Catalyst Funds
Rational Funds
Strategy Shares
Key Summary:
- Earnings season has begun, we have some solid reports across the brands universe.
- Streaming video & entertainment has become a consumer staple. Netflix wins.
- In the asset management industry, private markets are where the information advantages are real. Blackstone wins.
Very Important thesis: If equities generate roughly ~10-11% a year over time, leading brands, dominant global franchises, particularly those serving the dominant driver of the economy, in theory, should compound at 13-15%+ over time. In a world where rates and inflation will likely trend higher for longer, business models with pricing power, exposure to quality factors, and that generate strong profits and free cash are set up to win versus broad markets. Brands Matter.
Earnings Season Has Begun. Here’s a few portfolio brands executing well.
I love earnings season. Each quarterly report is a new piece of the puzzle, and it lets us know what management teams are thinking about their respective businesses, industries, and the economy in general. Remember, our investment in stocks is a De facto vote of confidence on the economies in which we invest. Earnings, revenue, margins, free cash flow, and the growth of these important metrics is what drives stocks up or down over time. As someone who invests but also likes to actively trade when markets act irrational, earnings season tends to offer some wonderful tactical trading opportunities along with offering great, long-term information for buy-hold investors. The next few notes, I’ll discuss some earnings reports and secular themes we are very excited about for the future.
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Netflix: NFLX
Remember when the cable industry was one of the most stable and predictable industries?
Legacy media brands sat by and let a new company, Netflix carve out a new market and take market share slowly, then all at once. Fast forward to today, Netflix is now the new cable and the first place most consumer begin their entertainment and content search. This nuance is a massive behavioral moat for Netflix, and I never hear anyone talking about it. Netflix reported a strong and stable quarter on October 17th and the stock is +10% on the 18th, last I checked. Here’s why we continue to like Netflix and why it’s a core holding as a dominant Mega Brand and a consumer staple.
The Report & Our View of the Stock:
Lots of growth potential around the world. 283 million paid subscribers headed much higher over time. Q3, revenue +15% YOY, operating margins 30% vs 22% last year. For Q4, they forecast 15% revenue growth and expect paid net additions to be higher than this quarters 5.1M sub growth. For 2025, they forecast revenue of $43-44B which is +11-13% growth, slower than 2024 but we expected this to moderate as password sharing opportunities diminish. Margins should continue to rise over time as content spend stays stable and revenue and free cash flow expand. And make no mistake, Netflix has solid pricing power to raise prices and drive more ad-tier subs. This business has become a solid consumer staple that adds significant value to a consumer’s life as a primary entertainment provider. The low cost of the service keeps churn low and engagement solid. Live sports and sports-related content will continue to grow bringing in new entrants. NFLX had the benefit of building a massive library of content fueled by debt when rates were largely at ZERO while peers in the industry sat idle and watched NFLX take their businesses. Now they are scrambling to compete in a world with much higher cost of capital and higher content costs. All in all, Netflix offers one of the best value propositions to consumers, has become THE place consumers start their content and entertainment searches which keeps churn low and pricing power high. This is a very powerful flywheel that grows over time with new and intriguing content added. Traditional consumer staples grow much less, do not generate this kind of profitability and margins and trade at the same multiple or higher as Netflix. More and more, consumer staple brands do not just live in the staples sector. With technology at the center of our lives, there are plenty of tech staples located in plain sight. Yes, tech and communication services stocks can be volatile, but just because their stock can be volatile, do not assume their business is volatile so when these staples go on sale, they are wonderful buying opportunities.
Blackstone: BX
The democratization of alternatives via private market access continues. Blackstone is the largest alternative asset manager on the planet at $1.1Trillion and growing assets at a rapid clip. The crazy part: there is so much room for growth ahead, particularly in the wealth management industry as most HNW investors have very little exposure overall. Here’s a crazy truth: these stocks are very under-owned and underrepresented in indexes, ETF’s, and active funds. And they have been massive alpha generators over the S&P 500. Apollo still needs to be added to the S&P and it’s a matter of WHEN, not IF.
The Brands portfolio owns a basket of the leaders because the secular growth opportunity remains enormous. Blackstone, KKR, Apollo and these brands are the smartest investors around the globe, have massive access to capital in good times and bad, have a wicked information advantage because they each own hundreds of private companies that give them the ability to look around corners for future trends. And they have hundreds of billions in dry powder to buy assets when they go on sale. No matter what the calamity, these great investors always seem to find a way to capitalize on turmoil. Stable, attractive performance just drives more asset flows which drives higher fee revenue which drives the stocks higher.
Like Netflix, the alts business is a wonderful flywheel and the benefits compound over time at scale. Just remember, these stocks can be volatile at times, so you often get a chance to buy them on dips. We love to hold the core position and trade around the position, using the vol to our advantage.
The Report & Our View of the Stock:
Overall, a solid quarter with solid trends for a good 2025. Massive $40.5B new flows this quarter dominated by private credit & insurance but good overall flows into Infrastructure, core PE, plus good fund raising in other real estate and opportunistic credit funds. Management fees $1.7B. Deployed $34B broadly across credit, PE, RE but credit was the big deployment area. Performance stable and solid across fund verticals, with real estate slowly recovering. $1.17T in assets with $171B in dry powder, so they have massive opportunities to put a lot of money to work over time and to generate solid fees that grow over time. 2025 is expected to show better realizations, and deployments as M&A heats up and sentiment gets better leading to more deals. Their deployments continue to be focused on data centers globally, AI, software, life sciences, and shelter opportunities along with renewables and energy. All of which tend to be solid inflation beneficiaries as rates are expected to stay elevated with elevated inflation.
Image created in 10 seconds using AI via ChatGPT.
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