CHARTED HOLDINGS

With earnings reports starting to ramp up, I gave myself the lofty goal of completing an equity research report for each of my holdings before results are disclosed. Netflix is the first to share its quarterly numbers on July 16th. The intention here is to teach myself real fundamental analysis, a skill I think will make me a sharper portfolio manager.

Aside from learning to compile an equity research report, which I have never done before, I read an interesting section on diversification through acquisitions, titled diworseification. In the book One Up on Wall Street Peter Lynch highlights a few comical examples of failed acquisitions that companies made throughout the 1960s.

Instead of buying back shares or cutting dividend checks many companies that were flush with cash thought it was a better idea to pay a premium for smaller companies in industries they knew very little about. Many of these acquisitions were later sold at a loss, leaving the parent company to clean up its mess by restructuring. These once prosperous companies had become potential turnarounds with a stock price that underperformed their competitors and, in some cases, never recovered.

This isn’t to say that acquisitions are bad as a whole; they can be beneficial “in situations where the basic business is terrible”¹. Perhaps the most famous example of this is Warren Buffett’s Berkshire Hathaway which was once a dying textile mill. Melville Corporation started as a men’s shoe manufacturer and became CVS. Loews Corporation began as a chain of movie theaters and became a diversified company with businesses in numerous industries. All these transformations were made possible through a series of successful acquisitions.

I appreciate how One Up on Wall Street brings attention to the risky nature of acquisitions and it couldn’t have come at a better time. Rocket Lab recently announced its intention to acquire Iridium Communications for $8 billion. And with diworseification on my mind, I was left with the following questions and then some:

Outside of this recent development, I continue to watch my portfolio’s performance yo-yo. At the time of this writing, I am up 4.86% YTD. Down slightly over the past week as the market responds to rising tensions in the Middle East. I’ll be watching closely to see how the current geopolitical landscape impacts shareholder reactions to upcoming earnings.

Thanks for reading!

- Eric Seel