Jensen's advice for a looming recession

Investing in 123 #4/2024

1 question to reflect on

The results of last week’s question:

The question this week (pick one)

Drawdowns, corrections crashes, it’s all part of the game. Each bear cycle has been accompanied by a stronger bull cycle:

Since 1950, when looking at the S&P500:

• There have been numerous corrections (10-20%)

• There have been 10 bear markets (20%+)

• And a couple of major crashes, the last one in 2020 (35%)

The question is not if the next one will occur but when.

The buffet indicator takes the market value of the Wilshire 5000 and divides it by the US GDP. It’s an approximate measure of the overall US economy versus market pricing.

Yep, the US sits at record highs. It’s not a perfect indicator though.

What can we do? Jensen Huang may have the answer ⬇️

2 quotes, do you agree?

I wish you great pain, and suffering

Jensen Huang, CEO of Nvidia giving a speech at Stanford

Jensen Huang says it best:

He argues that your strongest asset is not intelligence, but resilience. And resilience is cultivated through suffering.

• Are your current holdings resilient in the face of an economic downturn? Can they grow despite a crisis?

• Are you resilient as an investor? Have you suffered in the past, and are you ready for more?

“When we are no longer able to change a situation, we are challenged to change ourselves.”

Viktor Frankl, psychiatrist and holocaust survivor

We have no control over how and when a recession should arrive. Focus on what is in our control, ourselves, and our portfolios.

3 ideas of the week

Since the theme is resilience, here are 3 ideas that could withstand some suffering in the market.

Hammond Power Solutions (Ticker: HPS)

Category: Illiquid Small Compounder

What does it do?

Located in Ontario, Canada Hammond is the largest supplier of dry power transformers in the US Market. Recession or not, given the age (40 years) of power transformers on the grid in North America, they will have to be replaced. Electricity is essential.

Why should you care?

Recession or not, the 40+ transformers on the aging US electricity grid will need to be replaced. The market is growing, and Hammond is there to serve it. With an ROIC of 20% and a high reinvestment rate, this compounder is on a roll, but so was its price in the market. It has a fortress balance sheet (with a negative net debt) to wither a storm. Looks fairly valued at the moment, but need to dig deeper into its valuation.

Medpace (Ticker: MEDP)

Category: Mid-Cap Cash Generator

What does it do?

I normally avoid anything Biotech or Pharmaceutical, but Medpace is different. It helps other companies within the sector with clinical research trials. It’s a service provided to the industry.

Why should you care?

It’s a leading Contract Research Organization (CRO) that helps small biopharma companies undergoing late-stage clinical trials. With high skin in the game, a unique business model, and high Gross and FCF margins, this is a standout company. The problem is price. It had a serious run-up since the end of 2023, but the price is trailing down now. Could be interesting for a buy-the-dip list.

Visa (Ticker: V)

Category: Large Cap Buyback Machine

What does it do?

I do not think I need to explain. It provides the number 1 credit card network in the world, taking a small fee for each purchase made.

Why should you care?

Yep, it’s not very original, but it’s one of the few companies that have actually withered and thrived through several recessions. This is a long-haul resilient investment. Just do not expect to achieve a 15% IRR.

That’s it for this week.

May the markets be with you, always!

Kevin