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Analysis & Learning

The Importance of Magic, Innovation & Something New

January 25, 2024

The heart of QV is my 3G filter process. Stocks which are not great growth, great story and great chart don’t make the cut. Can we refine the process further by looking for other characteristics that make for great share price performance?

It gets a bit more subjective but three I find important are ‘something magic’, a focus on innovation (key for inclusion in the QV innovation portfolio) and ‘something new’.

Much of my thinking is obvious. The observation that if a company is not growing why should it become more valuable leads to the conclusion that such a company is wasting money as an investment. Immediately huge swathes of the investible universe are swept away.

A further implication is that if growth is good fast growth is better. This is more subtle because we want fast, sustainable growth. We could call such companies crown jewels and the search for them is a big part of what QV is about.

The magic bit comes from my old flirtation with zen back in my hippy, stoned man, days. In a famous book called Zen and the Art of Motor Cycle Maintenance, the author, Robert Pirsig, observed that no matter how detailed your instruction manual there is always something else you need to know, some screw that just won’t unscrew, some knack you need to fix the bike, which is hard to put down in a manual.

I came to suspect that shares/ companies are the same. You can read the annual report until you are blue in the face but there is always something indefinable, some hard-to-describe characteristic that makes one business a winner and another, which looks superficially much the same an also-ran.

Finding that magic, or perhaps just believing that it is there, is another part of my job on QV.

I imagine a portfolio of shares, all 3G, all in companies that have that magic, all spending heavily and fruitfully on innovation and ideally doing or having an important ‘something new’. This ‘something new’ will often be obvious (Netflix switching from DVDs to streaming), hence my dictum that investors should not fear the obvious, treasure doesn’t have to be hidden to be valuable.

Gen AI is a Gigantic ‘Something New’

Here is what the Harvard Business Review has to say about Generative AI.

Generative AI has truly taken the world by storm, revolutionising the way we communicate, work, and innovate. ChatGPT, with its 100m users, stands as a testament to the rapid adoption and widespread impact of this cutting-edge technology. Its stable diffusion and popularity on GitHub only reinforce its transformative potential. Even in its early stages, generative AI is already shaping the future across various domains, and its influence on our lives is set to grow exponentially. Embracing this powerful tech will open doors to unimaginable possibilities, ushering in a new era of creativity, efficiency, and progress.

Harvard Business Review

They are trying to sell a course so not going to pull their punches but even so ‘exponential growth’ and ‘unimaginable possibilities’ are heady stuff and like to translate into some dramatic stock market moves, which I believe are already underway.

Having said all that now for something completely different. United Rentals is an equipment rental company with a fabulous chart. The shares are approaching up 250 times since 2009 and the chart is just the kind of sizzling uptrend which I love. If every share you hold has a chart which looks like this you are doing something right.

You could say speciality equipment was a ‘something new’ for URI. It is certainly growing fast.

URI is a Class Act.

First and foremost, we remain focused on funding growth where we can generate attractive returns, both organically and through acquisitions. Beyond that, our goal is to allocate excess free cash flow to drive shareholder value and to this end, last night we announced several exciting things. First, consistent with the intentions we shared a year ago when we introduced our dividend, we are increasing our quarterly payment by 10pc to $1.63 per share, or $6.52 per share annualized. I’ll add that it remains our plan to consistently grow our dividend in line with long-term earnings. Second, we plan to repurchase $1.5bn of common stock in 2024, an increase of $500m versus what we bought in 2023. So, in total, we intend to return over $1.9bn to shareholders this year, equating to almost $30 per share, or a return of capital yield of over 5pc based on our current share price.

Lastly, and importantly, we are able to do this while also lowering our targeted full cycle leverage range by half turn to 1.5 to 2.5 times. As a reminder, this production follows the similar half turn reduction we announced in mid-2019. As most of you know, this is something we’ve been working towards with the idea of building an even stronger company and critically driving shareholder value. What’s more, this has all been achieved after fully funding growth. Just to provide some perspective, since 2019 when we introduced the first leg of our enhanced capital allocation strategy, our revenue has increased by more than 50pc, our EBITDA has increased closer to 60pc, and our earnings per share has grown more than 130pc, while at the same time averaged leverage ratio has declined from 2.6 times at the end of 2019 to 1.6 times at the end of 2023. This combination of results has supported strong shareholder value creation that our team is very proud of and remains focused on sustaining.

Matthew Flannery, CEO, United Rentals, Q4 2023, 25 January 2024

Strategy – Follow the Magic

The incredible success of the US economy is putting pressure on the European mixed economy/ stagnation model and going forward looks even worse for Europe (or even better for the US).

This chart of the Nasdaq Technology Sector index looks seriously WOW! It shows a new-high breakout after two and a half years of consolidation. The last such breakout came in 2013 and followed seven years of consolidation. That was followed by a nine-year bull market.

The consolidation is not so big this time but, if anything the fundamentals are even more exciting. An accelerating technological revolution seems to have reached a tipping point. My hunch is that we could be on the brink of a crazy tulip-mania bull market that is going to blow our socks off!

This message of a renewed tech blast-off is reinforced by the S&P 500 IT sector chart. This breakout is off and away. Should you chase this market higher? Yes, you should. Below is an ETF you should think about buying.

Share Recommendations

United Rentals. URI. Buy @ $648.5

iShares S&P 500 IT ETF. IUIT. Buy @ $26.63

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