Focused Compounding: Member Stock-Writeups

by Geoff Gannon

Focused Compounding

Merkur Bank

“Merkur Bank (MBK) is a small regional bank located in Munich, Germany…MBK’s stock offers a good opportunity to partner with an owner-operator whose financial wealth is being tied to the bank’s future performance. This should provide outside investors with the comfort that Mr. Lingel will not take on any undue risks. MBK is a well-run bank that does business quite differently than most of its competitors; it focuses on a few attractive markets that it understands well and values long-term partnerships with its clients. At the current price, investors can expect a satisfactory return on their investment without paying for any potential growth in the coming years.”



“Founded in 1883, Kroger is now one of the largest retailers in the world, with more than $115 billion in revenue in 2016, serving more than 8.5 million customers every day. As of January 28, 2017, Kroger operated, either directly or through its subsidiaries, 2,796 supermarkets under a variety of local banner names…it’s hard to get comfortable about Kroger’s ability to grow its EPS by 8% a year without more aggressive assumptions such as meaningful increase in leverage.”


Protector Forsikring

“Protector is quite a new player in the Scandinavian insurance market. The company was established in 2004, and listed on the Norwegian stock exchange in 2007... This is a far riskier investment than for example Progressive, Gjensidige or any other stable insurance operator. But at the same time, it is cheap relative to their historical performance and the potential growth rate it may achieve over the next 5 years. For a more diversified portfolio, this might be an interesting bet. However, for a very concentrated portfolio, this investment may be a pass.”


Wells Fargo

“In general, Wells Fargo makes money in two ways.  Firstly, it earns a spread on its interest-earning assets by borrowing at low rates and lending at higher ones.  Secondly, Wells Fargo collects fees for the products and services it offers (non-interest income).  Non-interest income only partially offsets the company’s non-interest expenses; thus, it is only accretive to earnings if it outpaces costs…I believe Wells Fargo securities represent a safe investment.  U.S. banks are very durable businesses with high customer / deposit retention.  Most American consumers and businesses use their bank accounts for transactions and are generally indifferent to interest payments on the money they use month-to-month.  Banks could change for the worse, but changing for the better is much more likely. Traffic to branches is declining, which should lead to branch closures and cost reductions.  Wells Fargo has a strong competitive advantage built on a strong branch network, huge base of low cost deposits, conservative lending practices, and an ability to increase non-interest income by cross-selling its products.”


Under Armour – One Member’s Take

“Athletic apparel manufacturers typically develop, market, and distribute their own branded apparel, footwear, and accessories for men, women, and youth.  Products are usually sold worldwide and worn by athletes, as well as by consumers of active lifestyles…the athletic apparel industry is an attractive industry for investors to shop in.  After a track record of impressive and consistent sales growth, Under Armour has stumbled in its last 2 quarters, causing a mass sell-off of its shares that have driven the price down by around 50% over the last year.  I believe that most of the causes of recent poor performance are either temporary or cyclical in nature; however, the brand’s dropping popularity with fickle teenagers could be problematic if it endures.  If the brand’s strength is intact and sustainable, Under Armour shares should perform well by offering returns ranging from 9% to 15% over the next decade or more if the brand endures, but if the brand fades, investors should expect a loss of 40% on their investment.”


Under Armour – Another Member’s Take

“Under Armour (UA) was founded in 1995 by Kevin Plank, then special teams captain of the football team from University of Maryland. Frustrated by the increase in weight traditional cotton T-shirts incur after heavy sweating, Plank set out to develop T-shirts using better materials…While UA is not a traditional value investment. Given the business quality and reasonable growth assumptions, buying its stock now may still get you market beating results if you buy and hold for 20 years. But if you want a wider margin of safety, you should closely monitor the stock price. Let’s say the stock price drops another 20% or so, it may still trade at a seemingly high P/E of 40x. Yet, that would be a good entry point already, with an expected return closer to 9% to 10% over the next 20 years.”

Focused Compounding

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