Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
7investing advisors Matt Cochrane and Steve Symington chat with Avory Founder & CEO Sean Emory about "value" investing, economic moats, and several of his favorite investing ideas.
August 6, 2020 – By Simon Erickson
Value investors look to buy companies that present a wide margin of safety, the gap between a stock’s intrinsic value and the price it is currently selling for. Growth investors buy companies that they believe have the greatest potential to grow explosively in coming years, believing that the greatest companies will provide great returns even when starting from what look like wildly expensive valuations.
Who is right? Sean Emory believes it’s a false dichotomy, arguing that all investors are value investors. Emory says:
“I think we’re all value investors. Despite the different growth rates that are out there, we’re all trying to look for value that’s left within a business, right? So if they’re growing 50% year over year, we’re trying to follow that thesis and ensure that they’re growing directionally to fill in that valuation. Or it’s a company that’s not necessarily growing and they’re going through some sort of transformation that’s going to unlock the value.”
Sean Emory is the Founder and Chief Investment Officer of Avory and Co. Founded in 2016, the investment firm describes themselves as value investors at their core in search of quality companies, led by talented individuals, that offer long-term sustainable growth opportunities.
In an exclusive interview with 7investing, Emory describes the journey that led him to founding his own investment firm, explains why he is so open about sharing his research process on social media platforms, gives thoughts on how he thinks about portfolio allocation, and, of course, discusses some of his favorite stocks, including Capri Holdings (NYSE:CPRI), Nutanix (NASDAQ:NTNX), and Square (NYSE:SQ).
Oh, and he also gives us the name of the microcap stock that currently has him and his team very intrigued – but you’ll have to take the time to listen for that gem!
0:00 – Introduction
3:21 – Why Sean is so open with sharing information on Twitter and other online platforms.
5:05 – Why all investors are value investors at heart.
7:25 – How can investors look for companies that don’t have economic moats now but are building one for the future.
9:38 – Validating an investment thesis by looking in out-of-the-way and obscure places for information.
12:40 – Sean shares thoughts on portfolio allocation and diversification.
15:45 – Sean shares the microcap stock that has his attention!
19:45 – The market is confused about Nutanix, but Sean loves the company’s leadership, product, and industry.
26:35 – Square’s Cash App is exploding now, but there are also reasons to be excited about its seller business long-term.
32:20 – What will Square’s Cash App look like in the future?
33:50 – Who will win the future of finance: Big banks or fintech?
35:45 – Capri Holdings looks like an undervalued luxury group holding company that is more than capable to withstand the economic damage from the COVID-19 pandemic.
Steve Symington 00:00
Greetings fellow investors. I’m Steve Symington, a lead advisor at 7investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that’s freely available to everyone. Listeners, today I’m joined by my co-host and fellow lead advisor Matthew Cochrane to interview a special guest — one who should enlighten and inform. Matt, why don’t you introduce our guest?
Matt Cochrane 00:27
You’re absolutely right, Steve. Today we are joined by Sean Emory, the founder and Chief Investment Officer of Avory & Company, founded in 2016. The investment firm describes themselves as value investors at their core in search of quality companies led by talented individuals that offer long-term sustainable growth opportunities. If you’re on FinTwit you should definitely be following Sean. He shares out some of his research regularly. Sean, welcome to the show.
Sean Emory 00:55
Hey, guys, yeah, thanks for having me.
Matt Cochrane 00:58
Sean, why don’t you just start by introducing yourself to our audience and telling us the path you took to founding Avery, what got you interested in investing and led you to start your own firm?
Sean Emory 01:09
Right? Yeah, again, thanks for having me. I really enjoy some of the work you guys put out there. For me my career really started early on, I began paying attention to stocks in high school, we kind of just talked about high school before the show, and that took me all the way to university and I was able to actively participate and manage parts of the school’s endowment. We managed at that time, a highly concentrated portfolio of 10 equities, 10 credits, so that that kind of philosophy is still in my heart today. I then went to a hedge fund during that time, we focused on small cap equities, so throughout kind of university and the hedge fund, small caps were at the core of what I was doing. And it really gave me a sense of understanding companies at their formation. And understanding and triangulate kind of what a good company eventually would look like. And then from there, I came back to Miami, Florida where I was born and raised and worked at a family office, I was able to not only manage a high conviction equity portfolio, but also oversee a macro strategy that goes beyond our borders. And this was an also important lesson throughout my kind of upbringing, which gave me a sense of understanding of companies that weren’t necessarily US-based and some of the intelligence that we’re seeing that today in Israel, right where a lot of the tech companies are coming out of. So early on, I was able to touch some of those companies as well. I founded an app with my brother and another founder, where it was based on geolocation and friends and things like that. So consumer and tech are obvious areas of investment focus as well. And that ultimately allowed me I had always a passion in analytics and research and that skill bodes pretty well for starting a firm and at the heart of every investment firm, I always say is great research. So I set out to build an investment firm built on our own proprietary research and really run strategies based on high conviction. So that’s ultimately kind of the chain of events that led to Avory.
Matt Cochrane 03:21
Sean, you’re very open about sharing a lot of information on Twitter and LinkedIn, you have a podcast where you interview specialists in their fields and experts. That’s kind of like different though, than how a lot of active investing firms approach it. Why are you so open in your communication, and so openly share some of your research.
Sean Emory 03:51
Yeah. So the real reason, honestly, is to put a lot of that research out there and to eventually get checked, right? In the sense of you put something out there on a thesis, and we don’t necessarily say we own or buy or sell anything, because obviously compliance-related issues. But you can probably get a good sense of where our, our mental state is at in terms of business. And generally speaking, I think the Twitterverse and some other parts of the internet are pretty good roundtable of interesting minds trying to, honestly we’re all on the same page together in terms of finding the best ideas and the best research and uncovering new things. So I think 10 years ago, this didn’t exist. Today it does. And taking advantage of that, I think is just important. So we do the work and why not share the work. And then commercially, honestly, it can be a driver of people learning more about Avory. So there’s two aspects to it. But again, they both are kind of a flywheel together, if you will.
Steve Symington 04:58
FinTwit keeps you honest, if anything.
Sean Emory 05:02
They definitely do.
Steve Symington 05:03
That’s hard. Sean, I can’t wait to dive deeper maybe into some of the companies that you hold in your portfolio, but just knowing some of the companies you hold and follow, I can’t help but notice, it’s an interesting mix of how most people would qualify them as value and growth. So how would you describe your investing style, and what do you look for before making an investment?
Sean Emory 05:25
Yeah, no, I think what you’re seeing is our belief that we are value investors at our heart. But the main concept is, I think we’re all value investors. And despite the different growth rates that are out there, we’re all trying to look for value that’s left within a business, right? So if they’re growing 50% year over year, we’re trying to follow that thesis and ensure that they’re growing directionally, to fill in that valuation. Or it’s a company that’s not necessarily growing and they’re going through some sort of transformation in which that’s going to unlock the value. But at the core of it is there’s value there at the growth rate is a function of just the business. But when we’re looking for a company, honestly, we’re looking for something we understand, and we do the work to try to understand best, we tend to stay away from things we don’t understand. You won’t see us owning a pharmaceutical company that’s actually developing the drugs. I think you’re seeing that today when it comes to vaccines and the race for vaccines. That’s happening every day in other categories. We just don’t see it because it’s not COVID-19. And it’s very, very difficult to — for us, obviously, there’s there’s specialists out there in that field — we just tend to stay away from that. So our core competency is where we tend to track, and from a kind of total investment portfolio, we’re ultimately looking for something that has a moat today, right the core principles of an economic moat today, but more importantly, honesty is one that can be developed into the future. And we think those are where the real gems and stars come from.
Steve Symington 07:07
I think that makes a lot of sense. I mean, people kind of, they tend to separate in their minds value and growth. But we really are, you know, we’re seeking value. And sometimes that might mean a company that is a value relative to its growth potential. And that’s really what we’re searching for.
Sean Emory 07:24
Matt Cochrane 07:25
What would you consider — what is evidence that a company might develop an economic moat? What would be something you’re looking for there?
Sean Emory 07:33
Well we’re seeing right now, right, so let me just give you an example of Square’s Cash App, where a network of 2 million users doesn’t have the same network effects as one of 40 million users. And obviously, it’s the product that drives the consumption. And it’s whether that product adoption and the evolution of the product, you think, right because at some point in time in our investment careers, we have to make instinctive decisions that are based on facts and a thesis that you build and trying to track that thesis. But ultimately, it’s trying to discover where whether company XYZ is developing a network where it is sustainable. And we all know the different network effects that are out there. Facebook, we saw yesterday, right with all the earnings reports, and the type of earnings power that they can have, even despite the situation. And you go through the chain of economic moats, and there’s 4, 5, 6, 7, 10 depending on however many you can define. And ultimately, we are trying to draw that path to moat status in a sense, right. And that was just a good example of Cash App as one where it wasn’t a moat maybe two years ago, it was the potential of a moat. I’d say the seller business was much more of a moaty business early on in terms of switching costs, right it’s hard to switch once you’ve already added their Seller business across 10 locations. And the Cash App side which was, I’d say under-analyzed by most . And now again, you’re seeing that acceleration in the business, in the App Store, app trends and things like that. So it’s clear evidence that a network is forming. We’re seeing the boost partners that are signing up to that product that is further evidence that there’s something that other commercial companies are interested in to be part of. And again, so these are little things that we’re looking at to see. Is there a moat building here?
Matt Cochrane 09:36
Gotcha. So Shawn, one of the great things about following you on Twitter and LinkedIn, just the interesting facts you find from out-of-the-way places. And like I feel like I want to feel better about myself maybe and think that like, I look in a lot of out-of-the-way places, but you come up with things that I wouldn’t even think about looking. So I’m talking about things like job postings, patents, and just other things you find from places where not a lot of people are looking. So where are you looking for new information? And how did these things inform your investing process?
Sean Emory 10:09
Yeah, I mean, this goes back to the question earlier, it’s like sharing it to the public sometimes. And in some cases, I sit there and I’m like, should I start sharing this? Because then most people will be doing the same thing I’m doing and then you kind of lose maybe the intermediate edge. If it is an edge, right? Not everything’s an edge. But so in general, that’s a pretty good question. And the truth is, it’s really all about the companies we own or track. So what we’re trying to do is validate our thesis. And with that, not all companies are equal. So take, for example, a company that your thesis is dependent on consistent innovation, and the evolution of the products. And really trying to uncover what is next in their pipeline could be critical to maintaining your position, right? You’re trying to grow into a valuation for a growth company. They better be innovating and developing new solutions and products. And if that’s not part of your thesis, then I don’t know what it is. And you have to figure out ways to try to track that. So job postings could be a good example of determining overall direction for some of these businesses, or think gaming, where that category, it’s all about game launches and releases, and ultimately, purchase intent of those products is going to be driven by kind of marketing and demand for that product. So we’re looking at YouTube views of their trailers for each game. And you can see a pattern develop in that kind of analysis of YouTube views on that. So again, we’re just trying to separate kind of just looking for unique information and really trying to say, okay, what’s our thesis on company XYZ? And what can we use that’s out there in the world to potentially track our thesis and make sure that it’s maintaining that trajectory. So that’s ultimately what drives us to try to uncover things. Right? Because again, a job postings for a company that’s not necessarily doing anything particularly innovative or changing anything, job postings may not tell you anything, versus somebody that is consistently innovating and doing new things. So it’s all specific to the companies we’re owning or tracking.
Steve Symington 12:32
That’s really interesting. So now, so let’s say you found these companies, you have the businesses that you’re interested in. Now, how do you think, Sean, about portfolio allocation? Now? How do you determine, how many companies you’re invested in at a given time? How do you think about diversification across different industries and sectors? Tell me a little more about your thought process there.
Sean Emory 12:55
Yeah, so breaking that up a little bit. First, from a portfolio-construction standpoint, we invest in 8 to 25 companies. So the lowest is going to be eight. And we take, which I think is different from most, is an equal-weighted approach at the onset. What we’re trying to do is remove our bias, right? Like I am a fan of Square, and a user this and that, right? So I have a natural bias towards them that I know is outside, right, so we have our valuation set out on all our companies as well. And so we start out as an equal weight and eight will be your, your kind of max number in terms of the equal weight from a positioning standpoint. If we don’t have a companies and we have five, those five companies are at eight equal weight, right, and the rest is cash at the equal weight as well. So we don’t have any…we can from a mandate standpoint we have we could be 100% cash if we wanted to. All my capital is invested in the same strategy so it’s time to be in all cash. I think it’s time to be in all cash. And essentially, there’s that alignment. But again, from a portfolio-allocation standpoint, it starts with the equal weight. And ultimately, we’re trying to discover these companies and move through a process that we’ve developed, which is called discovery, follow, focus, and then approved or not. And that’s ultimately the companies that go into our portfolio. Portfolio diversification across sectors industries — again, we have no bias, but we say there’s natural diversification. When you think about what they’re doing, again, tech is not tech, right? If you look at the tech sector, or you look at consumer discretionary, there’s their sectors, but when you start to dig deep, they’re not really related in terms of the companies underneath.
Steve Symington 14:47
So many subsectors, yeah.
Sean Emory 14:48
Yeah, very much subsectors and subs of subsectors and industry groups. And we think naturally if you’re finding the current company that has a moat or the company that’s going to develop a moat, there’s really only going to be one, two, three winners in a category. That’s played out in multiple categories throughout history. And that will allow you if you’re following your discipline of following companies that have a moat or are looking to create a moat, naturally enough, you should only be investing in one, two companies within a subgroup that will be different from another subgroup. So we think we’ll have natural diversification in terms of real inherent risk. But with that, there’s no actual segmentation in terms of we can’t have 100% tech or 100% energy.
Matt Cochrane 15:37
I was just going to say so, listeners, if you don’t know we’re recording on Friday, July 31. And you won’t be listening till the following week. But last night, Amazon, Apple, Alphabet, Facebook all reported and yet Sean, you tweeted out kind of like a cryptic tweet last night saying, you know, all these companies are reporting, but none of them are the one I’m most interested in. So if you don’t mind sharing? What were you most interested in?
Sean Emory 16:15
Yeah, so it’s spilling some beans but it’s Mohawk Group. And small little company. I don’t know if you guys heard of them. But I’m assuming yeah the IPO maybe a year and a half ago. So I remember when they went public first and watched the roadshow and everything and interesting. And again over the last year and a half or so we’ve just been following the company. Essentially what they’re doing is they live on the Amazon platform, right? They sell on Amazon. They’re arguably one of the biggest sellers on Amazon. And they are extracting data through their product called AIMEE. And essentially creating products, discovering products, where there is either a gap in terms of reviews and review quality, or a gap in terms of the product itself on Amazon and ultimately trying to build products in what they call their launch phase within a three month period to get them to be the category leader. So think batteries, right? Then they have dehumidifiers and ice buckets. If you go on their website, you’ll see some of their brands and their goal honestly at kind of a high level is to go after these long sustaining categories where brand is not as much of a part of the equation and their brand building is more on the review side. So if they can get category leadership quickly, within an Amazon category, they’re able to build out that review system and reviews in a sense that social power is a moat in itself. And as long as you’re maintaining your product and updating your product, obviously, that can be extremely powerful. The more they grow, the more products they develop the less risk per product right as they develop. So there’s this flywheel developing. During COVID, they’ve seen a massive acceleration in people purchasing dehumidifiers, people purchasing ice buckets and things like that, that they’re selling. So they’ve seen a sharp uplift in an activity and growth. So we wanted to see exactly what was going on there. We talked with the management team. We have a conversation with them next week after post earnings to get more insights, maybe bring them on our podcast. But anyways, just a very, very interesting story. We love the ones that most people aren’t paying attention to. And again, directionally, we know what the path to kind of a moat is at some point. It just whether the company can execute and get there. And that’s the question that’s like the million dollar question right?
Steve Symington 19:09
So to clarify for people listening this isn’t Mohawk Industries the flooring manufacturer. That’s a bigger company. This is, I believe it’s Mohawk Group Holdings, MWK correct? On the NASDAQ.
Sean Emory 19:22
Steve Symington 19:22
So that’s the one we’re talking about, the little small cap. Last I checked their market cap was like $140 million or something like that. So pretty small. Interesting company, a little bit of a dip today that I’m looking at, but I haven’t dug into their earnings report. But yeah, that’s a that’s an interesting company. Speaking of interesting companies, one of the companies that I’m most fond, is Nutanix. And judging by your Twitter feed, I think we share that affinity and it’s one of my favorite names and can you tell me a little bit about your — I’m assuming — your bull thesis for Nutanix?
Sean Emory 20:05
Yeah. So Nutanix is, we have an affinity for a lot of aspects of it. The product, the team, and their ability to execute and work through some of the things that have taken place. And ultimately, one of the reasons why we got involved is there’s a lot of confusion around the name. So for us, when you start to segment what’s going on in the infrastructure landscape, there is the separation between kind of public cloud, right? And on premise, basically, segments in terms of IT infrastructure, and what we are seeing and what we’ve heard, both in the company and in the industry is the evolution towards used to be public cloud versus private data center, and you’re seeing kind of that today, they would call it hybrid cloud, right? The combination of on prem and cloud or public cloud. And on top of that, you have multi clouds. So you have, ultimately, you can even hear there’s a lot of complexity there. Um, and wherever there’s complexity, there needs to be some sort of simple solution that sits in between it all to help orchestrate. So Dheeraj comes from Oracle, he knows data extremely well. Data is at the heart of all of this in terms of trying to make multi cloud hybrid cloud. And when I say hybrid cloud and multi cloud, it’s essentially being able to build an app, run it and maintain it no matter where the data resides, whether it’s in GCP, Google Cloud, or Amazon Web Services or Azure from Microsoft, or hosting it in your own private data center using Dell or HP or any of the other vendors. But having a single plane of glass is how they like to frame it in terms of being able to maintain provision and orchestrate all of your applications and data and doing so in an efficient way, right? So their end goal and a kind of value to their participants, and they have 16,000 customers there, they have a ton of businesses in the fortune 500. And the biggest thing that’s happening today is on the accounting side. So about a couple years ago, they went through the transition from essentially dropping almost half of their revenue in the hardware space. And ultimately, that sends a revenue shot to the business but that revenue came with no margin. And what we’ve seen over the last several years is as they evolved from a hardware-software centric business to a pure software business. There’s a lot of new transitions they have to go through as well which is the shift from term licenses to subscription licenses, which is another revenue kind of compression mechanism, I guess, right, because you’re moving from selling five year term licenses where you kind of get cash and revenue up front to a subscription license where now you’re paying that over time. And those are essentially two aspects of their business that has transformed that’s compressed revenue. We see it, it’s also showing up in their gross margins, though, however, the transition, which is allowing them to, obviously have much higher gross margins, which in theory allows them to deploy some of that in their sales and marketing, which shows their sales and marketing is a little bit out of whack from a pure dollar standpoint, but what they’re trying to do is again, align their business and their sales reps to this new model that they’re running. And they’ve been doing that over the last two quarters. And last quarter, we saw a bookings growth rate above 20% for the first time in over a year and a half. So COVID wasn’t the best thing to happen to them, even though they have some products in their pipeline that like Nutanix Frame, which is desktops as a service, they also run traditional VDI. And they’re they’re partners with companies like Citrix. And so they have part of their business that’s doing extremely well in this environment, which we think will be a catalyst for future adoption of their other products. So again, you have this company that’s going through a ton of transitions, IT infrastructure isn’t the cleanest and most easiest place to understand. We love that. And at some point, what’s easy to understand is when cash starts dropping to the bottom line, hopefully in the next kind of four to 12 quarters. We think that could be a powerful mechanism for investor interest, again. So kind of at a high level, that’s how we’re thinking about it in terms of everything that’s going on there. Again, not an easy place to understand, but that’s ultimately in our view, the cheaper parts of technology today.
Steve Symington 25:02
Yep. And you know, they want to make really the platform in in handling those IT tasks just really seamless and admirable from that standpoint.
Sean Emory 25:13
Yes, so the Forrester report the other day, right, so Forrester independent it’s very powerful for selling. So I used to know someone that worked there. These reports, the Gartner ones, the Forrester ones, they’re powerful selling tools for these companies. And yeah, and they’re building out a self-service model. I don’t know if you’ve messed with their test, right where you can go on there and kind of play with their product. And that’s powerful because no other company is really doing a self-serve onboard IT infrastructure. Other than like the Pagerduty’s of the world, which is a little less, it’s not the same thing, right? Because you’re not actually touching necessarily the data. So that’s an interesting selling motion that they didn’t have as of last year.
Steve Symington 26:04
When, for those of you listening, when Sean mentioned Dheeraj earlier, he’s talking about Dheeraj Pandey. Nutanix’s founder and CEO, really interesting character. And yeah, I have high conviction, trust in his leadership. But Matt, I won’t monopolize the conversation. I’d love to pass it over to you to ask about some of the other companies that you’re interested in.
Matt Cochrane 26:31
Yeah, sure. Sean, another company that we’ve noticed you’re very interested in is Square. So since COVID-19 hit it’s almost like a tale of two cities where, their Seller side is getting hammered. And their Cash App side is exploding. How do you see those two stories and how important is each for Square’s future?
Sean Emory 26:57
Yeah, so they’re both very, very important long term. We’re still uncertain about whether these two ecosystems merge. Or it turns out to be kind of the eBay, PayPal, kind of playbook. There’s easy places to see where there’s synergies in there, but there’s also easy places where you could say long long-term right where one’s an actual kind of financial institution and then the other one is dedicated to kind of seller verticals. Whether those two make sense together again, way too early to even hypothesize that — but we are, in a sense — but again, yes you take the Cash App business I think that’s the easy one to say that it’s performed well. App downloads are supporting that. All the different types of marketing prowess that they had as a company is pretty incredible. So stepping away from Cash App because again, that’s the easy one to say everything’s doing well. Seller business is an interesting one because while they’re likely seeing seller churn, right? Forced churn, right through closures of businesses, you’re also seeing the potential of an uplift in, in the amount of dollar volume that goes through their platform from their current seller base. Because sellers today are now being forced to only accept electronic payments, so a business that was doing 50% cash and 50% electronic transactions, let’s say at a coffee shop, is now doing maybe 50% of their volume from before but maybe 100% electronic and that comes out at the same number from a volume coming through that platform. Um, so that’s an interesting dynamic that I think we’re…some are maybe not taking into account. That while they may lose 20% of their business, the other 80% is 100% going through the system. In addition to that, when you look at the competitive environment, you look at companies like Toast, which had to furlough half their company. And other special verticals, whether it’s a point of sale solutions in hotels and things like that. These are industries that the verticalized, which we tend to like vertical kind of specific companies, um, this may bite them in the butt here, and not from their own doing because again, just before this, it’s got a really nice valuation and funding. But again, pretty much all of their sellers went from 100% payment volume to maybe we don’t know, right? But enough to furlough half your business. And so from an incremental customer standpoint, we think ultimately that could be a long-term or medium-term catalyst for them in terms of wins. It’s also forcing a lot of their current seller base to take to take on their Square Online which is kind of Weebly, which they acquired several years ago competed with Wix. So I knew we were investors in Wix. And Weebly was always kind of the number three or whatever. And, so they acquired that. So this is forcing sellers to move that direction, which if you’re Square you’re extremely happy about. They shared some numbers last quarter in terms of like 5x growth in that business,. Still small business relative to the entire thing. But again, if we’re talking about moats, if you have five locations, and now you have your online connected to it all, I think that becomes a pretty powerful long-term characteristic. And that’s really kind of what we’re looking at. I mean, Square’s not only going against the Clovers of the world, they’re ultimately going against the legacy kind of companies, not companies, but merchants that weren’t even embracing this day and age tech. And we’re using old legacy cash registers and things like that. And so that has probably forced them to think about moving to Clover to Square to many of the other kind of vendors. So we think again, this reshapes the thinking in terms of embracing a company, like Square’s point of sale, long term. And then lastly, PvP went through their platform. So I think it’s highlighted their their ability to be a kind of vendor for financial services, right? So, again, if we’re talking about job descriptions earlier, they had they have a lot of lending capabilities or requirements in their job description lately. And they have the the bank charter that they have to basically become a bank here in the next year. So this set them up well, and they make transaction fees from those PvP loans, so they’ll make incremental dollars from that. And then also highlight that they can process your loan. So if you were a Square seller before, now you feel probably a little bit more comfortable using Square Capital, maybe in six months from now, when business hopefully gets to some sort of stability.
Matt Cochrane 32:18
Sure. So if you could look, five years, maybe 10 years into the future, how do you see Cash App evolving from then to now? Or from now to then?
Sean Emory 32:28
Right. So my son will be 12 then. And if I’m looking at the evolutionary Cash App 12 years from now, or 10 years from now, I’m — look, I think they move in almost every vertical segment of financial services right. So everything from budgeting to eventually insurance to eventually mortgages and things like that. It just makes more sense to have it all in one place. If we’re ready to just step back and think as a consumer I’d rather consolidate my financials with one institution, I really would. I don’t like having to look at all my stuff and go to have to go to Mint or something like that to aggregate everything because they’re all coming from different avenues. So I do think they’ll continue to evolve that product and have lending have — and lending separates into all types of categories, right? And, again, we’re seeing early signs of that. So if Lemonade can go out there and create a digital insurance company, I think Cash App could do potentially something similar. That’s probably not priority number one, or 10. But I’m thinking if you’re talking about 10 years from now, I wouldn’t be shocked if there was multiple avenues that they could touch on. Again, I think it’s somewhat endless.
Matt Cochrane 33:49
And do you think it can get there like or a FinTech company like Square or maybe even PayPal? Do you think they can get to that kind of place where they’re an all in one financial app almost, before the big banks like JPMorgan Chase or Bank of America that are also investing heavily in technology?
Sean Emory 34:08
Yeah, I do. I think I think it’s somewhat overstated, that those companies, they’re investing in technology, they’re not building technology. And I think that’s the difference. And they just have different DNAs, right? These, these companies are willing to take bigger risks and create new products and solutions hoping that they will catch on, and they are catching on. And their marketing capability is allowing them to kind of upsell some of these solutions. So I do think honestly, that the some of the big banks will be there. I don’t think big banks go away. But you start to see the middle market of banks kind of stuck, where they don’t have the capital to invest in the proper technology. And again, they’re probably going after the young consumer and this is PayPal and Square, the ones that are catching the young consumers that in 10 years will be, hopefully 35 years old and ready to kind of take on their mortgage and all the different applications that we’re talking about here. But I do think they can be kind of the super app, let’s say of financial services, or one of the many super apps within financial services and/or just being kind of yeah, a digital bank. I think, ultimately, that is the future because it just makes sense.
Steve Symington 35:30
I think we should bookmark this podcast. So in another 5, 10 years, we can look back and be like, hey,
Matt Cochrane 35:35
We’ll have you back on and discuss what we got, right?
Steve Symington 35:38
Remember when we said this and now you’re right?
Matt Cochrane 35:44
So we talked a lot about technology and innovative companies. But now like there’s another company you have shared a lot of information about, and which I have a mixed history with. So that’s Capri Holdings. So, why don’t you share your thoughts on Capri Holdings with us? That the, for listeners, that’s the holding group of luxury brands such as Michael Kors and Jimmy Choo and other luxury brands.
Steve Symington 36:11
Versace, right? That was last year.
Matt Cochrane 36:14
Sean Emory 36:14
Yeah, so obviously the last four months has been very challenging for them and investors in general and the overall thesis there — and clearly COVID is not a friendly place to discretionary retailers — and that then obviously just makes a ton of sense, but when you when you look at what Capri was building will build over the next several years is again trying to do a couple different things. To stabilize that Michael Kors brand, most importantly in North America and a lot of that weakness in that brand is not coming from their direct retail but more mostly from their partners, right Macy’s and things like that, where they sell into wholesale. So it’s really trying to move a lot of that kind of wholesale business back into the retail and online. And they’re set up and positioned pretty well, especially relative to other retailers because they’ve focused tremendously on social over the last several years. So again, if you think digital commerce over the next decade is going to be extremely strong, we think they’re positioned well. When you look at the entirety of their portfolio of products, and again, it’s three companies Versace, Jimmy Choo, and Michael Kors, they have roughly like 45-50 million, let’s say Instagram followers, to for example, to essentially sell and market into and that’s really, really powerful when you start to compare it to companies like Tapestry, which owns Coach and Kate Spade and some others where they have about 7 million in total. So it positions them well, specifically when we start talking about Instagram shopping and some of the other products that are being built. WeChat overseas, which is an extremely powerful vertical for luxury retail, Alibaba and some other different products that are out there. And when you start to look at…so that’s the Michael Kors brand in terms of stabilizing that. That’s not ultimately the catalyst here as much as it is building out the Versace brand globally. Where here’s a company that came in doing $700 – $800 million in revenue with around 150 units across the world. The average luxury retailer think of Gucci and some of the others have 300 locations. So there’s there’s definitely space for them to build out and they were doing it successfully pre-COVID where same-store sales there were hitting in the low double digits. And that alone right — a company doing a billion dollars in revenue with the potential of 20 – 25% operating margins with 10 – 12% same-store sales. I mean, you’re talking about companies like lululemon that are getting 40-50 times multiples on that. And Versace alone could extract a ton of value in this business. Keep in mind in aggregate this business was doing about a billion dollars in cash flow. So we weren’t talking about a business that was that was struggling by any means on the cash flow side, it was more righting the ship. And for us as an investment standpoint, it was more of a transformation story. Now transformation going into a transformational period doesn’t really help you in terms of COVID. But what we’ve seen and one of the reasons we like Capri a lot is the management team. John Idol as the leader, he’s… one of the things he did really, really well was turn Michael Kors into around a $4.5 – $5 billion revenue business, which is extremely hard to do. He oversold his business, right because he degraded the brand slightly. Um, and now he has the opportunity with Jimmy Choo and Versace to grow those businesses using the same tactics in a sense, but at a higher level, as he did before. So, in this period, we were kind of uncertain on how this business would pan out. Why? Because starting this COVID-19, they had around $200 million in cash. They had about $1.9 to $2.2 billion in debt. Today they have $1.1 billion in cash $1.8 billion in debt. They basically sold through all their inventory, didn’t have to take on any more debt, pushed out their their maturities, and executed wonderfully here without having to look like American Airlines or any of these other companies that are essentially taking on debt to burn that capital. So position wise, investors haven’t had to sacrifice anything other than kind of nea-term growth. And so they’re positioned well as many of the vendors in the market are struggling, they sit well, they’re sitting on their hands, right waiting for the environment to clear up. But the core thesis, they are brands within retail, we don’t want to own fast fashion, we want to own high margin 60% gross margins on this business. 20% operating margins at scale looks very much like a software operating model outside of the consistent recurring revenue. So again, it’s really attractive and at the time, it was trading at kind of seven times, six times cash flow. And again, cash flow today is distorted and things like that. So it’s not a clear model today, but you have to give that management team a lot of credit for how they’ve been able to maneuver their financials to honestly weather the storm and just wait for the clouds to clear.
Steve Symington 42:08
I really do think that’s an underappreciated advantage, their ability to come out of this without taking on significant debt. I mean, that’s a big reason say, for example, Warren Buffett sold his airline holdings. He said they’re, you know, you’re going to come out of that with $14 billion in additional debt and that comes out of earnings eventually. And as a shareholder that leaves you that much poorer. And that’s a fantastic that — I keep wanting to say Michael Kors just because I covered them for years, KORS. But no, it’s Capri Holdings.
Matt Cochrane 42:39
And it’s certainly starting from a very low valuation. There’s no doubt about that.
Steve Symington 42:44
Yeah. So so that’s a compelling name on the consumer goods side that that has tech-esque margins. That’s interesting. So I really like that. And I think that’s probably a safe place to to wrap up our conversation at risk of going long. Sean, thank you so much for your time. Where can people find you if they’re interested in following you?
Sean Emory 43:05
Uh, yeah, I mean, Twitter. So @_SeanDavid, the website, Avory, Avory.xyz. You can check our podcasts out Inside Scoop with Sean Emory. So yeah, if you ever want to reach out you can shoot me a message on Twitter, email, email these guys. Or my own email as well, firstname.lastname@example.org. Those are kind of all the different places you can find me. We’ve got plenty of research.
Steve Symington 43:38
Beautiful. Sean Emory, ladies and gentlemen. Thank you so much for coming on and discussing investing with us.
Sean Emory 43:44
Yeah, thanks for having me, guys.
Steve Symington 43:47
So I think we can wrap it up again. Thanks for joining us and listening everyone. I’m Steve Symington, Lead Advisor with 7investing here with fellow Lead Advisor Matthew Cochrane and Sean Emory of Avory. We’re here to empower you to invest in your future. Have a great day, everyone.
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