Weekly Notes #16
How Walgreens failed, Estee Lauder's Christmas tree, Buffett vs the S&P500, Chris Bosh, Rheinmetall and Ben Graham's best investment
It`s been a while since the last weekly notes, and I hope you are looking forward to learning something!
In case you want to re-read the previous weekly notes, here is the link
If you like what you read and want to support my work, upgrading your subscription to a paid one would be amazing.
In case you missed it, these are the three most recent articles that I have published:
The best buys for March:
The ASML Q4/2024 earnings review:
The Q4/2024 Superinvestor update:
Without further ado, let’s start:
Loving what you do
I love this takeaway from David Senra from the book: Who Is Michael Ovitz? The Rise and Fall (and Rise) of the Most Powerful Man in Hollywood.
I'd absorbed a basic rule for success: love what you do. Too many people fight their job, a battle they cannot win.
That's why I write my Substack. I love it. I hope that you have something in your life that you love doing as well. If you have found it, you can count yourself lucky. If you have the chance to work on this topic continuously, you will develop great skills in this particular niche.
Quality before price
This is probably my most important learning over the last years in investing. Many investors had to learn this lesson. You can even ask the grandmaster of investing, Warren Buffett, and he also had to learn it from Charlie Munger. Berkshire Hathaway would not be the great company it is today without this very insight.
Before you buy a stock, make sure that the underlying business has strong fundamentals.
Purely buying a stock because it is cheap can lead you into a value trap. Cheap becomes cheaper for a reason.
One example that comes to mind is Walgreens Boots Alliance. I can’t remember how often it was pitched in the last years as being very cheap and a rock-solid company, and you can only make money in the long run. On top of that, it was even part of the exclusive S&P 500 Dividend Aristocrats. A club you only join after you have raised your dividend for at least 25 years in a row. So what could go wrong?
As it turns out, quite a bit. Walgreens was cheap for years, but the business was deteriorating at the same time.
While the revenues were fairly stable and even increasing, the net income collapsed and turned negative (i.e., the company lost money)
The reasons can be found in the income statement. The gross margins deteriorated and led to lower gross profit, despite higher revenues. The interest expenses for the huge debt on the balance sheet, plus high restructuring charges and impairment of goodwill, had huge negative effects.
What is the result? You might have guessed it, and I hope one of my most repeated sentences came to your mind like the famous lightbulb:
Price follows earnings
And so Walgreens’ share price followed the earnings: Down 90% from the top, even though the stock was “cheap” on a P/E basis for most of the last years.
Always look for high-quality companies FIRST and then find an attractive price. That is why I am here to help you.
Estee Lauder
Another company that has seen huge successes and has recently found itself in troubled waters is Estee Lauder. The chart of Estee Lauder looks like a Christmas tree. And that is not as nice as the one that is standing in your living room in December and has this amazing pine needle scent.
This was a result of two factors:
This is what happens when your fundamentals implode and your valuation is sky-high. A truly toxic mix. The net income of $2.9 billion in 2021 turned in just 3 years into na egative $700 million in the last 12 months.
At the same time, the P/E reached a high of 150 at the top. The fundamentals eroded faster than the stock price went down, and as a result, the P/E ratio was increasing (!) until early 2024, even though the stock price was already far removed from its all-time high and going down.
Traveling
When traveling, I am always curious to either learn about new companies or find the companies that I am invested in. In this case, it is Amazon in Japan. The color of Amazon Prime is easy to spot.
The same goes for AMD. In case you have not yet read my deep dive on AMD, make sure to take the time to learn more about this interesting company
Are you like me, and you keep an eye out for companies that you know?
Chris Bosh Hall of Fame Speech
I knew that Chris Bosh was a fantastic basketball player. I did not know that he is also a great speaker and writer. This speech is very touching, and I love this part the most:
Legends aren’t defined by their successes. They are defined by how the bounce back from their failures.
I hope you will remember this when you find yourself in some tough times. Because if there is one thing we can be sure of: Everybody has their rough patches in their lives, and it is up to us how we react to these circumstances.
You can watch the full speech here:
Big Tech spending spree
If you want to read the full article and learn about Big Tech spending spree, how Buffett performs against the S&P 500, the rise of Rheinmetall, and Ben Graham’s best investment, please subscribe and support my work.
To all existing subscribers: Thank you for your support, and enjoy the rest of the article!
Keep reading with a 7-day free trial
Subscribe to 41investments’s Substack to keep reading this post and get 7 days of free access to the full post archives.