This week’s reading and viewing list covers The Magic of Compounding and Mark Zuckerberg on Creators, AI Studio, Neural Wristbands, Holographic Smart Glasses, Picasso & More.
Throughout market history, stocks, sectors, and thematic investments have experienced a swinging pendulum of sentiment, oscillating between overly pessimistic and overly optimistic extremes. As we’ve noted many times, successful investing requires second-level thinking—moving beyond the headlines and digging deeper to understand whether forecasts are exceedingly bearish or bullish.
One area recently bucking some overly negative sentiment is the electric vehicle (EV) sector. Investors should note several important statistics. The EV market continues to grow, even if growth rates fluctuate. For instance, EV sales in the U.S. jumped 60% last year, from 1 million in 2022 to 1.6 million in 2023. To put this in perspective, in 2016, only 200,000 EVs were sold in the U.S., which is eight times fewer than today’s annual sales.
It is true the internal combustion engine (ICE) vehicles still dominate, commanding around 75% of total U.S. vehicle sales. However, EV sales have continued to climb in 2024. The same is true across Australian and Europe – while the growth rate of EVs may not be as steep as it was in 2022 and 2023, overall the EV market continues to increase.
So why are the share prices of EV makers like Tesla (NASDAQ: TSLA) down so much (at the time of writing) this year?
The issue isn’t growth—it’s expectations.
Tesla: Addressing Challenges and Showing Resilience
Shares of Tesla have been on a comeback trail recently. Tesla has faced numerous challenges this year, including slowing sales growth across the EV sector, distractions for CEO Elon Musk, and increased competition. These factors combined to push a negative narrative and sentiment towards the company.
However, the company has shown resilience in the first six months of 2024. In June, Tesla shareholders approved a controversial pay package for Musk, lifting a significant weight off the sentiment and sparking renewed investor confidence.
Now, after reporting stronger-than-anticipated vehicle deliveries, the Tesla share price has surged again helping the company increase its market cap by over 40% in the past four weeks.
In the second quarter of CY24, Tesla delivered nearly 444,000 EVs, surpassing the consensus estimate of 439,000 units. Despite a 4.8% decline from the year-ago period, the figure rose 14.8% from the first quarter.
In more good news, Tesla marked a record 9.4 GWh (gigawatt hours) of energy storage products deployed in the second quarter. This more than doubled the previous record of 4.1 GWh reported in Q1 2024.
There’s been a surge in interest in energy storage products to smooth out power supply as renewable energy sources are installed for applications including growing data centre construction.
The rise in energy storage deployments favourably positions Tesla with yet another source of revenue for the company. Tesla prides itself on technology – software, energy storage, robotics, and the potential for self-driving vehicles.
Tesla will continue to push the case that it is more than “just an EV car maker” when it provides an update on its self-driving technology on August 8.
Rivian: Securing a Lifeline Through Volkswagen Investment
EV start-up Rivian (NASDAQ: RIVN), despite developing a unique brand and increasing sales over the last two years, continues to face significant cash flow challenges. However, a lifeline emerged last week when global automaker Volkswagen (ETR: VOW3) agreed to invest up to US$5 billion in Rivian over the next two years.
This investment led to a surge in Rivian’s share price, although the stock remains down nearly 43% in 2024. Volkswagen’s investment will initially be US$1 billion in the form of a convertible note, converting to Rivian shares once regulatory approvals are received. Additionally, Volkswagen plans to invest another US$4 billion through a joint venture focused on developing next-generation EV architecture.
For Rivian, this substantial cash infusion will allow continued business scaling. Combined with its existing US$7.9 billion cash balance, this investment provides ample resources to ramp up production of lower-priced R2 SUV models and build out a US$5 billion manufacturing campus in Georgia, USA.
The partnership will also enable Volkswagen to access Rivian’s valuable zonal hardware design, critical for its next-generation EVs. Rivian’s ability to reduce vehicle costs and improve manufacturing processes will be bolstered by Volkswagen’s expertise, positioning Rivian to potentially achieve a positive gross margin by the Q4 2024 and setting long-term targets for profitability.
The TAMIM Takeaway
It is common to see leading players in particular sectors bounce back once it becomes clear that broader initial fears were overdone. Savvy investors should take note when historical multiples reach relevant lows and when narratives, rather than facts, drive share prices down. While second-level thinking does not guarantee success in investing, truth-seeking remains a crucial skill. The rebound of Tesla and Rivian highlights the importance of looking beyond immediate challenges to recognise long-term potential and strategic opportunities.
Disclaimer:Tesla (NASDAQ: TSLA) and Rivian (NASDAQ: RIVN) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
The recent price decline in this company has pushed its valuation to levels that we feel not only represent an attractive entry point for long-term investors but also potentially position it as an appealing takeover target.
Market inefficiencies often create these types of opportunities, while others may be driven by short-term fear, or as we discussed last week tax loss selling, we see this as a chance to acquire shares in a business that is currently trading at a significant discount to its intrinsic value.
The Company
Mcpherson’s Ltd (ASX: MCP) is an Australian consumer products company with a diverse portfolio of well-known brands.
Their product range spans health, wellness, beauty, and household categories with key brands including Lady Jane, Manicare, Swispers which are all category leaders in the beauty accessories segment. Dr. LeWinn’s, a skincare line featuring an Inner Beauty range with vegan collagen products, and A’kin, which offers botanical-based hair and skin care solutions. McPherson’s is focused on natural and wellness-oriented products, catering to consumer trends in these areas. Their multi-brand strategy and involvement in various consumer product categories provides a diversified business model, offering resilience over time in a more difficult trading environment.
McPherson’s is susceptible to consumer discretionary spending but we believe the health and beauty category is generally more defensive than other discretionary retailers operating within the same demographic of clientele.
Financial Performance
McPherson’s reported its H1 FY24 results in February which reflected a significant transformation in the company’s business model.
Despite an 8% decrease in revenue to $103.4 million, the company achieved a notable improvement in gross margin, increasing from 47.5% to 51.1%. This margin expansion was primarily driven by the strategic shift towards higher-margin core brands and a reduction in input costs. The focus on cost management and efficiency led to a net profit after tax (NPAT) of $1.6 million, a significant improvement on the NPAT of $0.1 million in 1H23.
The company’s net debt position improved significantly, with net debt excluding lease liabilities decreasing by $5.9 million to $4 million.
Cash generation was also strong with $9.1 million in operating cash flows before interest and tax to 31 December 2023. An impressive transformation from the operating cash outflow of $6 million in the previous corresponding period. McPherson’s declared a 2 cent dividend and if maintained equates to an attractive 10% dividend yield.
The company’s improved financial position and enhanced profitability metrics indicate a more resilient and focused business model, positioning it well for future growth.
Divestment of Multix
McPherson’s recently completed the sale of its ‘Multix’ brand and inventory to International Consolidated Business Group Pty Ltd for $19 million, subject to post-completion adjustments.
The divestment follows a strategic review announced in November 2023, aligning with McPherson’s focus on its core health, wellness, and beauty brands. As a result of the sale, the company expects to incur a one-off, non-cash asset write-down of $10-11 million in FY24 related to the ‘Multix’ brand and allocated goodwill, with pre-tax divestment costs estimated at $1.5 million. CEO Brett Charlton emphasised that this move strengthens the company’s balance sheet and reshapes the business for its future as a pure-play health, wellness, and beauty company. The sale is part of McPherson’s broader transformation plan, which includes reviewing its route to market for its remaining brand portfolio.
We believe that this cash could lead to either potential merger and acquisition opportunities or be returned to shareholders.
Chemist Warehouse Influence
The company established a strategic alliance with Chemist Warehouse in March 2022 whereby McPherson’s was appointed as Chemist Warehouse’s exclusive long-term distributor of a select portfolio of Chemist Warehouse-owned or controlled health and beauty brands outside of the Chemist Warehouse Network in Australia and New Zealand.
At the time of the announcement, the exclusive distribution rights will be for an initial term of five years commencing on 1 July 2022. McPherson’s will have three five-year options to extend the arrangements, subject to certain minimum performance thresholds on a brand-by-brand basis.
A key part of the alliance was the issue of shares to Chemist Warehouse. Chemist Warehouse remains a significant shareholder in the business, owning just under 10% of the company.
A Potential Target
Following the divestment of Multix we see significant value in McPherson’s and believe it could be a takeover target now that it becomes a pure play brand owner of health and beauty brands.
With forecast future sales of $160 million and earnings before interest and tax (EBIT) margins of 7-10% over time, that equates to potential Ebit of around $11 million on an underlying basis in FY25/26, which places the company at an attractive enterprise value to EBIT of around 3.5 times. This attractive valuation could encourage bidders to re-emerge following previous bids in 2021. Just over 3 years ago Arrotex Australia lodged a $1.60 non-binding, indicative proposal for the company, valuing the business at about $205 million. This bid followed on from a rival bid of $172 million from Geminder. The Arrotex bid ultimately collapsed following a four-week period of due diligence.
With a current market capitalisation of just under $60 million and an improving and focussed business model could we see an opportunistic return bid or perhaps a new interest?
The TAMIM Takeaway
The recent downturn in McPherson’s share price presents an intriguing opportunity for long-term investors and potential acquirers alike.
Despite a slight revenue drop in H1 FY24, the company’s strategic pivot has driven a notable improvement in the financial position of the business. McPherson’s divestment of the Multix brand, coupled with a strengthened balance sheet and its strategic alliance with Chemist Warehouse, enhances its focus on health, wellness, and beauty. With a compelling valuation, we believe McPherson’s is an attractive prospect.
The company’s transformation and current valuation make it an appealing takeover target amid rising merger and acquisition activity in the market.
Disclaimer:Mcpherson’s Ltd (ASX: MCP) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
Often the market will present an opportunity where a high quality company’s true value isn’t reflected in its share price.
“In the short run, the market is a voting machine, but in the long run it is a weighing machine”.
A famous quote from Benjamin Graham. The quote highlights that in the short term, market prices fluctuate due to investor emotions and external events, creating potential mispricings. Over time, however, the true value of a company, based on its financial health and performance, becomes apparent. Thus, despite short-term volatility, long-term investors benefit by focusing on intrinsic value.
Another take from legendary investor Peter Lynch on market valuation:
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Lynch considered that many market participants focus solely on stock prices without understanding the underlying business’s true worth. Individuals react to market trends and price movements rather than analysing a company’s fundamentals. Consequently, they miss the real value and potential of the investments, leading to misinformed decisions based on superficial metrics.
We’ve written about Close the Loop Group (ASX: CLG) here, we feel that this could be the best risk reward investment on the ASX.
The Business
As a refresher, Close the Loop Group (CLG) is a sustainability solutions company operating in the circular economy space.
It has two main divisions: Packaging (30% of revenue) and Resource Recovery (70%). The company specialises in manufacturing reusable packaging products, collecting and recycling printer cartridges, and repurposing electrical items such as notebooks, printers, gaming consoles etc for Original Equipment Manufacturers (OEM’s) like HP (NYSE: HPQ). CLG operates globally, with a presence in Australia, the US, Europe, and South Africa.
CLG has continued to make significant strides globally, particularly in the US market. Having acquired ISP Tek Services in 2023, CLG has strengthened its position in the electronics repurposing sector. This acquisition is seen as a key growth driver for the group, offering opportunities to expand work with major OEMs and other manufacturers in the future. CLG continues to explore new opportunities across the US, EU, and Middle East, with plans to establish a new IT refurbishment facility in Mexicali, Mexico, by October 2024.
The company has broadened its product range beyond its original focus on ink and toner cartridges. The company has developed innovative products such as TonerPlas® (an asphalt additive) and rFlex (a plastic resin made from post-consumer soft plastic). These new offerings have opened up additional revenue streams and market opportunities in the sustainable materials sector.
Why Close the Loop is Attractive?
There is an enormous opportunity in the global waste reduction market.
CLG has established a significant number of relationships with the largest OEMs for printer cartridge collection and recycling (300,000 global collection points). In the electronics space, CLG’s subsidiary ISP Tek is a valued partner for HP’s Renew business, which aims to minimise waste while generating commercial returns. Renew Solutions, established by HP in 2023, sells refurbished computers and printers through select partners. In April 2024, HP expanded its Certified Refurbished PC program to the US, Australia, the UK, the UAE, and other regions. ISP is one of a few certified partners and holds an exclusive three-year contract for North America.
This positions CLG to benefit from the increasing focus on sustainability and circular economy principles. For example, HP alone sells over 40 million notebooks pa whilst currently CLG only refurbishes less than 500k pa. We believe there’s a huge opportunity to expand their share and double the revenue from this division by expanding into 1, 2 and 3 year old products under warranty.
So far CLG has demonstrated impressive financial results and growth prospects whilst under promising and over delivering.
The company almost doubled revenue and net profit after tax (NPAT) in FY23. In addition, CLG at the 1H FY24 result has upgraded FY24 revenue to over $200 million, operating earnings of $44-46 million and NPATA of $26 million, reflecting continued growth. The continued synergies developed from recent acquisitions and further organic growth gives us confidence that further revenue growth and operating earnings expansion is achievable in the upcoming financial years.
Often companies that fall under the sustainability theme receive a ‘green premium’ and can often still be traded on potential while building a revenue base and operating at a loss.
CLG is a profitable business and generates healthy operating and net free cash flow. We expect this to continue in the coming years. While the company does have an expensive debt structure following its acquisitions we are hopeful it will be able to refinance this debt in the future on more favourable terms which could add $2 million to the profit line. From a net debt perspective, CLG net debt at the half was only $24 million or 0.5x Ebitda. We estimate a net cash positionwithin 6-9 months as the company generates strong cashflows.
From a valuation standpoint we believe CLG is significantly undervalued.
On the forecast 2024 full year results the company will generate 4.9 cents in Cash EPS versus a share price of 32 cents. CLG trades on a PE multiple of 7x and EV/Ebitda of only 4x. On this multiple we believe the market does not fully appreciate CLG’s potential. Given the recent revenue growth and market potential we feel this is extremely low. Recent M&A in the sector was completed on 10x Ebitda (TES 2022).
Once the markets begin to appreciate CLG we feel there is an opportunity for multiple expansion and significant share price appreciation. Management’s aspirational target is $500 million of revenues in 2-3 years with current Ebitda margins of 20%+ this could potentially yield $100 million of Ebitda at that point. This will require good execution by the board and management, who combined, own 45% of the company and hence are completely aligned and incentivised to create shareholder value.
The TAMIM Takeaway
In our opinion CLG’s depressed valuation and a lack of understanding by investors about the business and opportunity represents the best risk reward investment currently on the ASX.
The company’s growth trajectory, impressive financial performance, and tailwinds of the circular economy sector makes it an attractive investment. As the market increasingly values sustainability and circular economy principles, CLG is well-placed to benefit from this trend. Should the strategic acquisitions continue to provide synergies we expect continued earnings growth providing even more value at the current share price. The company’s innovative products and expanding global footprint, underscore its potential for continued success.
Investors seeking a high-quality, undervalued company with significant growth potential should consider CLG a promising candidate.
Disclaimer:Close the Loop Group (ASX: CLG) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
Finding unique opportunities in Japan is a thematic we have been enthusiastic about consistently over the years. Japanese balance sheets have historically been less than optimal, with many companies holding excessive cash reserves instead of returning capital to shareholders. However, we anticipate a shift in this trend, making the market increasingly attractive. Japan’s reputation for high-quality hardware production is evolving as companies invest more in digital transformation and artificial intelligence (AI). Despite its lag in software development, Japan is now embracing the digital economy, spurred by government incentives and a strategic pivot towards balanced growth in hardware and software. This change, coupled with favourable valuations and a stable economic environment, underscores the significant investment potential within the Japanese market.
Japan and the Digital Economy
Japan has long been renowned for its exceptional production of high-quality hardware, establishing itself as a global leader in sectors such as consumer electronics, automotive manufacturing, and precision machinery. Household names like Sony Group Corporation (TYO: 6758), renowned for its cutting-edge electronics and entertainment systems; Toyota Motor Corporation (TYO: 7203), a pioneer in automotive innovation and hybrid technology; and Canon Inc (TYO: 7751), a leader in imaging and optical products, epitomise Japan’s engineering prowess. This expertise in hardware has been underpinned by a meticulous approach to engineering and a culture of relentless pursuit of perfection. However, despite these strengths, Japan’s digital economy has struggled with the integration and development of quality software. This lag is partly due to historical focus and investments predominantly channelled towards hardware innovation, coupled with a conservative corporate culture that has been slower to embrace agile software development methodologies and disruptive technologies. There are signs that this dynamic is beginning to shift, presenting new investment opportunities. With increasing recognition of the importance of software in driving future growth, Japanese companies are now investing more heavily in digital transformation initiatives and software development. The government is also actively promoting the digitisation of industries through policies and incentives designed to spur innovation. This pivot towards a more balanced emphasis on both hardware and software is expected to yield significant advancements in the digital economy.
The Japanese Market
In our view the Japanese share market generally remains attractive. Valuations in Japan appear cheaper when compared to the United States, with lower price-to-earnings ratios signalling a potential for value investment. Business conditions are favourable, buoyed by strong industrial output and a stable economic environment. Furthermore, corporate earnings revisions in Japan have generally been on an upward trajectory, reflecting improving profitability and operational efficiencies among Japanese company’s. Notably, revenue per share of Japanese companies is growing nicely and has recovered compared to previous years. As an investor, you are buying into a market with substantial change, which remains quite cheap and attractive. The Japanese market had a great year last year and a strong first quarter before a recent pullback, suggesting there could be a significant opportunity here.
The Opportunity
As a result of the recent pull back, the TAMIM Global High Conviction team has revisited a number of Japanese businesses. One of these investments is Advantest Corporation (TSE:6857). Advantest stands out as an attractive investment opportunity within Japan, particularly for those seeking exposure to the “picks and shovels” play in the burgeoning fields of AI and semiconductors. Advantest has established itself as a global leader in semiconductor and component test systems, manufacturing automatic test and measurement equipment used in the design and production of semiconductors for applications including 5G communications, the Internet of Things (IoT), autonomous vehicles, high-performance computing (HPC), including AI and machine learning, and more. The company’s comprehensive product portfolio includes SoC test systems, memory test systems, and system-level test solutions, which are critical for the development and production of advanced semiconductor devices. Advantest’s strategic positioning in the semiconductor industry is further bolstered by its commitment to innovation and technological advancement. The recent launch of the DC Scale XHC32 power supply, designed to meet the rising power requirements for AI and HPC devices, exemplifies its forward-thinking approach. Additionally, the company’s global footprint, with operations across the Americas, Asia, and Europe, ensures a broad market reach and diversified revenue streams Over the long term Advantest has performed very well with a strong return for shareholders. The recent share price pullback is one we see as an opportunity to capitalise upon.
The TAMIM Takeaway
We continue to believe that the Japanese market offers a unique and compelling investment. As the country continues to bridge the gap in its digital economy, the integration of superior software capabilities with its world-class hardware production could unlock significant growth potential, making it a market to watch closely for both traditional and software-focused investments. We continue to believe that now is an opportune time to consider investing in Japan, leveraging the anticipated corporate reforms and technological advancements that promise to drive long-term profitability and growth. ____________________________________________________________________________________________________________________________ Disclaimer:Canon Inc (TYO: 7751) and Advantest Corporation (TSE: 6857) are currently held in TAMIM Portfolios.
Japan’s reputation for high-quality hardware production is evolving as companies invest more in digital transformation and artificial intelligence (AI). Despite its lag in software development, Japan is now embracing the digital economy, spurred by government incentives and a strategic pivot towards balanced growth in hardware and software. This change, coupled with favourable valuations and a stable economic environment, underscores the significant investment potential within the Japanese market.
Notably, revenue per share of Japanese companies is growing nicely and has recovered compared to previous years. 
As an investor, you are buying into a market with substantial change, which remains quite cheap and attractive. The Japanese market had a great year last year and a strong first quarter before a recent pullback, suggesting there could be a significant opportunity here.