Friday, May 6th 2022

Shopping the sale rack

Investor Update

As the market plunged to 2022 lows this week, our team took the opportunity to go shopping. We initiated a position in telecom giant T-Mobile (TMUS) for clients in the Flagship strategy while selling our small stake in the battered Netflix (NFLX). We also added to many of our highest conviction ideas, and trimmed a few positions that had become outsized based on the risk/reward profile.

The table below summarizes these moves:

Table

T-Mobile Raising the Bar

We’ve initiated a position in T-Mobile (TMUS) on behalf of Titan Flagship clients. Following its $26B merger between Sprint, T-Mobile has scale, spectrum, coverage, and customer value proposition needed to drive market share even higher, in our opinion. Given the inflationary environment, we continue to source high cash-flow ideas; we’re modeling that free-cash-flow will triple by 2026, allowing the company to return ~$6B of cash to shareholders via share buybacks.

As the first mover on the block, T-mobile’s 5G network reached well over 200M people in 2021 and expects to cover over 300M by 2023 – far surpassing competitors Verizon and AT&T.

Competition has been and continues to be the main risk for the wireless industry, but we believe the depressed valuation compared to peers warranted us building a starter position during this down week. This is a risk we continue to monitor closely, but we’re excited to be invested in T-Mobile on behalf of Flagship clients.

Topping off our top ideas

Alcon (ALC): Johnson & Johnson released standout bullish commentary on its surgical vision and vision care lines of business a la the same space Alcon plays in. The recent pull back in the stock price gave us an opportunity to average down on our initial starter position.

Amazon (AMZN): Amazon’s stock was crushed on earnings – a complete overreaction in our eyes. We took the opportunity to double our stake in this behemoth. We’re hard-pressed to find a company with a deeper moat than Amazon, and sleep easy at night with this as an anchor position in Flagship.

Booking Holdings (BKNG): The leader of the online travel agencies (OTAs), Booking’s overwhelming scale and supply advantage over competitors make this an asymmetric bet on the recovery of travel long-term.

Mastercard (MA): The tables turned in Q1 with pent up cross-border travel demand pushing earnings per share growth to staggering levels, strengthening our conviction that management will be able to navigate hairy macroeconomic and geo-political conditions.

Alphabet (GOOG): Just a small addition to Alphabet, but we felt the need to add to our already outsized position given the stock is still trading below historical averages on a valuation basis. Another quarter of GOOG growing dominance across advertising, mobile and cloud – a few industries that still have a decades long runway in our opinion.

ServiceNow (NOW): A mission critical piece in their customer’s tech stack, ServiceNow reinforced the strength they’re seeing in IT budget spend for their products. We’re bullish on enterprise software right now, and under Bill McDermott’s leadership, this is a horse we’re excited to bet on.

Target (TGT): Another situation where we took the opportunity to size up a starter position in a down market – Target’s sales mix skews more resilient than peers given 45% of its goods sold are non-discretionary like grocery and household essentials.

Alliance Resource Partners (ARLP): Management increased their distribution payout ratio to 40% in the recent quarter, and expect to raise this to historical levels near 100% in the coming quarters. Still sized on the smaller side in Opps, we believe this is an asymmetric risk/reward opportunity that should continue to thrive in an inflationary environment.

Hasbro (HAS): More activists have joined the Hasbro bandwagon, private equity firms are circling their competitors and the stock seems to defy all odds by continuing to show strength in a brutal tape. Our conviction continues to grow here which is reflected in our increased sizing.

Canadian Pacific (CP): Canadian Pacific cooled off after a huge run-up, so we took advantage of recent volatility to add to our position as we believe the company will deliver double-digit growth while generating a mind-blowing amount of cash flow.

Touching up the edges

SS&C Technologies (SSNC): With a bleak outlook for capital markets and the corresponding potential impact on sales growth, it felt prudent to roll back our position a bit in SSNC. Even after this trim, we’re maintaining a full position in SSNC given our confidence in the leadership team’s ability to create value through effective and thoughtful capital allocation.

CarGurus (CARG): With a softening used car environment, we don’t believe CarGurus deserves an outsized position in Opps despite our long-term thesis tracking nicely.

Meta Platforms (FB): TikTok’s potential impact on 2023 ad budgets makes us more cautious on Meta in the short-term, but with attractive 3-year IRRs, we remain holders of FB.

A broken “show me” story

Netflix (NFLX): We elected to sell our ~1% position in Netflix (NFLX) given the hit to management’s credibility and the stock becoming a “show me” story. As consumers, we’ve all seen the increasing streaming wars, and Netflix has been disingenuous with investors (perhaps with themselves as well) regarding the competitive landscape and saturating markets.

Although we believe NFLX will eventually be able to i.) convert free users in mature markets (i.e., password sharing / ad-tiered subs) and ii.) grow international penetration, we find the timing/trajectory difficult to predict due to competitive pressures. As a result, we're modeling lower EBITDA (i.e., competition -> more content spend) and penetration (i.e., success dependent on new initiatives), leading to IRRs of 11%, below our hurdle rate of 15%.

We may be back, but Netflix needs to prove their ability to execute over the coming quarters before we get interested again. 

As always, please let us know if you have any questions about this trades. Feel free to email our team at research@titan.com or pose a question on Ask Titan Anything directly in the app.

Onward, Titan investment team

As of this writing, AMZN, BKNG, FB, GOOG, MA, NFLX, NOW were a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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