason to leave. I have seen first hand the power of ecosystems, particularly in heavily regulated industries. Veeva systems — a holding in the Family Portfolio — managed to turn itself itself into a $40 billion vertically integrated SaaS ecosystem in under 10 years, as it solved the complex regulatory and systematic needs of the pharmaceutical industry. At $8 billion market capitalisation and the global law enforcement market at its feet, I think Axon has fantastic prospects to grow exponentially.
However, the period for The Twenties Trader Portfolios has been far from just plain sailing. On the occasions where portfolio holdings have gone sour, I have provided detailed commentary as to the prospects for the business going forwards and what I am planning on doing next. For instance, the recent breakdown of consumer staples holding Clorox Company, which was a position I had been adding to over the months from May to July due to poor results and deteriorating fundamentals led me to sell the holding and provide the following commentary for subscribers:
Clorox Co -15% (since first buy)
For an example of a company experiencing the full force of inflationary pressure, look no further than Clorox, which reported its quarterly results today (Tuesday 3rd August). A double whammy of forecasting declining sales and a reduction in margins has wiped 11% off the stock after the markets opened in the US this morning.
Clorox produces a vast array of household items from bleach to bin bags to Brita water filters. However, its diversified portfolio wasn’t enough to save it after reporting seriously weaker than expected results. Sales fell 10% during the last quarter and gross margin slipped 9.7% from 46.8% to 37.1% due to inflationary costs ramping up. This came as quite a surprise to me as the size of both the sales and margin compression was much large