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Welcome to investing, not rocket science! A non expert series on building and managing an investment portfolio. By now most of us have heard that the 16th largest bank in the U.S. has failed. With deposits greater than US$160 Billion, Silicon Valley Bank is the largest bank failure since Washington Mutual in the 2008 financial crisis. It is one month since this series began and in this time: equities have declined, bond yields have declined, currencies have broadly remained flat and Gold has appreciated in value. Most of the decline has occurred in the last one week.
What is the impact on the portfolio?
The portfolio has appreciated in value, +0.19%
The benchmark has declined -6.1%
The change from the last update - while equities was leading the gains in the last update, this time bonds lead the portfolio gains. As government agencies in the US, UK and EU resolve the SVB problem and prevent contagion, bond prices have rallied as investors go into risk off mode from equities.
The portfolio continues to outperform the benchmark index currently (largely since this portfolio is not fully invested yet and holds a high cash component), which meets one of the objectives, but it continues to trail inflation.
I am looking to evaluate stocks from the communication sector. One of them (Google) is a part of this portfolio with a weight of 5%. The stocks I am evaluating today are: Walt Disney, Netflix, Tencent, Meta, Deutsche Telekom and China Mobile.
Company Financials:
Meta, China Mobile and Deutsche Telekom have revenues between US$ 115 to 130Bn, Tencent and Walt Disney have revenues between US$77 and 85Bn while netflix is a smaller entity with revenue US$ 31Bn.
In terms of Market Cap to Revenue multiple and Earnings yield; Deutsche Telekom (0.9x and 6.6%) and China Mobile (1.3x and 10.7%) look relatively attractive.
Valuations and Efficiency:
Meta has the highest operating income margin followed by Netflix, Tencent and China Mobile.
Deutsche Telekom has the highest debt/equity at 312% while China Mobile has the least debt / equity at 4.6%
Deutsche Telekom and Walt Disney are the only two entities that have a positive PEG ratio.
China Telecom and Detusche Telekom have relatively better P/E ratio and Price to Tangible Book ratio
Trends in Company Financials
Revenue growth for Meta has declined from 47% in 2008 to -1.1% in its most recent announcement of results. Similar decline in Tencent as well. Deutsche Telekom shows consistency, but growth rate low at 6%.
Operating income margin highest for Meta followed by Tencent, however trend declining for both. Netflix (17.8%) sees improvement in trend while Deutsche Telekom and China mobile are consistent around 11 and 14%.
Earnings yield stable for all 5 stocks.
Capex highest for Meta (27%) followed by Deutsche Telekom and China mobile. Meta has burnt through cash on the Metaverse with no positive results on it. These capex spends is likely to reduce profitability in the future as amortization kicks in and is unlikely to increase revenues.
Tencent has the highest unlevered free cash flow margin followed by Netflix (both with declining trends) while Detusche Telekom margin is stable.
Fair value and upside potential
Two methods for valuation used here: Discounted Cash Flow analysis and Analyst targets.
On average, China mobile, Netflix and Meta offer the best upside potential.
On the charts, both tencent and meta have corrected 50% from their all time highs and have had a good bounce from their October'22 lows.
Summary:
At this time, none of these stocks give me conviction to add them to the portfolio.
China mobile tick some of these boxes but has negative free cash flow.
Deutsche Telekom tick some boxes but has high debt / equity.
Meta and Tencent tick some boxes but are relatively expensive and have higher volatility.
Portfolio action: None. I am going to add all these stocks to the watchlist.
Since 40% of this portfolio is in cash, in the next couple of posts this week, I am going to look at the watch-list to check if the recent market correction has brought any opportunities. I am also going to evaluate stocks from real estate and / or materials and mining to look for potential additions to the portfolio.
Thanks for your time!
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