Omni Supreme US: Scientific Investing in the Land of Opportunity
Omni Supreme US: Scientific Investing in the Land of Opportunity
US Supreme segments provide exposure to four different growth themes
- Omni Supreme US is the multi-cap investment offering where the portfolio is selected from the top 1500 large, mid and small cap stocks
- There are four key investments themes that the multi-cap portfolio gives exposure to, viz. AIoT, Consumption, Sports & Wellness and High Net Worth and Mass Affluent (HNWMA) segments
- Actionable: Omni Supreme US provides a superior exposure to the US economy compared to an ETF with higher yields and higher expected growth rates while still being well diversified across multiple independent growth vectors
Four attractive investment themes in the Omni Supreme US multi-cap portfolio
- Multi-Trillion Dollar TAM (Total Addressable Market) with large growth opportunities
- Global product and services ecosystem providing diverse growth vector
In our June 2020 OmniView we introduced four key investment themes of our Omni Supreme US multi-cap offerings. Omni Supreme US is our flagship offering to take exposure to the US equities. The portfolio provides exposure to the largest economy and the largest equity market in the world with the most innovative companies having global presence, best corporate governance practices and successful business models that are replicated around the world. Based on the Scientific Investing framework, a SuperNormal Portfolio of US companies with SuperNormal profitability available at SuperNormal Prices significantly below their intrinsic values is selected from the largest 1500 stocks.
In subsequent month's OmniVIew of July 2020 we further updated on the performance of each segment and compared the supernormality of the Supreme portfolio with the market on fundamental and valuation basis. In the following three months the portfolio has continued to deliver strong alpha (double-digit) over the benchmark.
While our recent report - Entering the Matrix-Understanding the Intelligent Digital Universe of the Omni AIoT US Portfolio was a deep dive into the AIoT segment of the US multi-cap portfolio, here we present insights into the other three segments viz. Consumption, Sports & Wellness and High Net Worth and Mass Affluent (HNWMA) segments.
Omni Supreme US Segment 1: Consumption Segment
Omni Supreme US has a significant exposure to the personal consumption sector with 6 stocks in this segment. Other segments of Omni Supreme US, including Sports & Wellness, HNWMA and even AIoT segment also provide exposure to some extent to the personal consumption sector. Personal consumption is the major contributor to the US GDP1 comprising 2/3rd of the total GDP. The US GDP is around $21 Trillion with more than $14 Trillion being contributed by personal consumption. Of this personal consumption of goods contributes nearly $5 trillion, while personal consumption of services $9.5 trillion. These data make it clear that the US economy is primarily consumption driven and stocks from the consumption sector would provide a direct exposure to the
Within this segment, clothing and footwear contributes $373 billion to the GDP2. Our consumption segment has exposure to two stocks in this category.
One of them is the largest specialty apparel company in the US and the second largest apparel e-commerce business in the US. This company owns 4 major brands which are $1 billion or more in sales with more than 80 million customers. Company is targeting to increase its digital sales from 25% of total sales to 50%. It is also working on rationalizing costs and hence improving the operating and free cash flows. With nearly $2 billion in cash, the company has a net debt, other than operating lease liabilities, of just few hundred million dollars. Given the existing FCF yields to EV and expected growth rates, the company is poised to deliver double digit returns. The EV to Sales of the firm is also at a nearly 30% discount to the sector median. The primary risks to this outlook are that the company is not able to rationalize itself on the cost front as planned. Also, further lockdowns related to COVID-19 or impact of economy-wide job losses cannot be ruled out.
The other company is a small, denim-focused apparel retailer of medium-range casual apparel, footwear and accessories for fashion-conscious, 15-30 year old, young men and women. The company has nearly 450 stores in 42 states. The total sales of the company are just less than a billion dollars. With a pristine debt-free balance sheet, excluding for operating lease liabilities and corresponding assets, it actually has nearly 15-20% of its market cap in cash. The free cash flow to EV yield itself is double
digit with growth contributing to returns further.
Life from Home
The furnishing and durable household equipment category contributes $403 billion to the GDP3. There are 2 stocks contributing to this category: both of them being classic life-from-home plays. One of them is a company primarily known for home furnishings with more than 20% homes in US owning the brand. They have more than 1000 stores across the US. They are in the top 5 brands across a number of categories with a TAM (total addressable market) of $100 billion. The home furnishing company has the flagship brand with nearly $7 billion in sales and another important brand with $1 billion in sales. The company has more than 35% in digital sales. Further, the company expects to significantly grow its margins over the next 3 years via strategic reorientation, operational efficiencies and other cost management efforts. The company is available at yields north of 8% assuming those higher margins work out. The catalyst is the actual delivery of those increased margins. Company re-ratings will be driven by actual delivery of higher margins, both at gross and EBITDA levels, strong cash flow generation, and growth in same store sales. Share repurchases would also add value.
Another firm in the consumer durables is a classic live-from-home play. It is a much larger firm with more than $40 billion in annual revenue. It provides equipment for work-from-home, learn-from-home, play-from-home and live-from-home. This is primarily a US-focused firm with significant digital sales of around 16% last year and more than 50% this year, driven by COVID-19-related store closures. With stores opening, the digital sales contribution will decline from 50%, it is still likely to sustain at levels higher than last year. Currently, the firm is available at an FCF/EV yield of 5%. The company has plans to increase the FCF significantly over the next 5 years which could deliver a total return in double digits. A rerating of the firm based on the higher free cash flows could result in much higher holding period returns.
Play from Home
Another stock in the consumption segment is a pure play-from-home specialty retailer. This stock provides exposure to the $150 billion (2019) gaming market worldwide which is expected to grow to $250 billion by 2025. The company has more than 5000 stores worldwide across developed markets. These stores have a reach of nearly 260 million customers within their catchment area. With more than 50,000 expert store sales associates to cater to customer needs and 60 million loyalty customers, the firm has strong entrenchment in its niche market of gaming. The company is expected to benefit from the next generation gaming console cycle. The company is available at a 20% yield of its normalized free cash flow. The company has had an 800% increase in digital sales during the last quarter. Since that was primarily due to the store closures and the sales migrating from the stores to digital channel, it cannot be expected to sustain at that level. However, it proved that the customers prefer the digital channel of this firm as opposed to other digital channels they might have chosen. The risks remain that the new console cycle does not bring in the expected sales, the digital channel faces competition from alternatives and the required cash flows are not generated. Barring these risks, the stock is likely to be rerated from a 20% yielder to a 7% yielder which could provide multi-bagger returns over the next few years.
The last stock in this segment represents the source of finance for all this consumption. This is a credit card, student and personal loans, and payments company. Their payments volume for the quarter exceeded more than $100 billion in the most recent quarter. The company enjoys high double digit yields on its credit cards while the weighted cost of funds is less than 2% providing a high net interest margin. With a high earnings yield of nearly 12%, high normalized ROE, and a growth rate of 7-9% p.a. the company provides a high expected return.
Omni Supreme US Segment 2: Sports & Wellness (S&W) Segment
The Sports & Wellness segment provides exposure to a multi-trillion-dollar industry which is one of the largest and fastest growing industries. As per global wellness institute4 the global wellness economy is valued at $4.5 trillion in 2018 and has grown at double-digit rate since 2010. Omni Supreme US portfolio companies provide exposure to two of the key segments Nutrition and weight loss and Physical Activity which collectively are valued at $1.5 trillion.
Nutrition and Weight loss
The US has more than 130 million obese people who need help with weight management and need to enhance their fitness levels. This market is growing with increased cases of obesity, higher incidence of lifestyle diseases and growing awareness about nutrition and healthy lifestyles. The weight loss and weight management market is estimated to grow at 6.9% annual rate from 2017 to 2027 5 to a market size of more than $300bn.
There are two companies in this segment which provide nutrition and weight loss services. The companies in this segment have annual revenues ranging from around $800 million to $1.1 billion, while the FCF for both is nearly $140 million. The EV ranges from $1.3 billion to $1.9 billion. The FCF yields range from 7% to nearly 10%. Even modest growth expectations in the GDP+ range would take the total return expectations to double digits.
Athleisure is a big trend globally. In the US, Activewear accounted for 24% of the apparel industry sales in 2018 64
and has grown steadily due to the changing preferences toward a trend that combines fitness, comfort and fashion. The global athleisure market is estimated to be around $350bn and is expected to grow at an annual rate of 8.1%7 in next five years to more than $500bn. For the US, the athleisure market is expected to grow an annual rate of 6.7% from 2019 to 2026 as per Allied market research8. Fitness consciousness has been growing for more than a decade and the pandemic has only accelerated this trend. With most of the employees working from home, office or formal wear budgets were diverted to athleisure which became the everyday wear. The Sports & Wellness segment includes some of the largest brands and retailers of this fast-growing athleisure trend. Two of the three companies have significant global presence outside of the US and this helps in booting the growth rates by tapping into newer markets.
The three companies in this segment have annual revenues ranging from around $1.3 to $7.4 billion, while the normalized FCF ranges from $50 million to $500 million. The EV ranges from $450 million to $4.2 billion. The FCF yields range from 6% to nearly 16% which makes the total return expectation in double digit range even with modest growth expectations.
Omni Supreme US Segment 3: HNWMA Segment
The HNWMA segment primarily consists of companies which provides goods and services belonging to experiential luxury to the High Net Worth and Mass Affluent segment of the population. The US HNW population is 6.3 million with a wealth of $21.7 trillion while the global population is 19.6 million with a wealth of $74 trillion as of 20199. The HNWI population has grown at a CAGR of 7% for the last 10 years and is expected to continue to grow at high to mid-single digit. The global luxury goods market is expected to grow at a CAGR of 6.4% to around $400bn by 202510.
Two of the four companies of this segment design and sell luxury items such as apparels, watches, jewellery, handbags, footwear and accessories. They are houses for some of the most popular and premium global luxury brands which are either owned or licensed. The primary market is US-based HNWMA segments. However, through a footprint of third-party and company-owned retail network spread across Europe and Asia these companies provide exposure to the global HNWI and MA segment as well.
The companies in this segment have annual revenues ranging from around $1.8 to $2.6 billion, while conservatively estimated normalized FCF ranges from $30 million to $100 million. While the reported FCF on the TTM basis is in the range of $200 to $370 million range, we have considered very conservative numbers as certain segments could be declining and may also see some long term changes in consumption patterns driven by the pandemic. The EV ranges from $350 million to $1 billion. The
FCF yields range from 9% to nearly 10% which makes the total return expectation in double digit range even with modest growth expectations.
The company is one of the premium airlines with a dominant market share for one of the most popular luxury tourist destinations in North America. Because of its focused destination, it is highly specialized to serve the tourist customer segment and has an edge over other potential competitors. They are number 1 or number 2 on a number of domestic and international routes to this destination.
While currently, the airline industry is hit by Covid-19, the normalized revenue of the company is around $2.8 billion with an operating margin of 11-12%. This yields around $300 to $350 million in operating profits and around $220 to $240 million in net profits. This is 12%+ yield to its Enterprise Value. The growth over last few years is in the range of 4-5%. This provides a potential expected total return of around 16%-17%..
The firm is a private banking entity with nearly $8 billion in revenues, more than 8000 advisors and client assets under administration of nearly $930 billion. While the Private Client Group is the largest revenue and profit contributor, there are other segments with significant contribution, such as, Capital Markets, Asset Management, and a Bank. The long-term growth, including both organic and inorganic, of the business has been in double digits. An organic growth of around 5%-7% is expected over the long term. The organic growth would primarily be driven by the AUM growing as a result of investment returns itself with some contribution from new assets coming from existing clients, new clients from existing advisors and new advisors and their clients bringing new assets.
This provides exposure to the wealth management and financial services market for High Net Worth Individuals. This is a very stable market which survives through recessions since the HNWI segment is relatively more immune to economic ups and downs. While the actual results have been quite stable, it is possible that the revenue and profits fluctuate with the market ups and downs since significant portion of the revenue will be linked to assets under management. The company is available at a PE of 14-15, providing an earnings yield of around 6%-7% with an organic growth of around 5-7%. This provides an expected total return in the range of 11%-14%.
The exhibit 1 below presents the fundamental and valuation ratios for each Omni Supreme US segment and compares them with the market using S&P 1500 ratios.
The clear actionable that comes out from the above exhibit is that the optimal way to take exposure to the US equities is not through an index ETF but through investing in the US Supreme portfolio. The multi-cap portfolio has superior fundamentals with higher profitability, better asset utilization and cash rich balance sheets helping it to capture economic alpha over the market portfolio. It further captures the value alpha as evident from significantly better valuation metrics.
The Omni Supreme portfolio is well diversified across multiple segments with different growth vectors which are relatively less correlated with each other.
The superiority of the Omni Supreme US portfolio is reinforced by the exhibit 2 as well. The estimated free cashflow yields clearly show that each segment of Omni Supreme has higher yields than S&P 1500 as well as has similar or higher expected growth rates. This positions the portfolio for higher expected total returns and a high likelihood of capturing alpha.
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Disclosures & Disclaimers
Omniscience Capital Advisors Private Limited (Omniscience Investment Advisers) is a SEBI registered Investment Advisory firm with registration no. INA000007623.
Equity investments are subject to market risks. Global investments are subject to currency risk, country risk and other risk factors. Please read all related documents carefully. An investor should consider the investment objectives, risks, and charges & expenses carefully before taking any investment decision. Wherever there is the potential for profit there is also the possibility of loss. Therefore, investors may lose capital in markets. Past performance is not necessarily indicative of future results. This is not an offer document. This material is intended for educational purposes only and is not an offer to sell any services or products or a solicitation to buy any securities mentioned or otherwise. Any representation to the contrary is not permitted. This document does not constitute an offer of services in jurisdictions where the company does not have the necessary licenses.
Performance is based on the investments done in portfolios with proprietary money. The performance numbers are pre-expense and unaudited. Global portfolios are maintained by an independent global custodian and the performance is calculated based on the portfolio holdings. India portfolios are maintained by Orbis Financial Corporation ltd, an independent, SEBI registered custodian and fund accountant; performance is based on the NAV maintained by the fund accountant. All benchmark returns and global portfolio returns are price returns starting from May 1, 2020. Beta and Standard deviation are calculated based on daily returns since inception. Individual returns of Clients for a particular portfolio may vary significantly from the mentioned model portfolio performances and the performance of the other portfolios. No claims may be made or entertained for any variances between the performance depictions and individual portfolio performance. The data is provided as an illustration of the behavior of the strategy under different market conditions. Reader should not use it to form an opinion about the future returns from the strategy. No express or implied guarantees or warranties about the accuracy and/or completeness of the performance are being made and OmniScience Capital shall have no liability for any damages, claims, losses or expenses. Neither the investment adviser nor its Directors or Employees shall be in any way liable for any variations noticed in the returns of individual portfolios.
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- U.S. Bureau of Economic Analysis - https://www.bea.gov/
- U.S. Bureau of Economic Analysis - https://www.bea.gov/
- U.S. Bureau of Economic Analysis - https://www.bea.gov/
- Global Wellness Institute Statistics and Facts
- Weight Loss and Weight Management Market $303.81 billion by 2027 Markets and markets
- NPD Group Future of Apparel Study
- Grand View Research Market analysis report
- Allied Market Research Report
- Capgemini World Wealth Report 2020
- In-depth: Luxury Goods 2020 - Statista Consumer Market Outlook