We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.
Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!
But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.
Here are the articles for the week ending 23 February 2025:
1. Weekend Thoughts: Demand Shocks and How Utilities Went From Sleepy to AI Darlings – Andrew Walker
That history has completely changed with AI over the past 18 months. Suddenly, the U.S. is experiencing real electricity demand growth for the first time in decades, and the rush for AI players to secure an enormous amount of electricity for their big AI datacenters has left the U.S. short electricity and scrambling to reopen old plants. The combination has created a bonanza for utilities; the whole sector screamed higher in 2024, and many of the utilities proved to be better AI plays than MSFT or even NVDA in 2024!…
…I mention it because I think that’s a really interesting set up to pattern to match / look for in the future. Find a staid, boring industry that most investors won’t look at that trades for a reasonable multiple (as utilities did pre-AI boom), and buy them just before a demand shock. You could argue if you do / time it right your downside is protected (it’s not like the stocks are going to go down when a demand shock doesn’t come; they’re not pricing one in!), and if you’re right you can make multiples of your money.
It worked for utilities in 2024, and it worked for all sorts of COVID beneficiaries in 2020/2021 (cleaning products, home gym equipment, etc.).
Now, there is one interesting wrinkle to this thesis: industries with long lead times benefit the most from a demand shock. Consider power: if you have a demand shock on the power side, then you eventually need to build more power plants to handle that shock. Building power plants takes a long time; I’d guess it takes 3-5 years from start to finish to build a baseload natural gas plant, and probably 20 years to build a nuke (if you can even get one built!). So a demand shock in power can create super normal pricing for a very long time. Most other demand shocks can be responded to much faster. A simple example: a demand shock in oil can be met relatively quickly; it only takes a few months to start spinning up new Permian wells!
2. How I avoided China’s biggest bond default – Willie Keng
In 2016, I told myself:
“Stay away from this Chinese company at ALL cost.”
It was a Thursday. I was in a room filled with high-level executives dressed in black suits – the company’s chief financial officer, finance managers, bankers, analysts and fund managers were there…
…Back then, even Chinese property developers from blue-chips to junk-rated companies all wanted to raise debt. China’s skyline was dominated by the grey, skeletal skyscrapers wrapped in scaffoldings. Tower cranes with long, mechanical arms swung on these buildings — there were noise of rapid urban growth.
And China’s property bond market was hot like an iron.
It was common to have 3-4 such company meetings in a single day. These were eye-opening — and very exciting times, as developers rushed to raise as much “cheap debt” as possible…
…In 2016, I saw the early warning signs of China’s bigger property developer, Evergrande…
…During that management [sic: meeting] held on Thursday, I concluded its leverage was too high…
…In 2021, Evergrande defaulted.
I’ve dug out some short-cut questions from my old notebooks:
1. How do you make money? (where are your sources of revenues from?)…
…11. How much debt are you refinancing over the next few years?
12. Who are your main bankers?
13. How do you hedge your interest rates? At what cost?
14. How much committed credit facilities you have with banks?
15. Why are you borrowing X debt, what are you using for?…
…23. How are you planning to refinance your short-term loans and who are the lenders? At what interest rate? Is it possible to get “secured” and “unsecured” funding?
3. The Magnificent Seven, MKL – The Brooklyn Investor
The question is, basically, what’s up with the Mag 7? How crazy is it? Is it Nifty-fifty all over again?…
…The Mag 7 is trading at 41x 2024 earnings, which is close to ttm earnings. and 33.5x 2025 expected earnings, and 28x 2026 expected earnings. I know, expected earnings is sort of rubbish. Nobody gets that right. But we gotta start somewhere, right?
By the way, if you exclude NVDA and TSLA, the above would be 32.6x, 29.6x and 25.8x P/Es, respectively. In this case, this is valid to do, because you can actually create a portfolio of high ROE, decent growth stocks at that valuation.
And then look at the ROE of each of these companies. And then look at the historic growth rates, 5 and 10 year of these companies…
… Let’s say the Mag 7 was a modern-day, techful version of a conglomerate like BRK. Its subsidiaries have grown tremendously in the past 5 and 10 years. Earnings will collectively grow 23% in 2025 and 19% in 2026 (willful suspension of disbelief may be key here), and look at the high ROE of each division (OK, I was too lazy to calculate a weighted average).
And this conglomerate is trading for 34x earnings! Or less than 30x if you don’t want NVDA and TSLA. Think about that for a second. How many ideas with those metrics can you find?…
… It’s easy to call AMZN a retailer, for example. YouTube is a big part of Google, and the rest of Google is advertising. So is Facebook. They compete with linear television, radio and other forms of entertainment in the past, and they make money from advertising, just like old media (including magazines too…). So we can call it media and advertising, not even “new” media. Just media. Tesla is an automaker. AAPL is more like the old Sony; consumer electronics. Basically every single consumer electronic product ever invented rolled into one product. They do media too; music, streaming etc. Gaming too. Only NVDA and MSFT sort of feel like the conventional ‘tech’.
My point was going to be, the Mag 7 domination may or may not be a problem, but it is quite diversified as a virtual conglomerate.
4. The Great EBITDA Illusion – Stephen Clapham
KPMG examined 1800 transactions between 2013 and 2018 and found that both the number of adjustments to EBITDA increased, as did the value. The number increased from 5.8 to 7.9 per transaction and the value increased…
…Pro-forma adjustments have risen by 10% and were in over 60% of deals. These include cost-related adjustments, to reflect the future value of cost reductions, and revenue run-rate adjustments, including planned price increases, or the expected impact of a new product line. In my experience, cost savings tend to have a higher deliverability as they are more within management’s control; but it’s a rare business which can increase price without affecting volumes, while capacity increases are often tricky to model…
…S&P’s Leveraged Finance group have also looked at the topic of EBITDA adjustments, but through a different lens.
“Our six-year study on EBITDA addbacks appears to shows a positive correlation between the magnitude of addbacks at deal inception and the severity of management projection misses.”
They highlight that addbacks represent a median 30% of management adjusted EBITDA at deal inception. They consider management projections to be aggressive and U.S. speculative-grade corporate issuers generally “present earnings, debt, and leverage projections in their marketing materials at deal inception that they cannot realize”…
…This is of real significance, especially to lenders…
…Forecasts made in M&A deals turn out badly with leverage nearly twice the projection in year 1 and worse by end year 2. Most of the miss is down to over-estimating adjusted EBITDA. The median miss in year one was 34%, rising to 35% in year two…
…Leverage forecasts made in leveraged buyout transactions are much worse with actual leverage of 8.2x vs a 3.9x forecast…
…The S&P report concludes:
“Our six-year study continues to underscore that addbacks and company-adjusted EBITDA are a poor predictor of profitability. Our substantial dataset makes it clear that management teams and equity sponsors regularly miss their projections by a large margin, and that the magnitude of the misses is positively correlated with addbacks and firms that we rate lower. This suggests that inflated addbacks may help companies with higher financial risk get deals done.”
The data is clear and there is no reason to doubt it. What surprises me is that private equity and credit funds continue to engage in such practices and that allocators and credit investors appear relaxed. That may be justified given past performance, but as I have written here several times, I don’t believe that the historical record is anywhere near sustainable.
5. There Goes My Hero – Ben Carlson
My family took its first and only Disney trip in the summer of 1990.
We rode some rollercoasters. Went to one of the waterparks. Decently fun trip from what I can remember as a 4th grader.
The strange part was that my older brother Jon was lethargic the whole trip. I still remember a picture of him taking a nap on a bench in the middle of the day. Something was off.
I was nine, so I didn’t think anything of it. My mother, a registered nurse, knew something was wrong so when we got home, they took Jon to the doctor.
He was diagnosed with a rare form of leukemia just before heading into the 7th grade…
…Jon endured months of chemotherapy and radiation, after which the only solution was a bone marrow transplant. My parents weren’t a match. Luckily, my sister and I were both were.
I was the bone marrow donor. There was no guarantee it would work, but miraculously, it did. Jon’s cancer went into remission.
It was a terrible year for our family but Jon was a trooper. He never once complained. Even though he lived in the hospital on and off for months at a time and lost all of his hair he never felt sorry for himself…
…Last year, he was diagnosed with stage 4 pancreatic cancer. Last week he passed away just shy of his 46th birthday.
Jon was a tough son of a bitch and went out swinging.
The original plan was to manage the pancreatic cancer with chemo until Jon died but he didn’t want to just wither away. He called specialists all over the country, finally finding a doctor who would give him an experimental drug that allowed him to stop receiving chemo.
And it actually worked for a while. The cancer spread slowed. Eventually it would stop working but it gave us an extra six months or so…
…Grief is strange. Although you know millions and millions of other people have felt it, it still feels like the most personal of all emotions. I guess it is in some ways depending on the person and how they were lost.
At times, I’ve felt like there’s a black cloud hanging over my head. Other times, it’s as if there is a dull knife stuck in the back of my head. Sometimes it crashes into you all at once like a wave.
But it also forces you to reminisce about the good times. These past few months, it’s almost felt like my life has slowly flashed before my eyes through the lens of all the memories of my brother…
…After his bone marrow transplant, Jon was approached by the Make a Wish Foundation — anything he wanted, within reason.
He could have asked to meet his favorite celebrity or athlete. He could have asked for a room full of video games. He could have asked for a four-wheeler or a jetski or some other fun toy like that.
Instead, Jon requested a two-week all-expenses-paid vacation to Hawaii for our entire family. We got to swim with dolphins, fly in a helicopter, see some volcanoes, play on the beach, and more. They even sent a limo to our house to drive us to the airport.
I didn’t realize it at the time, but it was like Jon instinctively knew our family needed that after what we all went through. I still can’t believe a 12-year-old had the foresight to be so selfless, especially when no one would have blamed him for being as selfish as he wanted.
Jon was wise beyond his years and valued experiences with loved ones more than material possessions…
…As we worked through his financial situation it became abundantly clear he was more than prepared for something like this than I ever could have imagined. There was a large life insurance policy. He was holding far too much cash for a person his age.
Jon why do you have so much cash?
Ben, I knew something like this was going to happen. I’ve known it since I was 12 years old.
That bout with cancer changed his entire perception of risk. He’s been working and saving since age 19 because there was always a voice in the back of his head telling him something like this could happen again…
…He also left behind some life advice for his kids that helps explain the kind of guy he was:
Be happy with what you have, you don’t need as much as you think.
Never leave anyone behind.
Life is way better than a screen, go live it.
Our mantra is to go live like Jon. I’m so lucky to have him as part of my life while he was here.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Alphabet (parent of Google), Amazon, Apple, Markel, Meta Platforms (parent of Facebook), Microsoft, and Tesla. Holdings are subject to change at any time.