Chronicle of August 2024
Our Top Holdings
Instead of bashing Kamala Harris' economic policy (tempting as it is), this month's chronicle will focus on some of our largest portfolio positions. Our stock selections may not have the highest gain potential in the world, but we invest in them because we’re confident they can deliver solid returns with acceptable risk. In this article, we highlight 4 stock holdings in our Signature Equity strategy (click here to download latest factsheet).
Vistra (VST 0.00%↑)
Vistra Corp generates electricity from a diverse mix of gas, oil, coal, and renewables focuses on nuclear power. With over 40 GW of capacity, Vistra supplies electricity to 20 states, including Texas, which accounts for 46% of its demand. Additionally, PJM Interconnection, which manages electricity distribution across 13 states in the eastern U.S., contributes 33% of Vistra’s demand.
Operating extensively in Texas is advantageous for Vistra. Power companies in Texas benefit from the state's deregulated market, allowing them to sell electricity directly to consumers with greater price flexibility.
Vistra’s most promising growth story lies in the anticipated supply gap in both Texas (see below graph: ERCOT) and PJM, each expected to face a 40 GW shortfall over the next six years. This gap is driven by the rapid expansion of AI-powered data centers in these regions. AI data centers can require up to 10 times more electricity than traditional ones. For instance, according to the International Energy Agency, a single ChatGPT query consumes 2.9 watt-hours of electricity, compared to just 0.3 watt-hours for a Google search.
Another notable aspect of Vistra is its 2.4 GW of nuclear power generation in Texas, which is particularly well-suited for AI data centers. Nuclear energy is highly reliable and cost-effective, making it an attractive choice for data centers that require consistent and affordable power.
Furthermore, as a company in the utilities sector, Vistra is an under-the-radar beneficiary of the AI growth trend. This has kept it relatively insulated from the risk of being over-hyped. We believe Vistra's projected double-digit annual EBITDA growth over the next five years is underappreciated, especially given its attractive valuation of 15x P/E and 10x EV/EBITDA.
Broadcom (AVGO 0.00%↑)
Broadcom Inc is a well-established company with roots dating back to the 1960s when it was part of Hewlett-Packard. It has consistently proven itself as an adaptable enterprise, emerging as a key player during the mobile era and now strategically positioning itself in the AI era without directly competing in the GPU market.
Broadcom produces a wide range of products, including solutions for data centers, networking, broadband, storage, chips, and enterprise software (such as cybersecurity and IT infrastructure management). Simply put, Broadcom’s products are essential for the infrastructure that enables networks of computers to function.
As the AI era replaces the mobile era, Broadcom is well-prepared to serve as a crucial infrastructure provider for AI networks. For example, (NVDA 0.00%↑) NVIDIA's GPUs rely on switches to connect with other GPUs, and Broadcom manufactures these vital switches. In every data center where numerous GPUs are interconnected, Broadcom products are likely at work.
Broadcom is one of the key beneficiaries of the AI boom. However, due to its complex mix of products, it receives less attention than other AI chip players like NVIDIA or AMD.
Ferrari (RACE 0.00%↑)
Since our inception in 2016, Ferrari NV has been one of our earliest investments. We chose to invest in Ferrari based on the belief that its valuation trajectory would align more closely with luxury brands than traditional automobile manufacturers. Our thesis works very well. Our first buy call in February 2016 was $32, by end of August 2024 the stock price was $496.79, a 15.5x result in about 8.5 years excluding dividends!
Ferrari operates in the ultra-luxury segment, which means it is less likely to be adversely affected by economic crises or recessions. Its clientele primarily consists of ultra-wealthy collectors who are insulated from financial hardships.
Ferrari’s customer base is expanding faster than the company's production growth. The company has sold around 13,000 cars annually. Ferrari's growth has mainly been driven by increases in the selling price, a trend that is sustainable due to the growing number of ultra-high-net-worth individuals. According to Knight Frank’s The Wealth Report, the number of ultra-high-net-worth individuals reached 626,000 in 2023, up by 25,000 from 2022. As more individuals seek to showcase their success, the competition for acquiring a Ferrari intensifies.
On Holding (ONON 0.00%↑)
On Holding AG is a Switzerland-based shoemaker renowned for its ‘Cloud’ series. While it occupies a similar market space to Nike, On stands out with a slightly higher price point and a distinct difference in design. On’s shoes feature unique cushioning technology that delivers a light and bouncy feel, setting them apart from Nike's offerings.
On Holding is in growth mode. It recently penetrated Asian market and taking market share from other well established players. Last quarter, On Holding’s sales from Asia grew by 74% year-on-year. We’ve dubbed it ‘the next Nike’.
Cash and Equivalent: the dry powder
Our cash and equivalents currently account for nearly 30% of our portfolio, consisting of ultra-short-term Treasury ETF (SGOV 0.00%↑), gold ETF (GLDM 0.00%↑), and some cash. While classified under the 'cash and equivalents' category, these assets still provide us with a yield of over 4% and nice gains from gold. We are more than ready to deploy these cash & equivalents during the next market correction, if needed. At present, we don't see a large cash holding as detrimental to our outperformance. Here’s the evidence: by the end of August 2024, our Signature portfolio strategy delivered a 22.3% year-to-date return (net of fees), compared with 19.5% ytd return of the S&P 500.