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HOlmes Osborne

    15th Year in Business

  This marks our fifteenth year as an investment firm. When Holmes started in the business 21 years ago, you could leave your money in the money market fund and earn 5%, invest in the stock market and earn 12% a year, and receive 7% interest in bonds. Boy how things have changed! You’d be lucky to get 5% in the stock market over the next ten years (though we’ll try our best to beat that number at this firm).

It’s funny, the industry still thinks it’s the old days with high fees, aggressive investments, and an over emphasis on hot stocks. You’d think that with big market corrections in 2001 and 2008/2009 investors would be leery but quite the opposite—people seem sanguine about financial markets.

Most firms haven’t gotten away from research and pretty much invest in the same thing. We call these the usual suspects—oldline American companies mixed with some tech stocks. The tech stocks have been driving results for the last few years but investors have short memories. All investments go through cycles and this cycle has been in its longest bull market of all time.
    
   Trip to Brazil

Holmes was able to visit three companies on a trip to Brazil. The first was Petrobras, the largest oil company in South America. The second was B2B, an online retailer. The third company was Estacio, a for- profit school that is expanding.

Holmes was going to visit Rio Tinto but the company had a dam break and several hundred people perished. Tragic. This is why it is so important to make company visits and get a better idea of what management is doing.
    
 First Quarter 2019 Activity


We sold out of Impapala Platinum and had some success. Platinum is rarer than gold yet has traded at a large discount for quite some time. We first purchased in 2016. We sold half of the position a few years ago for almost 100% profit and recently sold the second half of the position for about a 30% profit. Impala was a higher risk/higher return stock. Orkla was a holding that we held for over four years.

Orkla is the Kraft/ Heinz of Norway, specializing in frozen food, cheese, crackers, pizza, and many other grocery store items. The irony is that we originally bought the stock because Orkla reminded us of Kraft and then we sold it after Kraft began having problems.

The food business is very competitive and retailers have the upper hand for now. Amazon and the dollar stores are shaking things up and putting pressure on profits of the big food manufacturers. Orkla’s main shareholder stated that he was worried about the future and the company’s CEO recently stepped down.

When a CEO steps down and he/she is in their early 50s, it’s usually not for a good reason. Sure, they’ll tell you that they need to take time off but usually they can see the handwriting on the wall.

Most of our accounts made a small profit on Orkla, as the dividend yield was north of 5% for much of the time that we owed the stock.

We briefly owned Signet. Signet is a jewelry store with retail brands such as Piercing Pagoda, Zales, and Kay’s. We thought the company would have a hard time competing with the online retailers but bought shares after a huge earnings miss. We hoped for a rebound but when this didn’t happen, we cut our losses and moved on.

Our next purchase was Dean Foods, the largest dairy company in the U.S. Dean’s stock has done quite poorly as milk sales have witnessed high competition from plantbased products such as almond milk. Dean doesn't have much of an organic presence and sold off its White Wave Division to Groupe Danone, the French foods company that owns Danon Yogurt, for $5 billion a few years ago. This may be one of the dumbest moves a management team has ever made as Whitewave is doing quite well for Danone and could have helped Dean with plant based milk and organics.

This is a higher risk/ higher return stock. We looked at the real estate that Dean owns around the country and think the stock is undervalued. Dean owns entire city blocks in Honolulu, Houston, Miami, Los Angeles, and other expensive property markets. Another company needs to step in and buyout Dean.

If things don’t turn around, we’re tempted to launch a proxy fight. This is when an investor has their own slate of directors whom they want to elect to the board.

Our beloved Dollar General is getting close to doubling its value from when we bought it two years ago. Management keeps opening stores all across the country. Dollar Tree hasn’t done so well for us but we’re optimistic. Its Family Dollar division is going to sell alcohol and Dollar Tree is going to sell items for more than $1. As long as the two companies continue opening stores, we’ll remain shareholders. Remember, when a retailer stops opening stores, it’s time to sell. At that point, store upkeep outpaces growth in income.


 5G Technology

You've probably heard of the new technology that communication companies will be using in the near future called 5G. Of course, we in the United States are using 4G across most of the country.

5G is a system that will allow multiple ways to communicate and download data across the spectrum. Fire departments can be on 5G and be on a completely different platform than cell phone users. Of course the benefit that most people want is that you will be able to download much more data onto your cell phone.

The challenge with 5G is that the distances that it reaches will not be even close to the distance of modern cell phone towers. A modern cell phone tower can reach up to five miles. 5G can only reach a few hundred yards.

In other words, 5G towers can’t be placed everywhere. 5G won’t be viable in rural areas for this reason. Also, 5G signals cannot pass through walls.

With the increased download capability, new industries will emerge. 5G can support one million devices per square kilometer while 4G can only support 100,000 devices.

Driverless cars are not a reality because the data that their computers need cannot be downloaded quickly enough with current technology. If 5G towers are built along interstates and freeways, cars on the network can communicate with one another.

So how can we profit off of this new technology? As you have probably heard, Huawei of China has been barred from doing business in the United States. The American government is afraid that it will give the Chinese government too much control over our country’s technology. This opens the door for Ericsson and other telecom manufacturers.

Perhaps the old American glassware company Corning could be a way to invest. Corning makes the optic cables that will be used to bring the data to 5G towers. It’s a lower tech way to invest but fiber is likely to become obsolete, at least in the near term.

Ericsson makes much of the equipment that will be used in 5G. It’s stock hasn’t done much for a long time as the company’s technology and profits are not what they used to be. Samsung is a big competitor of Ericsson but has many other technology divisions (and is thus less affected by 5G). Nokia is another competitor and could be an interesting investment.

Qualcomm has done a great job constructing new microchips to be used in cell phones and is a company that Americans can be proud of. Intel recently announced that it is getting out of the phone chip business and concentrating on other things as it has lost out to Qualcomm.

We’re not big technology investors because things change too rapidly. However, we might buy one tech company that will be a recipient of the 5G wave.



 

holmesosborne@holmesosborne.com


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