Aarsh Kak

Over the past few months, I have been buying small positions in Nokia (NYSE: NOK) and Pearson (NYSE: PSO). Both reflect a type of company which has become particularly interesting to me: transition companies. By this I mean companies who are in the process of transitioning from a lower multiple business model to a market that is valued at higher multiples. This started with my interest in Walmart two years ago when I believed the potential for Walmart increasing their online sales presence meant they deserved a greater valuation.

In the case of Nokia, many know the company as the old cell phone manufacturer but they have been making significant moves into 5G. This is a known fact however, what I am betting on is the fact that they can successfully transition their whole company to focus on 5G and become a dominant player in the space. Currently, they are valued significantly cheaper than many comparable 5G companies.

For Pearson, they are transitioning from a textbook publisher to an online education company. Publisher’s such as Pearson are valued cheaply due to a declining end market, and if the company is successful in transition to an online education platform (that may supplement textbooks), Pearson’s value will significantly increase.

For both cases, the difficulty comes in being able to quantify a difference in opinion compared to the market. As in how much better do I expect Nokia/Pearson to transition compared to the market, and how should that be reflected in the value of the stock. I’m still refining my how to take my though process and apply it to valuation techniques that aren’t overly simple or too complicated.

One thing mentioned by Peter Thiel in his book Zero to One is that wall street fundamentally undervalues long term vision. I want to research this idea more because I believe it has merit. Thiel gave a few examples, such as Amazon, that I discounted at first because I thought the market was just discounting the company on a risk basis. What really validated the idea to me was thinking back to when my Mom, who understands tech, kept talking about buying Microsoft in 2015. She would tell me that Nadella has the right, focused long-term vision for Microsoft. Since then, Microsoft’s value has grown immensely. As an investor who’s quantitate analysis is limited, deeply understanding the long-term vision of a company may be a way to get an edge in the market.

One factor that may support this idea is that many institutional investors have narrow time frames so an investment will not realize its long-term vision during their holding period. As an investor looking to grow my portfolio over decades, I can leverage my time arbitrage to focus on the long-term vision of a company and hold an investment long enough to reap the fruits of such a vision.

I’m writing for this to remind myself not to try to play the market. I was looking at a handful of social media stocks (mainly FB and SNAP) during the COVID-19 crisis. They seemed to be overly punished for the crisis and I believed that FB was undervalued. However, I held off on finishing my research and buying stock because I believed the market would have another large dip. Trying to ‘play’ the market and buy the dip made me pass up a good company for a good price. Now, these companies appear to be quite expensive and don’t fit into my investment ideology. At the same time, I need to check myself for giving into the ‘fear of missing out,’ as I see these social media stock and the market in general post large gains. I need to get back to thinking about the basic valuation principles rather than get caught up in the market.

I have over 40% of my portfolio in cash and the recent volatility has me searching for the right opportunities. I am currently skeptical if the market has fully priced in the impact of the virus as I believe that things can only go back to ‘normal’ once a vaccine is developed and deployed which is unlikely to happen before the end of 2020. Looking at the current situation in Wuhan as businesses open up could give me insight into what the following months will look like

Given my long term holding period, I am not overly concerned with the day to day swings but rather picking a strong undervalued business that will realize its potential over the next couple of years. I am particularly interested in investing in businesses that will come out of the crisis with less competition. For example, many suspect that Neiman Marcus will enter bankruptcy. I wonder what this would mean for Nordstrom, given it can survive the crisis.

Based off of pure gut feelings, plenty of valuations for companies don’t seem right in the market. Using that gut feeling to bring me to proper investing opportunities is the goal.

I invested in Cloudera back on August 2 for $6.56/share, let me take you through some of my thought process.

I’ve always been more interested value investment; I tend to shy away from flashy growth opportunities in favor for undervalued companies with low multiples relative to the market segment. Cloudera, a young technology company that is yet to be profitable, doesn’t traditionally fit in to value yet I found it to be a worth purchasing for many of the same reasons.

I keep an eye out for stocks that have a poor annual performance, hoping to find companies that have been beaten down to cheap levels while they’re long-term value did not change. I believe Cloudera is one such company. I was curious if the 67% drop from the 52-week high from $20.18 to $6.56 was based more a true decrease in intrinsic value or more based an overreaction to factors that have little effect on long-term outlook.

Part of the reason for Cloudera’s decline is because of the extreme expensives and the sudden leave of the CEO Tom Reilly. However high expenses for a developing technology didn’t fully explain the drop and included the one time expense of acquiring Hortonworks. The departure of the CEO and missing expected revenue by less than 1% (yet actual EPS were -$0.13 compared to an expected -$0.23) caused the stock to drop over 40% in a single day. I believed the marketed panicked, believing that there must be a hidden, catastrophic reason for the CEO to leave. I saw it as an overreaction.

At this point, Cloudera presented a company with huge potential, a front runner in cloud based data analytics that was trading for a Price/Sales ratio of 3. After doing more investigation into the direction of the company and their long term outlook of the field, I concluded that Cloudera had more upside than risk, so I invested.

More thoughts on the current state of Cloudera to come.

Hey everyone,

My name is Aarsh Kak and started this site to document my journey as I learn and invest. Ever since middle school, I’ve been exploring the stock market, using my personal portfolio as a way to learn through experience. I began by reading Benjamin Graham’s The Intelligent Investor, which introduced me to the concept of value investing. While it wasn’t the easiest book for a seventh grader, the ideas behind evaluating the intrinsic value of a company resonated with me. I began investing real money using the concepts I understood from the book, along with the help of Investopedia. I entered the market with an overconfident zeal of a middle schooler which was reinforced by a portfolio of a couple of stocks that beat the market.

Now, after graduating high school, I am starting to realize how much there is to learn. As many have said, investing is more art than science, and I’m hoping to acquire a multitude of techniques and tools to try to turn my personal portfolio into a masterpiece. I decided to broadcast my learning process to anyone it may interest, and hope to receive as much advice and feedback as possible.

I plan to post my thoughts and new concepts I learn on a weekly basis.