Who Let The Dogs Out?

                                    Opie                                        

Opie, our Basset Hound pictured above, is the latest in a series of rescue dogs that my wife and I have adopted over the years. Rescue dogs typically have been named by the rescue group caring for them, but my wife and I have always, until Opie, renamed ours (some of the rescues have had what I call "stripper names," like Crystal or Sugar, and we had names already picked out, anyway). Opie was a name we kept, because what could be more perfect than Opie Taylor, who was the son of Sheriff Andy Taylor on The Andy Griffith Show. Our Opie even has reddish-brown coloring and freckles. I have even thought that we could have a whole menagerie of pets named after characters on the show--Barney, Aunt Bee, Floyd the Barber, etc. I even have human friends who have been auditioning for years to be Otis, the town drunk.

As was widely reported, pet adoptions surged during the COVID pandemic, sometimes to the extent of emptying the animal shelters of all of their guests. This made prefect sense, because if you are locked down at home, some canine companionship could at least ease the isolation. I also found that Opie made for a pretty handsome Zoom backdrop. Owning a pet involves some expenses, of course, and while you don't have to buy a Louis Vuitton dog bed, you are probably not going to cheap out on your pet's healthcare. Spending more and more at the veterinarian is a trend that has been in place since long before the pandemic, as people increasingly view their pets more as members of the family. Some investment analysts have even coined a term here as an investment theme: "the humanization of pets." Opie's latest battery of annual vaccines cost us about $400, and that is on top of the $200+ for his anti-anxiety medication. There are pet healthcare options now that didn't even exist when I was a kid going with my dad to take Rover (yes, I named her when I was four years old) to the vet. 

Just as Opie can engage his ultra-sensitive Basset nose to track a chipmunk in our backyard, smart investors have a nose for following the money. There is money being spent here, and the scent leads to a company called IDEXX Laboratories (IDXX, $555). IDXX develops, manufactures, and distributes products, including diagnostic products, and services for the veterinary and livestock sectors. This is not what I call a "consumer facing" company, meaning that you and I don't buy their products and services directly. But, if your pet has been to the veterinarian, there is a good chance that products from IDXX (or one of its competitors) have been involved in any diagnosis and treatment. More money spent on pets means more potential for business for the company. IDXX has a market cap of about $45 billion; the shares have had a 21.76% annualized five-year return, compared with 12.50 % for the S&P 500. This is what I like to see: a company in the sweet spot of an emerging and enduring trend.

My wife and I love our veterinarian, Dr. Thomas Slattery at Walnut Grove Animal Clinic here in Memphis. We have been taking our pets there for years, and we are committed to supporting locally-owned businesses whenever we can. Now, you might assume, reasonably so, that your animal clinic is owned by one or more of the vets at the practice--but wait...it might not be. There has been a trend lately of Private Equity (PE) firms buying up veterinary practices (along with nursing homes, motor home parks, and other businesses). Is this necessarily a bad thing? Some people think it warrants at least a raised eyebrow.  Here is an article from The Nation, a decidedly left-leaning magazine that rarely has anything positive to say about capitalism and free markets:

https://www.thenation.com/article/economy/private-equity-pets-veterinarian/

Yes, Private Equity firms are in it for the money. But guess what? Your veterinarian is partly in it for the money, as well, because everyone has to make a living. Don't expect The Nation to celebrate the virtues of the profit motive, but no profit means no animal clinic. My own experience is that the most important part of this equation is the individual veterinarian, her expertise and palpable concern for animals. You wouldn't expect someone who hated dogs to go into the field. But private equity involvement here does cause me some concern. I like to go into a business and be able to shake hands with the owner. If the ultimate boss is the Private Equity firm, then the owner is likely not even a veterinarian, and is removed from the day-to-day operations. Having corporate overlords whose chief focus is efficiency raises the specter of unfavorable outcomes--and the fear that things may start "going to the dogs," so to speak. My advice? If you love your vet and are satisfied with the quality of care she is providing, then by all means stick with her. She is the one who truly matters.

Speaking of local businesses, we shop at Hollywood Feed for our dog food, dog beds, toys and other pet paraphernalia. And one business that is not threatened by Amazon is dog grooming. Wendy Isham owns and operates Star Barks Mobile Pet Spa, and she comes to us in a gigantic bus that is outfitted inside for bathing and grooming the dogs. The dogs even get a bandana after each session. Wendy provides exceptional service, and it is the ultimate convenience for us.

Take are of your pets, but always be aware of who is behind the curtain.

Sweet Dreams, Opie

Life is short. Get busy.

Jim

Copyright 2024 James Brinkley Taylor, Jr.

Disclaimer/Disclosure: My family members and/or I own shares of IDXX. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.

Email me with any questions, comments, or feedback:

jbrinkleytaylor@gmail.com

                                                

 

Remains of the Day

 

Humphrey Bogart as Philip Marlowe and Charles Waldron as General Sternwood

 in The Big Sleep

My wife and I spent about a year recently visiting estate sales in search of items for the lake house we were building. Some productive bargain-hunting, but I found it depressing to be immersed in the detritus of some stranger's life. Estate sale outfits will stick a price tag on everything in sight, from the intriguing pieces to the gross items and the sad ones. I saw a piece of men's underwear (boxer shorts, but not my size) and a child's art creation, the latter which I purchased for one dollar in hopes of returning it to the homeowner or a relative, thinking that the sentimental must have been swept up in the  estate sale person's zealous effort to clear out every last item that wasn't bolted in place. The whole experience is like picking through a days-old buffet of rotten fruit and molded cheeses to find one edible morsel. Of course, one man's trash is another man's treasure--and there is the occasional useful item, such as a glass Pyrex dish, that has not become tainted with use.

All of this got me to thinking about how furniture and other household goods make their way through this market system of second-hand belongings and how those goods are priced. As I write this, I see on my computer screen that the last trade of Microsoft (MSFT) was at $406.34, with the bid at $406.33 and the ask at $$406.36. If you wanted to buy shares, you might have to pay the ask price; if you owned shares and wanted to sell them, you might get the bid price. MSFT is the most valuable company in the world, with a market cap of some $3 trillion, and the shares are very liquid. The "tightness" of the bid/ask spread can be viewed as a measure of that liquidity. Now consider a very different situation, where you want to sell your house, and you put it on the market for $400,000. It is not likely that you would get that price--unless it is a red hot real estate market, or someone falls in love with your house and just has to have it, or unless Taylor Swift once slept there. Odds are that someone will make you an offer of, say, $375,000, which you will counter at maybe $385,000, and you'll end up selling at something less than your original $400,000 asking price. The bid/ask framework applies to many transactions, even if not explicitly stated as such. The market for houses, obviously, is not as liquid as the market for stocks.

Now imagine a fictional interior designer, whom I will call Jacques Fountainbleau (he must have a stylish and sophisticated-sounding name). Jacques loves to haunt estate sales, and at one sale he sees a chest that catches his eye. He thinks this piece will work perfectly in the home of his client, whom I will call Ophelia. Jacques will pay $400 for this chest and then clean it up and price it at $2,000 for Ophelia. He is decorating her entire house--wallpaper, paint colors, sofas, chairs, tables, etc.--and the chest is just one piece of his project. Ophelia is happy to pay Jacques a hefty sum, because she is not concerned with the prices of the individual pieces (we can think of this as a gestalt experience). She is, after all, getting a house designed by the famous (at least locally) Jacques Fountainbleau, and she is paying a price for the panache. One day Ophelia decides to downsize and sell the chest. She hires an estate sale manager, and the chest sells for $500, 30% of which goes into the estate sale manager's pocket. If you pay top dollar for a lovely piece of furniture at a highly regarded antique shop, don't expect to be able to sell it down the road at anywhere near that price. 

In a similar vein, you can buy a bottle of Veuve Clicquot Champagne for about $70 at the liquor store and drink it at home. You can also go to the Windsor Court Hotel in New Orleans and pay about $150 for the same bottle. Why? Because drinking Veuve at home is just not the same as sipping Veuve in the Polo Lounge of the Windsor Court. It's all about the experience, and it's really more about psychology than it is about economics.

My wife is quite skilled when it comes to sniffing out bargains, and she demonstrated this as we shopped for lake house furnishings. I think of her approach as stripping out all of the psychology involved with shopping and putting the focus on the functional and utilitarian (it is a lake house, we used to say to each other). I see estate sales as "clearing" events, where the primary goal seems to be to get rid of all the stuff--and making any money from it is really secondary. When the situation is one where someone really wants and needs to sell, it makes for a buyer's paradise. And my wife is still going to enjoy her Veuve in the Polo Lounge, because she will definitely not be shopping for the cheapest bottle of bubbly in New Orleans.

Maybe one day some of my cherished belongings will wind up in an estate sale. And maybe when people are picking over my stuff, that line from The Big Sleep will come to mind, where General Sternwood says to Philip Marlowe: "You're looking, sir, at a very dull survival of a very gaudy life."

Life is short. Get busy. And Happy Valentine's Day!

Jim

Copyright 2024 James Brinkley Taylor, Jr.

Email me with questions, comments, or feedback:

jbrinkleytaylor@gmail.com

Hanging on Every Word

 

Federal Reserve Chairman Jerome Powell

Fed Chairman Jerome Powell appeared on 60 Minutes Sunday night, saying nothing really different from what he had to say after the Fed's meeting last week. The markets Monday are acting as though he had said that the Fed would sell short every stock in the S&P 500. As I wrote in this space in December, the big news about the Fed's so-called pivot is that they are likely done raising rates, and that the next move would likely be to lower them. Some investors in wishful-thinking land got the idea that this would happen in March. I never thought a lowering of rates would happen in March, but the more realistic thinking is that this will happen sometime in 2024.

Stock prices, broadly speaking, are determined by a combination of two factors. First, expectations of future earnings. Second, the interest rate at which those future earnings are discounted to a present value. For a number of years investors enjoyed a magical situation where the economy was strong enough to produce good earnings for companies, while interest rates were at historic lows. Economic reality is not that magical, at least not over long periods of time. A strengthening economy typically puts upward pressure on interest rates, while at the same time enhancing the chances that companies will realize greater earnings. That results in a sort of tug-of-war between the two forces. What investors hope for is that earnings will be powerful enough to overwhelm the pressure on valuations from higher rates. When that happens, stock prices likely rise.

The numbers that came out last week show a strong economy with robust jobs growth, not a situation where the Fed would be eager to cut rates. Normally the Fed would wait for at least a whiff of weakness before taking action to stimulate the economy, to stave off a recession. It just does not make sense for the Fed to cut interest rates anytime soon. That could change at any time, and when it does, that is when we will likely see an interest rate cut.

As for investing and stock-picking, the same old rules apply--there's really nothing radically new here. I prefer companies that have strong earnings growth prospects from a meaningful secular tailwind. That is why the AI companies have been so strong. Over the past year alone, Nvidia (NVDA, $690) is up some 227%. With a strengthening economy, economically-sensitive (cyclical) stocks have the potential to outperform, along with consumer discretionary companies that benefit from a strong labor market. Historically, though, consumer staples stocks, such as Procter and Gamble (PG, $159), tend to lag in such an environment. People don't buy more Charmin and Bounty just because they have more money.

It looks as if the Fed has engineered the so-called "soft landing" that everyone thought was so elusive. They have dampened inflation without killing the economy, and that is no small feat. Some commentators are suggesting that this is a "no landing" economy now, where growth keeps chugging along without persistent inflation. It has to land sometime, though, but for now I'll enjoy the flight.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I hold shares of NVDA and PG. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.

Copyright 2024 James Brinkley Taylor, Jr.

Please email me with any questions, comments, or feedback:

jbrinkleytaylor@gmail.com