Titan Trade Update: Initiating three new investments

Amidst the ongoing volatility, it was an active week for Titan’s portfolios.

On Wednesday, we sold out of our position in Twilio (TWLO) for Flagship clients while trimming our stakes in several other portfolio holdings into extreme market strength.

On Thursday, we initiated two positions in Flagship and one in our Opportunities strategy during a material market pullback, drawing down some of our strategic cash reserves for the first time this year.

The table below summarizes these moves:

Tapping the cash reserve for first time this year

In our Flagship strategy, we’ve initiated positions in Alcon (ALC) and S&P Global (SPGI). In our Opportunities strategy, we’ve initiated a position in Moody’s Corporation (MCO). All three positions were funded using a portion of our cash reserves, marking the first time we’ve drawn down cash this year.

Over the last several months, we’ve been reducing our positions in high valuation (aka expensive) names and high beta (aka volatile) stocks while building a sizable strategic cash reserves.

It’s important to reiterate that all else equal, we would always prefer to be fully invested; in the coming months, we hope to return our portfolios to this condition.

After a challenging start to the year in equity markets , we’re cautiously optimistic about current market conditions. We see a world where high valuation names have a bit more pain ahead, but believe the time is right to initiate positions in quality companies that we believe are on sale.

We expect to maintain a sizable cash reserve in each strategy given the continued volatility around inflation and the war in Ukraine. And while markets will likely never signal an “all clear” to investors, we’ll continue to opportunistically pick our spots to deploy this capital as conditions evolve.

Adding a few more compounders to the mix

We believe S&P Global (SPGI) and Moody’s Corporation (MCO) are two companies that almost fit a textbook definition of what we mean when we talk about wanting to own compounders. In our eyes, SPGI and MCO are both high-quality businesses with dominant market share, durable competitive advantages, and significant pricing power as toll collectors in the global debt capital markets ecosystem.

Our investment thesis for both S&P Global and Moody’s is based on four main drivers:

Dominant leaders in a duopolistic industry with strong pricing power advantages: SPGI and MCO control 80%+ market share in the debt ratings market.

Superior data analytics platforms: SPGI’s and MCO’s analytics divisions have proven to be scalable, asset-light business models with visible recurring revenue streams and stable margins.

Well positioned to capitalize on the explosive growth of ESG investing: We expect the shift to ESG-focused portfolios to continue for decades into the future, and we’ve underwritten 35-45% compounded annual growth in both companies’ ESG business lines.

Capital-light businesses with an unmatched capital allocation track record: Both SPGI and MCO generate substantial free-cash-flow given their “asset light” business models, meaning their balance sheets are largely free of depreciating assets that require regular and substantial maintenance and investment. The return on invested capital (ROIC’s) for both businesses are at the high-end of Titan holdings, with our working suggesting a 25-35% ROIC for both businesses.

Clear eyes with Alcon

In our Flagship strategy, we initiated a position in the global leader in the eye-care market, Alcon (ALC).

What's bad for our eyes is good for Alcon's bottom line. The eye-care market is a secular growth story driven by a myopia epidemic resulting from far too much screen time, an aging population, and rising income levels driving more demand for eye care. We believe these trends create attractive markets with defensive characteristics, which should continue to grow even in the event of an economic slowdown.

Alcon has always been hyper-focused on physicians because they are the "gate-keepers" to the eye-care market, and consumer decisions are heavily influenced by their doctors’ recommendations. Physicians care more about effectiveness, customer comfort, and new products than price and Alcon's long-standing relationships with physicians are hard for competitors to replicate. Additionally, roughly 70% of the company’s sales are recurring, which always provides another layer of comfort.

We're excited to add additional healthcare exposure to our Flagship strategy, and we believe this secular growth story can compound client capital at 15% annually over the next 3 years.

Cutting ties with Twilio

Twilio has been an incredibly frustrating holding over the last 6 months, and after a swift fall from recent highs, the stock is nearing its pre-COVID levels. We had materially trimmed our position ahead of their last earnings report, and this week sold our final stake in the name.

We struggle to see what gets this stock moving higher in the near/medium term given the stagflationary macro environment, continued near-term margin headwinds, and an apparent air pocket down to pre-COVID valuation lows even after the brutal drawdown over the past 3-6 months.

With a lack of company specific catalysts for Twilio in the near-term, we frankly believe there are better risk-adjusted opportunities (e.g. SPGI, ALC) for clients in Flagship. We were able to harvest losses for many clients which should help offset taxable gains elsewhere in client portfolios.