Newsletter XV - 7 Sins of Investing, $IIPR, & Earnings Season

Week Recap

“Don’t waste your time always searching for those wasted years,
Face up; make your stand and realise you’re living in the golden years”

-Iron Maiden


Earnings Kicks Off in the Hourglass Portfolio

Spotify – SPOT 1.53%↑

  • MAUs: +26%

  • Premium Users: +16%

  • Total Revenues: +11%

  • Gross Margin: 26.4% (+166 bps)

Spotify came out swinging in their Q3 results, with across-the-board, above guidance results. Total user counts in both ad-supported and premium tiers grew at remarkable clips considering the size of the business, and gross margins ticked upwards as well.

This last point is especially great to see, as margins have always been one of the biggest question marks around Spotify’s business and haven’t shown much improvement over the last number of quarters.

TFI International – TFII 1.85%↑

  • Total Revenues: -14.8%

  • Operating Margins: 12.3% (-480 bps)

  • Diluted EPS: -43.4%

  • Announced approval from TSX to buyback ~7m shares

TFI’s business results have taken a bit of a hit over the last year as a result of a weaker economy and fewer shipments driving revenues down, as well as divestments that created tough comps for TFI. This quarter was no different, but shares have been remarkably resilient overall, only taking about a 3% hit after the recent quarter’s results.

Arista Networks – ANET 0.42%↑

  • Revenues: +28.3%

  • Gross Margins: 62.4% (+210 bps)

  • Diluted EPS: $1.72 (+52.2%)

  • Cash from Ops: +233.3%

Arista. Goddamn. Networks.

What a phenomenal company. Epic performance followed by epic performance, quarter after quarter. Arista is one of my highest conviction positions, and the company continues to grow into a larger and larger chunk of my portfolio – especially after a +20% post-earnings bump in the share price.

Schrodinger – SDGR 11.31%↑

  • Total revenues: +15.1%

  • Drug Discovery Revenue: +11%

  • Software Revenue: +17.2%

  • Gross Margins (software): 76% (+600 bps)

A solid bounce back for Schrodinger after a rough Q2 – nothing spectacular, but back into positive growth territory. Good to see the gross margins taking a step forward and continued solid growth on the software.

The real test on the Drug Discovery segment, however, will come in Q4, when results from Schrodinger’s MALT1 inhibitor, currently in Phase 1 trials, are announced. Q4 is also typically Schrodinger’s largest quarter, when the company’s customers usually sign annual or multi-year contracts.

Microsoft – MSFT 0.47%↑

  • Revenues: +13%

  • Diluted EPS: +27%

  • Cloud Revenue: +24%

  • Free Cash Flow: +22%

Same ol’ Microsoft, which continues to kill the game, particularly through their cloud platform. Not much to report here beyond business as usual for Microsoft, which seems poised to sustain really solid and frankly ridiculous growth, considering the size of this business.

Stem – STEM 2.39%↑

  • Revenue: +34%

  • Gross Margins: -9% (-2400 bps)

  • Adj. Gross Margins: 12% (-100 bps)

  • CARR: +43%

  • Contracted Backlog: +125%

  • Bookings: +203%

Stem reported after market close on Thursday and delivered some mixed results. The company had stellar growth in their KPIs, and record growth in bookings alongside >100% growth in contracted backlog shows that demand for projects is still very strong.

Where Stem’s stock will inevitably get punished a bit is on the gross margin decline – this is one of the key issues surrounding most renewable energy companies at the moment. Stem’s adjusted gross margin figures are a much more accurate tell on how margins are performing, as they exclude costs associated with warranties on the hardware they sell – nonetheless, a 1% decline is still not great to see.

Still, Stem’s business is on track to hit their guidance (or better) and are still trending towards being adjusted EBITDA positive for 2H ‘23 and FY24. It’s also great to see a reacceleration in bookings growth after two quarters of lowered demand. Overall fantastic results, but don’t be surprised if shares are getting hammered while you read this due to the gross margin hit.

Palantir – PLTR 5.68%↑

  • Revenues: +17%

  • Total Customer Count: +34%

  • Commercial Revenues: +23%

  • Commercial Customer Count: +37% (10x over 3 years)

  • EPS: $0.03 (+$0.09 YoY)

Palantir capped off Q3 in spectacular fashion. Palantir reported its fourth straight quarter of GAAP profitability alongside steady growth, expanding margins, and continued penetration into commercial markets, particularly in the U.S., with an accelerated +33% YoY growth.

Palantir has received a lot of flak from investors for its rich valuation, but the company continues to grow into its shoes with results like these – the commercial growth especially, as well as results from several major companies that adopted Palantir’s platforms, continue to vindicate the elevated prices. Shares are up nearly 15% after announcing earnings.

Weekly Watchlist Stock

Innovative Industrial Properties – IIPR 2.27%↑

The cannabis industry burned a lot of investors. But for investors that got in early on Innovative Industrial Properties, the downswing has hurt much less than it did for investors into companies like Canopy Growth – WEED 1.04%↑. Those lucky enough to get in pre-cannabis gold rush are sitting pretty on a nearly 27% CAGR over ~7 years with dividends included.

While many retailers got caught up in undifferentiated products and an inability to effectively brand themselves under government regulation, Innovative was unaffected by these problems – as a REIT focused exclusively on acquiring and managing commercially-licensed grow ops, Innovative is making money as long as cannabis is being grown.

It’s a sneaky picks and shovels play on an otherwise wholly unattractive industry, and the performance speaks for itself. Despite the stock getting caught up in the wider market craze of 2020-2021 and plummeting 70% from its peak, Innovative Industrial continues to chug along with almost 19% TTM revenue growth and a strong margin profile. The collapse in share price also means the company is paying a nearly 10% dividend yield, a fairly attractive proposition for dividend investors.

The last year has definitely seen a significant slowdown for them though – while still growing, EPS growth has fallen from 19% → 9%, EBITDA from 30% → 12.5%, and revenues from 34% → 18%. Margins remain strong and have sustained pretty impressive growth on a 3- to 5-year basis, but gross, operating, and EBITDA margins have all declined over the last twelve months.

There are some fairly attractive figures here overall, and the growth this business has seen since its IPO in 2017 is very appealing as well. The downturn over the last year can be explained fairly simply too, at least at a surface scratch – as the general weed craze dies down and consumers are pressured by the current macroeconomic environment, there is simply less money being spent on cannabis. Reduced demand and a trickier environment for smaller businesses mean that many retailers just don’t require or can’t afford the same levels of supply.

This ultimately works its way up the ladder to impact the commercial growers that are Innovative’s direct customers and subsequently Innovative itself. In short, Innovative is vulnerable to market cyclicality the same as most other companies – but considering they are still growing in the current environment, albeit at a slower pace, they clearly have some resiliency.

This is the beautiful part of a picks and shovels play – as long as enough people in enough places still need their evening doobie, weed will need to be grown. And as long as weed is being grown, Innovative will be making money. If investors are bullish on the cannabis industry in the long-term, I’d say this is one of the most attractive places to park some money in the sector and cash out on a 10% yield as the current market cycles through.

However, my one major concern is a dividend payout ratio sitting at a hefty 126%. This figure has been steadily decreasing over the last 5 years from ~150%, but it still adds a lot of risk to the business – a high payout ratio eliminates any cushion in the balance sheet, and if tough times continue it could come back to bite them in the butt. So, I’m cautiously adding Innovative Industrial Properties to my watchlist as an intriguing picks and shovels play on cannabis, but I’ll need to do some extra digging to figure out how vulnerable they are to getting screwed by the payout ratio.

Weekly Read

The Little Book That Still Beats the Market: Greenblatt, Joel, Tobias,  Andrew: 8601300286433: Books -

I could only do so many recommended reads before I squeezed this investing classic in. Joel Greenblatt, one of the legends/wizards of the financial world, published ‘The Little Book That Still Beats the Market’ in 2005.

In the Little Book, Greenblatt goes over his ‘Magic Formula’ to value investing, an approach that ranks companies based on their quality and holds a portfolio of the highest-ranking businesses for shorter periods of time – typically a year.

The strategies implemented in the book are designed to make investing simple, straightforward, and accessible to people from non-financial backgrounds that are still looking to outperform the market.

The Little Book has definitely raised some spirited debates, with lots of investors of the opinion that the book’s widespread success has made the Magic Formula harder to implement and succeed with now – that the top ranking companies in the system are so widely bought that valuations offer little upside potential.

Given that there are specific Magic Formula screeners now available online, I’d say there’s probably good odds that’s true; nonetheless, the book is a great look into a simple investing process from one of the investing greats. Even if the formula itself is a little over-prescribed at this point, there’s still lots of great insights to be found for investors interested in value investing or looking to incorporate value principles into their own processes.

Investor Spotlight

This week’s investor spotlight is a congratulatory one!

Sleep Well Investments

Deep dives into time-tested businesses with high reinvestment potential
By Trung Nguyen @SWIs

Trung at Sleep Well Investments recently hit 1000 subscribers on his publication, a huge achievement that I thought deserved a second shout out. In honour of this big milestone, I asked Trung about his journey as a writer and investor.

Trung started out as a hardcore value investor, even holding a value investors meetup in his hometown of London. He then turned to growth as the market of 2019-2021 got frothy, but both experiences taught him about who he wanted to be as an investor.

He started Sleep Well Investments to reflect his new investing style, and all the lessons he’d learned along the way – now, his portfolio reflects his values as a business owner rather than a shareholder, and as a long-term investor in high quality compounding machines. And now he’s sharing his insights and the product of his transformative investment journey with readers through the SWI newsletter.

On that note, Sleep Well Investments is also coming out with a new deep dive at the end of this week, so be sure to follow along on Trung’s journey to get access to his next article – they’re always succinct, incredibly informative looks at very high quality & overlooked businesses.

He also was just featured in a podcast talking about his investment journey as well – give it a listen if you’d like to hear more from Trung’s own mouth!

Investing Tidbit

7 Deadly Sins of Investing

This isn’t quite what they taught you at Bible camp, but that doesn’t make the 7 deadly sins of investing any less important. But instead of hell, these 7 deadly sins lead investors to a portfolio full of poor returns, bad decisions, and ultimately stress.

I often think about these 7 deadly sins; they serve as sort of a macro-level checklist for me, to help keep me grounded and ensure that none of my decisions are being made because I’m falling prey to the deadly sins – particularly when it comes to envy and the effects of social media.

Let’s look at the 7 sins as they relate to investing:

Greed – Failure to Monitor Risk

Risk is a part of every portfolio. Many great portfolios have had very decent sprinklings of risk – growth strategies in particular are often more oriented towards higher risk, with the expectation that over a longer investment horizon, this volatility will get smoothed out.

Chasing sky-high returns by overloading a portfolio with risky assets, however, is very rarely a method for success. Overconcentration in high-risk assets, failing to balance investments across different risk levels, or over-indulging in speculative stocks are ways that greed can keep investors from keeping a steady and objective view when it comes to their risk levels.

Pride – Overconfidence

Confidence is a very fine line to ride in investing. Investors need a certain amount of grounded confidence, especially in order to take contrarian views that can lead to fantastic returns. Many of the investing greats had the confidence to say when the market was wrong and bet the other way. And they won big.

However, the stock market is full of the investors you hear less about, who had too much confidence and bet it all. And they lost it all. Confidence is important, but overconfidence can ruin investors just as easily. Always incorporate risk potential and core investment strategies into decisions to keep from falling victim to overconfidence.

Wrath – Investing with Emotion

This sin extends beyond wrath to include all investing that’s done with emotions, rather than cold, hard fact. Investing and emotions just really weren’t meant to mix – enough said. Making panic sells, or rushed buy decisions because of excitement, or any other number of emotions can get in the way of a patient and consistent approach that is key to successful investing.

Envy – Comparisons & Social Media

It’s easy to scroll through fintwit and see people showing their YTD returns or their compounded annual returns. Investors may start to compare it to their own returns and wonder why they aren’t generating those. While it’s easy to get caught in this, it’s important not to.

There’s something to learn from nearly every investor, even if it’s just ‘how not to do things’. But that doesn’t mean investors need to hop in to the same stocks as some rando on X – they may have entirely different investment goals, risk tolerances, etc. If you have a system in place, stay true to it. Fall not to the path of envy & comparison.

Sloth – Neglecting Research

Research is an important part (perhaps the most important) of investing, particularly if investors are doing individual stock picking. Doing thorough and objective research into investment opportunities and investment strategies is probably one of the biggest favours investors can do for themselves, yet it is often neglected.

This neglect can lead investors down a path of rushed decisions, herd mentality, and emotional investment decisions. If investors avoid the path of sloth and make all their decisions based on grounded research, then both their portfolios and stress levels will thank them for it.

Gluttony – Focus on Yield

I feel like I see a lot of this when talking to other Canadian investors. There’s something about the landscape up here that makes investors, even young, growth-oriented investors, love their dividends. The same likely holds true with investors everywhere – and while dividends can be great and certainly should have a prominent role in investors portfolios as they near retirement, exclusively chasing yield can also be dangerous.

A 10% yield on a company may look attractive, but there is very often an underlying reason for the high-yield, such as a major drop in share price or an unsustainable payout ratio. Exclusively chasing high yields is gluttony, and a quick way to catch falling knives that will damage your portfolio in the long-term.

Lust – Get Rich Quick Mentality

Investing is really a game that rewards the patient and slow-moving. In contrast, it often bites investors that approach the markets with a get-rich-quick scheme in mind that will have them retired by 30.

The odds are very much against investors trying to get rich via trading, and very much with the investor that understands that the stock market is a slow game that will reward them over the long-haul. Lust for quick riches is a quick way to destroy wealth, rather than create it.

What’s New at Hourglass

Episode XV – First Look at InMode

This week’s podcast episode was a first look at InMode, a vertically integrated business designing, manufacturing, and selling medical devices for minimally invasive aesthetic procedures.

The Israeli-based company sells their radiofrequency devices to physicians and clinics across the world, where they help to generate greater revenues for clinics and better results for patients.

In the episode, I cover the problem that InMode is solving, the business model, some of the concern’s I have with the business, and then scratch the surface on Inmode’s balance sheet and valuation. Drop your thoughts on the episode in the comments for this newsletter or on the podcast!

Upcoming Deep Dive – dentalcorp

Dentalcorp is a Canadian firm rolling up a fragmented but cycle-resilient dental industry in Canada. The company currently trades at a significant discount to both its peers and its historical valuations as the market prices in risks associated with a leveraged balance sheet in a tougher macro-economic environment.

However, dentalcorp is still growing at impressive clips in a (relatively) massive potential growth market, generating steady cash flows, reinvesting back into long-term growth for the business, and actively de-leveraging to maintain a healthy risk profile. This is a company I own shares in and have been consistently adding to over the last year, so I’m excited to share my research into the company with you all.

Make sure to stay tuned for that research article coming out next Thursday (November 9th), and if you want it sent straight to your inbox, hit that subscribe button below!

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