Scuttlebutting At Chipotle and Whole Foods Market

Chipotle Mexican Grill and Whole Foods Market are listed in US and I had a chance to visit them in London, UK. Chipotle Mexican Grill is a chain of restaurants specializing in burritos and tacos. At the counter, the items that you can choose to be put in the burritos are lined up in trays (reminded me of Subway). The store was not that crowded at I went around 3pm, past lunchtime. If I had gone at lunchtime, maybe I could have seen more people dining there. The store I visited is very near Leicester Square (address: 92-93 St. Martin’s Lane London WC2N 4AP).

Whole Foods Market, which claims to be “America’s Healthiest Grocery Store”, is a store that sells organic food, among others. I like one of the concepts in Whole Foods Market where patrons can choose their own takeaway meals and pay a certain amount for every 100g. They have both salad selections and full-meal selections. They store was considerably crowded. The store I went to was at Piccadilly Circus (address: 20 Glasshouse St London W1B 5AR).

Below are some photos I took. The third photo shows the takeaway meals selection that I was talking about.

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Some Halloween fun:

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Dividend from SGX Increases

Singapore Exchange Limited, or SGX for short, released its Financial Year 2013 (FY 2013) on yesterday after market close.

The company saw its revenue increase 10% at $715.1 million from $647.9 million the previous year. This was mainly due to a 23% increase in Derivatives revenue and a 9% increase in Securities revenue. The net profit was up 15% to $335.9 million from $291.8 million in FY2012. The fully diluted earnings per share came up to be 31.32 cents, up 15% from the previous year. The net profit margin increased 2 percentage points from FY2012 to 46.6%.

SGX has a clean balance sheet with zero debt and it sits on $763 million of cash. The total equity was $888.6 million, as of 30 June 2013. The return on equity was at 39%, up 3.8 percentage points from the previous year.

Cash flow generated from operations was $418.8 million and the capital expenditure was at $27.6 million. This translates to a free cash flow of $391.2 million.

The proposed final dividends increased to 16 cents per share in FY 2013 from 15 cents per share in FY 2012. The total dividends also increased to 28 cents per share this year from 27 cents per share the previous year. The dividend payout ratio is at 0.89.

Mr Magnus Böcker, SGX CEO, said, “We are pleased to report a net profit of $336 million and underlying profit of $351 million, both up 15% over the previous year. This is our best performance since FY2008. Our continuing investments in new products and wider distribution enabled us to benefit from increased market activities. Securities total traded value increased 10% to $363 billion. Our Derivatives market continued to deliver growth with a number of records including total traded volumes of 101 million contracts, up 32% year-on-year.”

The trailing PE for SGX is at 24.3 and the dividend yield is 3.68%, at the time of writing.

Latest changes in the STI reserve list

Effective 24 June 2013, Suntec Real Estate Investment Trust, will join the reserve list of the Straits Times Index. This is after a quarterly review done to the STI.

The five companies in the reserve list, as of 24th June 2013, are:

  • Ascendas Real Estate Investment Trust
  • Keppel Land Limited
  • UOL Group Limited
  • CapitaCommercial Trust
  • Suntec Real Estate Investment Trust

The companies above will replace any current STI constituent that becomes ineligible as a result of corporate actions prior to the next review.

The average full market capitalisation of the stocks/REITs in the reserve list is around S$4.8 billion. The average full market capitalisation of the stocks in the STI is currently around S$17.8 billion.

What Makes See’s Candies So Unique?

In the last post, we looked at a book entitled “See’s Famous Old Time Candies”. In this post, we will look at what Warren Buffett saw in See’s Candies that made him buy the company lock, stock, and barrel back in 1972.

In the preface of the book, Warren Buffett wrote that, “We discovered that we had purchased a company that held itself to a high standard of business ethics – product quality, service integrity, and the right sort of relationships with employees and suppliers. See’s Candies became our model for investment in other quality companies.”. The reasons behind See’s sustained success include its people and its products. He quipped that, “No one has matched our product, and our people are devoted to the proposition that no one will ever match our service, either”.

See’s is very stringent when it comes to quality. The Quality Assurance team runs lots of lab tests, checking for food safety and doing sensory analysis. The team checks for any microbiological growth and purity of its chocolates as well.

It doesn’t compromise on its quality even during crunch times. There was once in 1941 when butter, sugar and cream were in short supply in US. Instead of cutting down on the amount of ingredients used in each chocolate, See’s continued using the best ingredients, but made lesser candies. Each shop had a quota to sell and when they ran out of candies, they closed the shops for the day. This was a win-win situation. There was a scarcity effect created around the candies and long lines formed outside its shops. It lived by its motto: Quality Without Compromise. It’s continuing to do so too.

See’s Candies is also innovative. It sells over 150 different varieties of chocolates that one will be spoilt for choice. For Father’s Day, it creates unique gifts for dads. There was once a chocolate hammer and chocolate tie made for Father’s Day. And the tradition is continuing…

Management wise, Charles Huggins, President and CEO of See’s Candies has been touted by Buffett as someone who “combines discipline of a fine analytical mind with intuitive marketing savvy and a moral sensibility that is rare in the 21st century. In short, I wish we could clone him”.

Branding wise, See’s Candies still uses Mary See’s photos in its stores and on its chocolate boxes. Mary See was the mother of Charles See, the man who founded See’s Candies. Furthermore, there was a special edition Barbie Doll created for 2001 Berkshire Hathaway Annual General Meeting and its stores still use the iconic black-and-white floor tiles.

Even with competition from other chocolate manufacturers like Cadbury, Mars, Ferrero, etc, See’s Candies is still flying its flag high!

Riding on the ASEAN Growth Story

Myanmar has been the talk of the town recently due to it opening up. Listed companies such as Yoma Strategic, Super Group, Yongnam and Interra Resources that deal with Myanmar have seen their share prices shoot up. Myanmar may be the next growth story in the ASEAN region but ASEAN as a whole still has lots of room to grow.

I was at an event this morning and an analyst from Maybank-Kim Eng shared his views about ASEAN, the growth potential and the companies that deal with some of the countries in the ASEAN region. The photos of the slides below are self-explanatory (apologies for some of the blurry photos):

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The Importance of Checklists

Atul Gawande wrote an article called “The Checklist” and it makes an interesting read. In it, he discusses how checklists have helped bring down the rate of infection in Intensive Care Units (ICUs) tremendously. The checklist can be as simple as a five step process. Doctors are to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. As a result of the checklist, the ten-day line-infection rate went from eleven per cent to zero!

Checklists have not really taken off in the medical sector but checklists are being used extensively in the aviation industry. Pilots use it. Aircraft engineers use it. Quality specialists use it. The list goes on. Usage of checklists ensure that errors are reduced and decision-making vastly improves as a result. By using a checklist, it does not make the individual less competent as many believe so. Our memory sometimes can fail us at the most crucial point and that is when a checklist comes in handy. Even the most experienced crew member can forget certain things in a particular situation.

How is the usage of checklists related to investing? Charlie Munger, the partner of Warren Buffett, is a huge advocate of using checklists. He has said in his book, Poor Charlie’s Almanack, that “effective checklists minimizes errors and omissions”. There’s an investment book entitled “The Investment Checklist: The Art of In-Depth Research” by Michael Shearn that is dedicated entirely to value investing using checklists. In investing, usage of checklists help to keep emotions in check. Emotional stability is extremely paramount to investment success. Emotions can take over cognition without us realising it. When our company’s stock price falls, we can take out a checklist that we have prepared to see if the panic we are feeling is warranted for.

Personally, I use a four-page checklist before I invest in any businesses. Usage of such a checklist ensures that I do not omit important steps that may impact the sound analysis of the business. Do come up with your own investment checklist and see how that improves your investments. A simple five-step checklist has helped to bring down infection rates in ICUs tremendously and I’m sure an investment checklist will help you too!

One-Time Solvable Problems

When an outstanding business is affected by a temporary one-time solvable problem, it can be a huge opportunity to invest in the company and get great gains in the process. “A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem.” – Warren Buffett. The following is an example of how Warren Buffett practiced what he preached.

In 1963, a “salad oil” scandal occurred when American Express found that $60 million lent against collateral were mostly sea water instead of salad oil. The borrower was bankrupt and American Express had to take a loss of $60 million. Buffett analysed the situation and found that the trust in American Express travellers’ check and charge cards were unaffected. The company’s intrinsic value was also higher than the share price then. He saw virtually no downside and maximum upside. He invested 40% of the net worth of the Buffett Partnership, or roughly $13 million. Buffett bought 5% of American Express stock, which had collapsed to $35 a share from a high of more than $62. In the following two years, the stock price of American Express tripled and the Buffett Partnership reportedly sold out with a $20 million profit.

On hindsight, it seems easy to buy more when a company is having a one-time solvable problem and the share price gets a huge hit. However, do we have the stomach to buy more without hindsight (when the problem is staring at your face currently)?

We should not be affected emotionally when the stock price gets a hit. We should cut out all noise from the media, fora, friends and so on. Then, we should look at the problem objectively and discern whether it is really a solvable and one-off issue or is there something larger. For example, when Kingsmen had a problem back in January, I analysed the problem rationally without any noise from a forum and decided that it was one-off. The investigation by Criminal Affairs Department is not over and I might be wrong (that is, it might not be a one-off problem). What I am driving across is that we need to have independent thought and do due diligence when a problem strikes our company and act accordingly, no matter what others may say. Warren Buffett’s quote of “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right” rings true here.

Starting investing at a young age also gives the advantage of seeing more of such problems and learning from them. Experience is a wonderful teacher that certainly cannot be obtained by merely reading books. Since I started investing in 2009, the Kingsmen problem was the first one I faced as an investor and it really made me gain a great deal of experience. I have come across other problems with other companies like Osim, Boustead, Olam and Sakae Sushi but I wasn’t invested in them when the problem occurred. In any case, we can look into the problems that other companies face (as if we are invested in them) and analyse if they are one-off or not, gaining experience in the meantime.

Therefore, when a company is hit with a problem, we have to look at it rationally without any external noise. The ability to rationally think and buy more during a problem comes with experience as well. It is easier said than done but nothing is impossible.