Thursday, Jun 2nd 2022
We’ve invested in V, added to CNI, trimmed LRLCY, and sold TSM
On Wednesday, we initiated a position in Visa (V), added to Canadian National Railways (CNI), trimmed L'Oreal (LRLCY), and sold our stake in Taiwan Semiconductor (TSM) on behalf of clients in our Offshore strategy. The table below details these moves:
Visa (V), a duopolistic payment provider, operates as the toll road of global commerce. Acting as the rails for close to 60% of all global purchase transactions (ex-China), in our eyes, Visa has near-impenetrable staying power due to its durable two-sided network and unmatched scale.
As the world continues to reopen, we expect Visa to capitalize on the recovery of cross-border travel in the coming quarters. With over 50% of revenues derived overseas, we believe Visa’s international take rate may reach up to 8x higher than domestic take rates, indicating increased profitability as the mix of international payment volumes increases.
Given Visa’s highly levered revenue profile to global economic reopening / international tourism, our constructive view of an accelerated rebound in consumer travel may provide Visa with robust free-cash-flow while also providing the Offshore strategy with an attractive inflation hedge against current market conditions.
Off-and-on lockdowns have been a headwind for the payment sector, and Visa is currently trading below its March 2020 lows from a valuation perspective; these are the types of discounts we’ve been anticipating. Visa emerged from the pandemic more profitable and, in our eyes, an even stronger company than before.
We’re thrilled to be shareholders of Visa once again, and we believe there is ~50% upside, or the potential for a 3-year IRR of 18%, net of fees.
Since first investing in Taiwan Semiconductor (TSM), our thesis has been tracking better than expected, and frankly, fundamentals have gotten stronger in recent months; the company’s pricing power has been on full display as they continue to lock in long-term contracts at higher prices than we initially underwrote.
Having said that, fundamentals don’t always matter in the short term as much as investors may like.
When we initiated a position in TSM, the risk of a Chinese invasion of Taiwan was always non-zero; it was a risk that we were comfortable with and felt like we were being appropriately compensated for taking.
In recent weeks, heightened geopolitical tension has worsened, and the perceived risk of an invasion has risen. “Headline risk” is real and could cause other investors to sell the stock based on negative reports alone. To be clear, we are not predicting an invasion near-term. While it's still a left tail risk, we do not want to expose our clients to that level of potential capital loss despite our positive outlook on the stock all-else equal.
Consistent with our investing framework, we continuously evaluate the probability of outcomes and update these views with new information. While an invasion of Taiwan would have broad ramifications for the global economy, we believe the impact on TSM would be significantly greater than other publicly traded securities.
We added to our position in Canadian National Railways (CNI) given an improving fundamental outlook through the end of 2022 and an increased margin of safety given the recent reset in guidance, in our eyes.
Lastly, we took the opportunity to trim our position in L'Oreal (LRLCY). A weaker consumer and persistently high logistics costs could lead to margin pressure and increased downside risk on the stock over the coming quarters. We remain bullish on L’Oreal’s long-term growth potential and remain happy shareholders.
As always, let us know if you have any questions about these moves and a member of our investor relations team will follow up.
John Bottcher and Christopher Seifel
Titan Investment Analysts
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