SBUX - Starting My Portfolio Share - Q2 2023

2023-07-07 10:53:22 ET

Summary

• As a former retail banker and current educator, I plan to share my portfolio with the Seeking Alpha community each quarter to encourage transparency and accountability.
• My investment strategy includes focusing on companies with high FCF margins, high returns on invested capital, monopolistic or highly competitive positions, and manageable debt.
• And I avoid investing in banks, materials, energy and REITs, health companies, companies reliant on China, and companies with low net profit margins.

A Little About Me

My first career was in retail banking, working in savings and investments. Not a CFA. Not a professional analyst. Nor a portfolio manager. But certainly, someone who dealt daily with people with very high net worth (typically £500k to £5 million), and had to hold a working understanding of how the markets operated and of individual stock ideas. The job ended in 2008 after months of verbal abuse and one death threat. You can probably make your own connection between the dates, my role and the general public at large...

Working now as an educator, there are three things that I try my best to be: humble, kind and honest. I have used Seeking Alpha for many years, but as I start to contribute more to the Seeking Alpha community as a fairly new analyst, I wish to apply these same values here as I do in my day to day life.

Hence, today I intend to start sharing my portfolio transparently with the community each quarter. This will hopefully:

• Keep me accountable.
• Encourage others to share (I love learning from other people's portfolios).
• Help me to become a better investor by listening to feedback.
• Give anyone who reads my articles or 'follows' my research an idea of my philosophy and time horizon.
• Hopefully be useful to at least one other person on the platform.

My Current Portfolio

* This is currently quite skewed by my Amazon holding.

Why do I hold ETFs?

First of all, I think that ETFs are great! For most retail investors, saving regularly into a large, diversified and inexpensive passive ETF such as an MSCI World or S&P 500 indexed fund is the best way for them to invest without the extra work/risk of choosing individual stocks. I further believe that one can also beat either of these two indices by choosing certain sector focused ETFs, such as Health, Technology and Industrials as these tend to outperform over long periods and through cycles.

For me, I use ETFs for specific exposure to sectors or markets where I can see growth, but do not have the time, expertise or inclination to find individual ideas.

Nasdaq 100, MSCI World Tech Sector and Global Semiconductors - I own these three somewhat overlapping funds as ways to get additional exposure to technology stocks. I also own some big tech, but the next 20 years is likely to see huge changes in which companies are successful. These funds give me exposure to lots of SAAS companies, the entire chip industry as well as any new up and coming Big Data or AI companies that emerge and are slotted into indices without having to make changes to my portfolio and interrupting its compounding.

MSCI World Health - Health is a great sector. There will always be people reliant on medication as well as those who wish to use products to enhance or improve their health. The rise of medical devices, robotic surgery as well as the use of our own genetic variations to individualise therapies are all exciting catalysts for growth for the sector. The problem for me is that I have almost zero idea of how the industry at large works. As one can see from the chart below, Health tends to beat the market, and I believe that it will continue to. Owning a sector ETF gives me instant diversification across these great companies without having to worry about when key medications turn generic or lawsuits or spinoffs, etc.

MSCI India - India is for me an exciting growth opportunity. It has a large an increasing population that is quickly emerging out of poverty and resultingly has a huge young potential workforce as well as a middle class a lot larger than the entire population of the USA. One can gain exposure to India through US companies, but I also believe that there will be a generation of entrepreneurism, and unlike China, which has had a similar explosion in growth and wealth generation, India is a capitalistic and democratic nation, hopefully leading to less risk for investors. My problem is that I don't know where to start with looking for individual opportunities, so I've decided to regularly contribute to this index fund.

How do I choose individual stocks?

Simply put, I look for highly cash flow generative companies that have near unassailable competitive advantages, good balance sheets and long runways to incremental and steady growth. I try not to overpay and I intend to hold the companies for as long as possible to allow maximum compounding with minimal interruptions and taxation. I try to stay relatively concentrated to ensure that I can keep up-to-date with my holdings and increase my chances of beating the market over the long term.

I actively seek out:

• Companies with FCF Margins above 20% (or the potential to do so in the future).
• Companies with high returns on invested capital.
• Companies with highly competitive positions in their respective markets.
• Companies that I feel good about holding until I retire (I'm turning 40 soon).
• Companies that have either little to no debt, or at least very serviceable debt.
• Companies that are not overly cyclical.
• Companies that can steadily and organically grow over time.

I actively avoid:

• Banks, Materials, Energy and REITs. They are all either outside of my core understandings, or sectors that historically are overly cyclical or lag the overall market.
• Individually picking health companies as mentioned, given they are definitely outside of my circle of competence.
• Companies that have high capital expenditures that need to be maintained in order to produce their goods or service, such as automobile companies or cruise lines.
• Companies that are reliant on China.
• Companies with low net profit margins, such as brick and mortar retail.
• High yielding dividend stocks that payout most of their earnings and don't grow their core business.

My top 10 holdings and why I chose them:

Amazon ( AMZN ) - Holding Amazon is a little like holding a one-stock ETF. They have many long and winding tentacles; however, I'm really only interested in 2 of those parts - AWS and the Advertising Services. The transition to cloud is still a decade long growth story and AWS will be up there with Microsoft's Azure as holding a big chunk of that recurring, highly profitable and mission critical cloud infrastructure space. Further, turning their low-margin e-commerce platform into a 2nd Google, where companies pay to have their products appear at the top of consumer searches is a brilliant profit driver. I am a long-term focused and patient investor and so haven't been put off by recent over investment and increased capex during the pandemic. I am very confident that the company will return to positive cash flows soon.

Visa ( V ) and Mastercard ( MA ) - It is very difficult to separate the two, so I chose not to! Visa and Mastercard have an effective duopoly on the largest digital payment system in the world. They are both very high margin, with FCF margins around 50% for each of them and they use these cash flows to buy back lots of shares as well as increasing their dividends. Further, these cash flows are still growing steadily having fluctuated during the pandemic as high margin cross border payments dwindled. Yes, there is increasing competition for digital payments; however, a) they are interwoven into the banking system, b) there is still the potential to get millions more cards into the hands of the world's unbanked, and c) their war is against cash not their competitors - even some of the largest economies in the world such as Germany and Japan have hardly touched the surface in terms of levels of card acceptance and both are still heavily reliant on cash payments.

Microsoft ( MSFT ) - Like Amazon, Microsoft feels more like an index than an individual company. With several monopolistic and oligopolistic products, including: Windows, LinkedIn, Office, Xbox, Azure as well as lots of investments into other areas of technology, most notably OpenAI and its integration of its ChatGPT software. Further, Azure, like AWS are likely to have very large parts of the lucrative Cloud Infrastructure as a Service market. Microsoft is the only company to have been in the top 10 largest companies in the S&P by market cap since 1995. My guess is they will still be there when I retire in 20 years!

S&P Global ( SPGI ) and MSCI ( MSCI ) - I do not like banks, but I do like these 2 companies that are integrated so fully into our financial markets. Between their respective data, market intelligence, and indexing as well as S&P's credit ratings oligopoly with Fitch and Moody's ( MCO ), there are lots of high margin and recurring revenue streams that will continue to compound for many years to come.

LVMH ( OTCPK:LVMHF ) - Very simply, I like the luxury goods space as it is pretty indestructible. Even during recessionary periods, the people who can afford to spend thousands on a bag or hundreds of thousands on a car, will still be able to. LVMH has a wonderful selection of luxury brands across fashion, prestige alcohols, jewelry and watches, and perfumes.

Starbucks ( SBUX ) - Starbucks breaks a few of my rules. It has quite high debt, is arguably reliant on China in part for its growth and has relatively low FCF margins and reinvestment returns compared to others in my portfolio. I own 21 companies and Starbucks and PayPal ( PYPL ) are most at risk of being sold. Having said that, it is a slow growing behemoth that sells one of the last truly addictive and socially acceptable products globally. My original thesis was simply that it would continue to slowly expand into Asia, become more efficient and return increasing amounts of money to shareholders. It is an aspirational brand and remains popular with young people. I have held it for many years and am unlikely to sell unless there is a major reason to do so; however, if I were to start again tomorrow, it would not be an investment that I would make.

Apple ( AAPL ) - Apple is the largest consumer ecosystem in the world and is slowly pivoting from a high end aspirational hardware maker, to a service provider of entertainment media, connected fitness and casual gaming. I do not believe that its toe being dipped into the AR waters will be any kind of needle mover, but I do believe that there is a future where Tim Cook gets his wish of moving Apple into the health space with Apple Watches that take glucose and blood pressure readings and further integrates the company's devices and services into our lives. As aforementioned, I am bullish on India and feel that there is still plenty of growth in the company's current core product, and iPhone sales (the first foray into the Apple world for many) only has penetration of around 3.5% in India.

Evolution Gaming ( OTCPK:EVVTY ) - Feel free to read my article about this iGaming software developer and casino game hosting company. In a nutshell, it is a Swedish company that is rapidly growing and is already very profitable. It runs casino games for many of the biggest names and although it does have (limited) competition, 35% margin on cash flows that have over quadrupled in the past 5 years in a global market that is growing very quickly has made me very excited about the newest company in my portfolio.

Thank you for reading and looking forward to constructive feedback and comments!

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