A reader's comments on problems at Nike; Starbucks' many challenges; What you get by investing in Berkshire Hathaway; Interesting factoid on volatility; 'Buried treasure' in Wall Street's 'trash'
1) I love getting feedback from my readers – folks often provide information I didn't know or insights I hadn't considered.
Here's a great example from Ron B., in response to my two e-mails about Nike (NKE) on August 9 and August 12. He writes:
Completely agree with your comments. We own a successful children's boutique clothing store front in Oxford, Michigan that specializes in higher quality and cool unique clothing and shoes for kids. It is difficult to carry certain brands. Nike and Adidas won't even talk to us, much less entertain minimum buy discussions, etc.
What is interesting is, in Nike's case they have consciously exited their own long-time retail partners to focus on direct channels such as online sales and their own Nike storefronts, which are typically located in large urban downtown shopping areas. There are now zero Nike retailers in a 15-mile radius from our store, if you exclude outlets.
Ron said that he recently visited New York City and observed:
Recently I was in the Nike store in Manhattan, where my Gen Z "adult" daughters left underwhelmed and empty-handed. They walked in the store with the intent of purchasing something, but it didn't happen. Oddly, anyone can walk into Kohl's or other discount stores and find Nike branded shoes that are of lower quality for discount prices, which I find amazingly confusing from a brand strategy perspective.
Further, it's difficult to buy shoes online without risking size or comfort issues and even more so where kids are concerned. I personally have a Nike account and have in the past designed and purchased shoes for myself for a small extra fee, but recently the product offering has not been compelling enough for me to make a purchase.
Regarding the clothing trend toward business casual/dress sports, Ron writes:
I have a pair of special order Converse (owned by Nike) Chuck Taylor slip-ons that I don't wear much because they are too tight. Meanwhile brand's like Wolf & Sheppard, lululemon, Kenneth Cole, and newcomer Viore are eating Nike's lunch in the business casual / dress sports shoe and clothing space. How did the arguably best-known athletic clothing company on the planet miss this opportunity?
Ron summarizes Nike's mistakes:
Limited product offering and inventory in high-rent Nike storefronts + reduced traffic at conventional retailers + ignoring boutique retailers in small town main street + uncompelling product on painfully annoying app + cheaper product offering in discount stores + failure to capitalize on consumer trends + the death of the shopping mall = TROUBLE. It's as if Nike aspires to be Louis Vuitton but without the product, long rich history, or strategy.
Referring to activist Bill Ackman of hedge fund Pershing Square – who recently disclosed a stake in Nike – Ron concludes:
Hopefully Mr Ackman's influence can drive new leadership to get Nike back to basics, fix the go-to-market strategy, and right the ship. Harvard Business School case – forthcoming.
Thank you, Ron!
I agree with his observations and repeat my conclusion from my August 12 e-mail:
... as long as the guy responsible for Nike's woes – CEO [John] Donahoe – is still in charge, I have little confidence that he'll be able to admit his mistakes and fix them. I would want to see a change in leadership – or at least clear evidence that current leadership is on the right track to fix issues.
2) Following up on another household-name stock that has fallen out of favor...
Regarding Starbucks (SBUX), which I wrote about last week, the Wall Street Journal recently published an insightful look at the many challenges the company faces: What's Wrong With Starbucks? Excerpt:
There are at least 170,000 different ways to customize a Starbucks drink. The world's biggest coffee chain may have almost as many challenges.
The coffee? Often feels expensive. Cafes get jammed during the morning rush. The app may tell you it's a seven-minute wait for your order, which stretches into 15 or 20. There are plenty of other coffee options – especially in China, which Starbucks has targeted as a key growth market. And the brand often manages to become a culture-war punching bag.
Incoming Chief Executive Brian Niccol was hired this week to help fix all this, and tamp down a Wall Street rebellion as the company's stock sagged and activist investors swooped in. He brings restaurant chops that his predecessor, Laxman Narasimhan, didn't have, and industry adoration for his success turning around Chipotle Mexican Grill.
As the article continues, Starbucks faces unique challenges... but some are out of Niccol's control:
Rising prices from the grocery store to the gas pump have customers pulling back from restaurants and other discretionary spending – is that White Chocolate Macadamia Cream Cold Brew a want or a need? Chains are pitching deals to keep consumers coming, though many say their patience is waning for spotty service and ever-present tip prompts.
I'll repeat my conclusion from last week's e-mail:
Starbucks could be a very profitable investment... but I would want to hear Niccol's plans and see him on the path to executing them before putting my money to work.
3) This article from last week does a nice job of breaking down the buckets of value at Berkshire Hathaway (BRK-B), now that CEO Warren Buffett sold down his massive position in Apple (AAPL): So you invested in Berkshire Hathaway: What did you buy? Here's a graphic from the article and an excerpt:
Well, for starters, Berkshire now has more cash than ever, some $277 billion worth at the end of Q2. Taking that at face value (assuming no holding company discounts), that's roughly 30% of the company's market value. So $292 of our $1,000 hypothetical investment in our example is just cash.
Next up is the company's stock portfolio. An updated 13F filing from Wednesday reveals that – again assuming no conglomerate discount – it's worth about $317 out of our $1,000. That implies that the rest of the business, primarily Berkshire's actual operating divisions, is worth the remainder, or some $391 in our example.
So if you're buying Berkshire you're getting exposure to: a bunch of iconic American stocks, some Japanese equities, cash, some railroads, insurance companies, and energy assets. Oh, and Dairy Queen and Duracell, which Berkshire also owns.
Berkshire's stock portfolio generates $4.9 billion in dividend income, and its $277 billion in cash, assuming it earns 4%, generates another $11.1 billion in annual interest income – a total of about $16 billion of nearly risk-free cash pouring into Omaha to be allocated by one of the world's top investors.
This is one of the many reasons why Berkshire continues to be one of my favorite large-cap stocks.
4) Here's an interesting factoid, courtesy of Creative Planning's Charlie Bilello in a recent post on X:
I expected to see such declines occurring as markets recovered from shocks like the global financial crisis and the COVID crash. But 12 of the previous 19 largest nine-day declines occurred in the bull market from 2014 to 2018, and not a single one was in 2009 to 2010... while only one was in 2020.
So, to my surprise, this has historically been a bull market phenomenon – which bodes well for this historical pattern repeating itself going forward.
5) A study discussed in a recent WSJ article underscores what I've long believed – that investors are doing exactly the wrong thing when they pile into the hottest stocks and eschew the least popular ones: Wall Street's Trash Contains Buried Treasure. Excerpt:
In a paper that starts out by stating that "no one enjoys getting dumped," two investing quants reveal some surprising, and potentially lucrative, traits of companies that have really let themselves go. With about half of the money invested in American stocks now sitting in index funds, and many active managers holding portfolios that resemble them – just try beating the market these days without "Magnificent 7" stocks such as Nvidia or Microsoft – index castoffs have a hard time meeting someone new.
That is when investors should pounce, says Rob Arnott, chairman of advisory firm Research Affiliates, with colleague Forrest Henslee. This week they are unveiling a stock index named NIXT that would have earned investors about 74 times their money since 1991 by buying stocks kicked out of indexes.
This is an astonishing chart from the article:
I don't recommend that individual investors try to buy all stocks after they're removed from an index... but that's certainly a good place to start looking for babies thrown out with the bathwater – good companies that are encountering temporary, fixable problems.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.