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Some shares on my shopping list

December 3, 2022

In case you hadn’t guessed it before the main person for whom I write Quentinvest is me. I’m the guy I most want to help make a fortune in the stock market but obviously I would be thrilled to have all you guys come along for the ride.

It may be premature but I am starting to get a little bit pumped about this stock market and I am in there buying stocks and injecting cash into my account.

I don’t actually buy shares, I bet on share prices going up. This sounds very different but as far as I am concerned it is exactly the same thing. When I bet on a share going up I feel like an owner of the shares. I will participate in anything that happens to shareholders from dividends to share splits. The differences are four. The good news is no stamp duty to pay, I can buy up to five times as many shares as I pay for and there is no tax to pay on any gains, nothing, nada, zilch. If I make a million I keep a million. The bad news, but acceptable as far as I am concerned, is that I pay interest on my entire position, which will be a bit more these days.

There is even a way around that which I will investigate for future reference. I am told that the best way to make a spread bet is not to make what IG calls a DFB, a daily funded bet, where the interest is payable but buy the longest dated bet (nine months), which is funded by the spread between the bid and offered price and then roll it over when it comes to expiry.

The actual mechanics of spread betting can be a little hard to get your head around. Take Apple as an example, which is not a stock I hold. I am waiting for a buy signal. You need to create a spread betting account to start for which you need to be an IG client and for that you need to show that you can do basic maths and have a reasonable understanding of how the market works. I have just done this for my daughter and scored 100pc so it can’t be that hard.

Imagine you are in your spread betting account and you search for Apple. This is a stock which trades 24 hours a day (all sessions) and was priced 14821 sell and 14840 buy which is the dollar price around $148 expressed in cents. You are offered the option to sell or buy. Click buy. The minimum size of bet is expressed as 0.13 per point (i.e. you make 13 cents, $0.13 for every point/ cent the price rises). The easiest way to understand this is to multiply 0.13 by 100, which gives you 13. So the minimum bet is equivalent to holding 13 Apple shares which are presently worth around $1,924. On five times leverage you need to put a fifth of that into your account which is $385 or around £314. Obviously you can buy more. The sky is the limit.

This times 100 formula works for everything so 0.2 per point is like holding 20 shares, 1.0 per point is like 100 shares and 100 per point would be like 10,000 shares so a massive bet. No you need to click to decide in which currency you make your bet. The default is £ but I switch to $ for US shares.

If Apple is the only share you have and you are fully leveraged if the shares drop at all you will get a margin call which may seem alarming but isn’t. The way the rules work is that as long as your equity is more than 50pc of your margin requirement you can hold the position. If it drops below that IG will sell you out. You have a guarantee that whatever happens you can never lose more than you put in. I will discuss tactics for margin accounts in future issues.

Note that everything I suggest can be done without margin in a share account. Choose what works for you but if you go the margin route I urge you to start small. It’s gambling but really sensible gambling. The aim is to win.

I feel more positive about the market because I am expecting my Coppock indicators to start turning higher from December onwards and because shares all over the place look to be making base patterns and/ or breaking higher.

Some groups of shares which look especially interesting just now are selected Chinese technology shares, my favourites are BiliBili, Futu Holdings, Pinduoduo and UP Fintech Holdings, UK quality growth about which I shall write below and US financial technology, especially stock market related technology, also featured below.

I am starting to make purchases in these areas so I have already bought shares like the four Chinese stocks, Ashtead Group and Nasdaq Inc. Another one I have written about recently which I am probably going to buy shortly is Moderna Inc., the vaccines and mRNA business.

Netflix is not in one of these categories, it is a FAANG stock, but it has a good chart and a massive ‘something new’ with the November launch of partially ad-funded lower priced subscriptions. Previous ‘something news’ with Netflix have led to multiple share price appreciation. I have just bought some Netflix.

Netflix looks good

People often say that management is important and I believe that to be true. It is not for nothing that Netflix has been one of the success stories of the millennium. It is managed by very clever people. There is an argument for saying that everybody who works at Netflix is super clever because they all get to do the clever stuff. They don’t make anything. They commission programmes, improve the technology, market the product and make sure their 223m customers around the world have a great experience and they do. Netflix is unbelievable value for money. I don’t even know what it costs but for say a tenner a month you get a tsunami of amazing content (it turns out the Lumsden family pay £15.99 for a premium subscription which means five of us can watch different programmes at the same time).

The shares have had a big fall. Even the guys at Netflix can’t hit the ball out of the park every single quarter but are they ex-growth; no way.

In November they launched a lower priced ad-supported service in 12 countries. I guess they are testing the water but I am sure they will hit the right formula and it will be a huge success. I don’t think it will cannibalise what they already have. Who wants ads unless you are strapped for cash but I am sure there is a big market of people who are strapped for cash (I know we all are up to a point but people for whom a Netflix subscription is a deal breaker) and there is massive demand from advertisers for good ways to reach a large audience with ads so this new business could become huge.

They have also moved into gaming, which is likely to make subscriptions even better value and stickier.

Beyond TV and movies, we’re coming up on the one year anniversary of our gaming launch. As we’ve said, this will be a multi-year journey for us to learn how to please game players. Our first year was about establishing our gaming infrastructure and understanding how our members interact with games. We now have 35 games in service (all included in every Netflix subscription without in-game ads or in-app purchases) and we’re seeing some encouraging signs of gameplay leading to higher retention.

With 55 more games in development, including more games based on Netflix IP, we’re focused in the next few years on creating hit games that will take our game initiative to the next level. More generally, we see a big opportunity around content that crosses between TV or film and games. For example, after the launch of the anime Cyberpunk: Edgerunners (49 million hours viewed) in Q3 use of CD Projekt’s game surged on PCs.

Q3, 2022, letter to shareholders, 18 October 2022

Netflix is a strong competitor.

  • Our competitors [Amazon, Disney, Hulu] are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix’s $5 to $6 billion annual operating profit.
  • After a challenging first half, we believe we’re on a path to reaccelerate growth. The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.
  • In the 190 countries in which we operate, our $30bn-plus of annual revenue is roughly 5pc of the combined estimated ~$300bn pay TV/streaming industry, ~$180bn branded advertising market, and $130bn consumers spend annually on gaming. So, we believe that we have a long runway for growth if we can continue to improve our offering steadily over time.
  • Our aim remains to be the first choice in entertainment, and to continue to build an amazingly successful and profitable business.

They have a plan.

Over the medium term, we believe we can adjust our pricing and cost structure for a stronger US dollar world. Our long term goal remains unchanged – to sustain double digit revenue growth, increase operating profit even faster (as we expand margins) and deliver growing positive free cash flow.

The chart looks good with even the Coppock indicator turning higher. There is certainly no chart reason not to buy the shares.

Ashtead sees strong demand

This is another great chart, which looks similar to the Netflix chart. Shares don’t go up all the time but like Netflix, Ashtead seems to be a business that grows all the time and as well as reporting great results they are seeing strong demand.

“The Group has made a strong start to the financial year across all geographies with rental revenue up 26pc at constant currency. Our end markets remain strong and we continue to execute well across all actionable components of our strategic growth plan, Sunbelt 3.0. In the quarter, we invested $699m in capital across existing locations and greenfields and $337m on 12 bolt-on acquisitions, adding a combined 33 locations in North America. This significant investment is enabling us to take advantage of the substantial structural growth opportunities that we see for the business as we deliver our strategic priorities to grow our general tool and specialty businesses and advance our clusters. We are achieving all this while maintaining a strong and flexible balance sheet with leverage near the bottom of our target range.

Q1 ended 31 July 2022, 6 September 2022

Ashtead is in the FTSE 100, which has an interesting chart but the chart above is of a 2 times leveraged ETF tracking the FTSE 250. It has just given a golden cross buy signal. The Coppock is negative but looks ready to turn higher. On this basis Ashtead scores 4/9 and an adventurous investor could consider having a nibble at 2MCL.

In future issues I shall talk about other UK growth shares that I like as and when they give buy signals.

US stock market technology is looking interesting

My favourite in this sector is Nasdaq Inc, which I have already written about and indeed bought a few. But there are plenty that look interesting including MSCI. The chart looks positive and the Coppock indicator, at around minus 40, is the lowest it has ever been.

If you were looking at the latest quarterly results in isolation you would have no idea that the shares had just suffered a substantial fall in value.

In the third quarter, MSCI delivered another strong performance despite significant turmoil and dislocation in financial and commodity markets around the world. We posted organic recurring subscription run rate growth at over 14pc and adjusted EPS growth of 12.6pc.

We achieved our best third quarter ever of net new recurring subscription sales growing at 26pc. In addition, our retention rate was 96.4pc up by 188 basis points from a year earlier. In terms of capital management, we repurchased another $225m worth of MSCI shares through October 24. For the year as a whole, our total share repurchases now stand at approximately $1.3bn.

Q3 2022, 25 October 2022

The business is doing well because it is developing products to meet demand.

We also posted subscription run rate growth excluding foreign exchange of 97pc in climate and 35pc in ESG [environmental, social and governance] ex-climate. All of these numbers illustrate how MSCI is capturing key market trends. As the indexation trend continues beyond market capitalization indices, we are meeting investor demand for tools to support more customized and personalized portfolio construction and highly specialized outcomes. Likewise, as global economic pressures accumulate, we have provided the risk analytical tools investors need to stay ahead of the turmoil.

All of these will help us emerge even stronger when the current market turmoil subsides

Q3 2022, 25 October 2022

Strategy

Slowly but surely I am starting to reengage with the stock market. I have just updated my benchmarks list and it is looking the most positive it has for ages. This may be an arrogant thing to say and I could end up with serious egg on my face but hopefully I am part of the early warning system on the stock market.

I am a close observer of stock market trends and an active participant in the market. I guess there are many like me and that is what is helping this stock market to move higher. For the first time in a year we are starting to recommit money to a market where the selling may finally have exhausted itself. As a result prices are starting to move higher and this makes the charts look more positive which draws in more money.

It may be too early for much to have changed on the fundamental front but what could easily change is perceptions of those same fundamentals. A shift from a glass half empty to a glass half full approach changes everything.

We know that because look at what has just happened. Share prices have collapsed but in many cases with little accompanying change in the fundamentals, especially the more long term ones. A short term setback does not mean that the business model no longer works or that the future opportunity has been compromised in any way.

It was a case of what goes up can come down. Maybe it is now a case of what came down can go up.

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