Fundamentally Furloughed

Qualcomm - QCOM (Hold)

Thanks to @Fotis for the suggestion to take a look at the mega chip manufacturer Qualcomm. This isn’t a company I have looked at before but it’s an exciting firm and one you might not have heard of, but you have likely engaged with their products and solutions.

qualcomm

Qualcomm is a specialist in network technologies, think 4G and 5G, for mobile and smart devices. They also get involved in the hardware as well as the policy side of wireless networks.

What Do They Do?

Qualcomm is split into three different divisions.


Source: Qualcomm Investor Relations

QCT develops and supplies circuits and software based on CDMA, OFDMA for mobile devices. We are talking smartphones to gaming devices, broadband gateway equipment to the Internet of Things (IoT) devices. Aside from their biggest market which is smartphones, smart and driverless cars will be a massive growth market for this segment.

This is the biggest revenue driver right now and the biggest focus of the business. Selling chips for the next generation of phones, e.g. 5G enabled phones with fast chips with integrated networks. They also offer network cards and software for Wi-Fi, Bluetooth, NFC, and even help support location and data services.


Source: QCT Information

QTL grants licenses to use portions of Qualcomm’s intellectual property, which includes patent rights essential to the manufacture and sale of some wireless products. Their heavy investment into the standards and processes in the wireless space, along with a rough and tumble league of lawyers, mean they can lockout competitors or collect IP license fees from rivals.

While a declining area, due to the growth of 4G over the years, we can expect this to increase as 5G devices increase in popularity. However, new competitors with their IP mean this isn’t going to be lucrative forever. This does force other companies to invest in their R&D creating an arms race.

It’s worth noting that Qualcomm has an advantage due to its vertically integrated business model. Versus other network firms who do not own the IP behind the technology, or even the manufacturing process.


Source: QTL Information

QSI looks after and makes strategic investments. This is different from the groups R&D which belongs to each sub-division. Here Qualcomm invests in different companies involved in automotive, IoT, mobile, datacentres, and healthcare.

This allows them access to the inside track with early-stage companies which might be moving faster in specialist areas. This is an easy way to acquire new licences or customers, depending on the focus of the company.


Source: QSI Information

What Are The Risks?

Qualcomm is a competitor to Huawei. The two has slightly different approaches but are heavily influenced by each other.

Huawei has secured 5G contracts in the UK, while this helps the rollout of 5G which enables 5G enabled devices (where Qualcomm can sell the chips) they are missing out on the available infrastructure plays.

There is also the bet on 5G delivering on the promise. Having faster internet on devices is only a small part of the deal. The real cherry is the new devices and technologies that 5G enables. For example, why do complex processing on your phone when doing digital enhancements to a photo (privacy concerns to the side for a moment) when it can be done by cloud edge computing? Fast, lean, cloud-based functions which your device can rely on to do complex processing without it being a drain on your device. Driverless cars where the central processing is done remotely due to the availability and speed of 5G. You are no longer limited to the hardware of the device you deploy with.


Source: Forecast of the 5G chipset market size worldwide from 2019 to 2027


Source: Number of wireless subscriptions by generation worldwide from 2010 to 2023

While the 5G growth and adoption, figures look extremely promising. Qualcomm does have an additional risk which isn’t shared by all its competitors.

The vertical integration of its business is a blessing and a curse. Any manufacturing or logistical issues encountered will be felt throughout the whole value change. This does make them slower to innovate against their adversaries who don’t have the same constraints.

We also have the different legal issues Qualcomm has, having just ended with a successful payout from Apple over the use of their IP. While they are the largest smartphone chip producers they are not loved by their customers. Making them vulnerable in the long run to a more customer-centric business. This is where their licence division focused not on making money but locking out competitors and keeping the barrier to entry as high as possible.


Source: Wallmine

Qualcomm is also extremely sensitive to a US/China trade war. Which is sadly brewing once again. If Trump is to be elected for another four years, this will put the pressure back on for Qualcomm as it damages it’s manufacturing plans.

Fundamental Headline


Source: Genuine Impact

Qualcomm is a very high-quality company. They have excellent profitability, bringing in $24.7bn in revenue and converting an impressive 18% into profit.

They also have a strong grasp over their debt due to the high cash conversion.


Source: Qualcomm 2Q 2020 Results

$2.5bn of short term debt is normally a warning sign, but with $8.4bn cash on hand (plus other cash-like assets which I haven’t included), this is meanly cash flow control.


Source: Qualcomm 2Q 2020 Financial Results (Summary)

In terms of a dividend, this might be an attractive business for you. With 72.5% of earnings paid back to investors! They sure know how to keep you sweet. A 3.2% dividend yield is impressive, while not groundbreaking, but can be sensitive to the risks mentioned before.

When it comes to buying Qualcomm it’s very expensive to pick up right now. Nothing about the price versus balance sheet, or income, or even against the cash flow is attractive right now.

Even when we take target share price figures into account and future growth, the company is still overpriced. There is a lot of optimism around the 5G explosion with little risk priced in. This means negative news or slowdowns (which the trade war can easily bring back) we can expect to slash the price.


Source: Genuine Impact

We are also seeing an unimpressive, but not concerning view from the sell-side analysts. We are seeing analysts change from a buy rating to a hold one.

I can understand why, with so many unknowns in the immediate future, and trade war 2 electric boogaloo on the horizon, we can expect some discounting of the share price yet.

So Why A Hold?

There is a lot of upsides here, I see strong future growth and a high-quality company with enough cash reserves to fight off the competitors and keep winning big deals.

When it comes to 5G these are the guys to watch, while slower than their peers they have the vertical integration few companies can dream of.

However, we are likely going to face some short term volatility. This is a stock to watch, if you hold it you won’t have any issues with pound cost averaging, but if you are looking to enter this is one to add to the wishlist and keep monitoring. We have political, manufacturing, and competition risks to manage right now unless you are happy to lockin and get those dividends, this doesn’t feel like one to rush.

Either wait for the next earnings or until the share price makes this slightly more attractive.

Let me know what you think! Any suggestions for companies or funds to look at next, or any points you disagree with. Love to hear your feedback!

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Great post man! Thanks a lot :slight_smile:

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No worries, thanks for the suggestion! I had a lot of fun looking into them and taking a look through the numbers. It’ll be one I’ll start watching now as well :+1:

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Great posts! I find the visuals and charts in your post to be particularly useful as they me to access to a great range of information and analysis.

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Thanks for the kind words, it’s great to hear you are enjoying them :champagne:

I’m planning a lighter write up today ahead of the bank holiday. While I might be free the girlfriend still has to work. Finally a chance for her to help me shopping for once :smiley:

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Lyft - LYFT (Buy)

This is an interesting company for me. Late to the ride share business, operating in fewer markets than their competitors, smaller market share, and having to face the same criticisms over gig-economy workers being employees.

What has my attention about Lyft versus their competitors, and why am I interested in a transportation-as-a-service company which operates only in the US and Canada?

lyft logo

What Does Lyft Do?

The phrase transportation-as-a-services doesn’t give you that many clues, they could be running a bus loan service. At the core of their business is using technology to make transportation better for individuals. This is a slightly different take compared to a company like Uber which uses technology to solve logistic and fleet management issues. Both result in similar outcomes but play out with different business investments and focuses.

Unlike other firms, Lyft doesn’t make it completely clear all their business lines and services just by looking at their investor relations page. One of those, if you know you know kind of deals.

I had to read the full SEC filings to get some useful information. Lyft likes to group everything and talk from the perspective as a group, which isn’t useful when it comes to breaking down their bets and individual risks.


Source: Lyft Full Year 10-K SEC Filing

Ride sharing marketplace
The core offering, this is the platform that connects drivers and riders. It’s more than just a marketplace, this also controls surge pricing and predicting rider flow. Like Uber this is a key piece of IP, knowing where your drivers need to be so they make money and knowing when to expect rides so there is never a shortage for riders.

Bikes and scooters
Shared bikes and scooters in major metropolitan areas is a growing trend, no doubt you’ve seen this yourself. When thinking about transport you’ll often here bikes and scooters referred to as “the first-mile and last-mile of a multimodal trip”. This is for short walking distances, part of a larger journey rather than trying to get walkers to start scooting about. These are “dockless” as well, which means they employ staff to go around and move these bikes and scooters so they are always available where you want them to be.

Lyft believes they operate the largest bike-sharing platform in the US, but all we care about is they have exclusive city partnerships in a majority of locations, like including New York City, the San Francisco Bay Area, Chicago and Boston.

Public transit
I joked they could just be running buses, turns out that’s not completely false. Their public transit business is just displaying transit options, this generates no revenue or fee. As part of their business, it’s all about engaging with their app and product suite. Looking up and planning travel with Lyft means giving over your valuable data.

Autonomous vehicles
Now we are getting to the juicy bits. Lyft partners with Waymo and Aptiv (plus a few others) to make this happen. They have deployed a fleet of autonomous vehicles in Las Vegas where it is revenue-generating. Over 100,000 rides in Aptiv autonomous vehicles with a safety driver since January 2018.

Rentals
Most firms in this space also end up vertically controlling the experience. It starts with mandating the cars which can be used, and quickly brings them into the world of car rentals to drivers and offering insurance. However, rentals now include a new offering which they have started testing in 2019. Renting cars as a rider for things like a weekend away. This is temporary car ownership. While a tried and tested business from the era of airport car rentals, this is another growing revenue line in a world where car ownership is at risk.

The Competition Summary

Let’s take a look at the fundamentals of Lyft and their competitors, this is a quick comparison to see the health of each company and to frame where they stand as investments.

Lyft


Source: Genuine Impact
Good debt control, not profitable, and doesn’t pay any money out to shareholders. Very expensive to buy as they aren’t profitable and the share price is predictive of them growing. Poor future revenue, but very strong future earnings, very strong sentiment to buy the stock now.

Uber


Source: Genuine Impact
Decent debt control, not profitable, and not paying out any money. Extremely expensive to buy right now. High returns are priced in and expected. Poor future revenue, but extremely strong future earnings, and decent sentiment to buy the stock.

Yandex


Source: Genuine Impact
A large Russian company where Yandex.Taxi is a small part of their business but I’ve included it due to the list being so short! High profitability, debt is extremely well covered and controlled, still not great at paying money out. Not as expensive to buy as the other two but larger firms tend to be worth less than the sum of their parts, due to poor synergies and optimisation. A very weak outlook for the future, not something the analysts think you should be even considering right now.

It’s pretty tough to find direct competitors which you can invest in. Most of the competitors are privately owned, and the other public ones are large firms like Yandex or car manufactures where it’s a smaller part of their business.

To help paint a picture, here is a landscape picture from an asset manager.


Source: GAM TaaS Is An Opportunity

Looking above where we covered off the different business lines, you can see the different areas of the TaaS landscape Lyft is trying to enter into.

What Are The Risks?

The biggest risk is, what if this isn’t the future trend we think it is? There is a big expectation that the future of car ownership is in decline. In the future we rent our transportation and see it as a commodity. Even companies like Tesla are working towards your Tesla working as a public taxi while you are not using it. The risk is, what if this graph is wrong.


Source: Statista Ride Hailing Taxies - User Growth

The prediction is more and more users will start ride hailing than ever before, and this is a year on year growth which won’t end.


Source: Statista Rie Hailing Taxies - Revenue Growth

Even accounting for COVID-19 we are expecting ongoing growth outpacing user growth, meaning we are using the services more and more.

The other big risk is the law. The gig economy as it stands today is being challenged. Right now Uber and Lyft are facing a legal battle in some US states to not classify the drivers as employees. This is a common trend around the world and one the taxi services are having to fight. On the side of the corporations is the growing number of gig worker market places available, e.g. Deliveroo, which would also be affected. While TaaS firm can repurpose their offering, this is a fundamental threat to their core services currently.

A sudden change in the law could result in years worth of setbacks.

Finally, on the point of law, is automation. Both Lyft and Uber are making automation bets, along with a few other notable companies like Tesla and Alphabet. If driverless cars are not given the freedom these firms are pushing for, it means these experiments stay in R&D for longer and keep burning cash.

For publicly listed companies they sure do behave like start-ups. Extremely high cash burn, need to be well funded which means more capital will likely be raised (plus aggressive acquisition strategies to fund,) creates a situation where a bad global pandemic could shake your business to the core.

Lyft has been forced to make some tough moves and laid off staff, as well as massively downgrading their 2020 plans and targets.

A sensitive, unknown, trend setting, cash consuming, non-profitable business. Some meaningful risks in a nutshell.

The Growth Plans

Which brings us back, with so many risks what are Lyft doing about it. What is the growth strategy?

Number one is to increase their use cases. Think about the transit business line which doesn’t generate any income. They want to become the go-to source for transportation, using their services or not. This also gives them the flexibility to move into a service provider and step away from delivering the service (think Amazon running a marketplace but they don’t manufacture the goods, well not always.)

Subscriptions are also a new feature they are working on. Produce regular predictable revenue and a loyal customer base to roll out new products and cross sell into.

Next up is the B2B angle again. Selling their logistics management solution to other fleets. Rather than digging for gold, sell the pickaxes. Another way to pivot the business or potentially expand it, depending on the climate.

Geographic expansion. Lyft is very small geographically speaking compared to many of their competitors. They are very focused, which is great for a very tailored experience, terrible for your market penetration outside of your home regions. Uber is burning cash getting themselves a very defensible market hold, Lyft is planning to start expanding as well.

Acquire more of the value chain. They brought Flexdrive which was their business partner for loaning cars to drivers. Lyft is not shy when it comes to M&A activity, they see this as a way to grow their business and completely control the experience from top to bottom. A smaller region focus means you can create strong synergies but replicating this round the world might be tougher.

What’s The Hook?

Looking through you might still be surprised I have this as a buy. The long term future looks like a challenge, and it’s not as impressive when it comes to fundamentals. What is the upside that has my attention?


Source: Genuine Impact

The future share price is what has me excited. Let me turn this rank into a tangible number for you.

Lyft is currently priced around $32 a share price right now, the medium sell-side analyst target price (target price is normally within the next 12 months) is $51 a share. This is a 60% increase.


Source: Wallmine

With the general view being a buy, buy-hold, or hold. The analysts see a strong short term future after COVID-19. While there will be some struggles once the lockdown eases up, the growth strategy seems promising.


Source: Genuine Impact

Additionally there might be some short term wins to be had for Lyft over Uber.

Barclays analyst Ross Sandler expects a quicker recovery for Lyft than Uber because of its West Coast orientation, assuming West Coast cities reopen a few weeks before the eastern U.S. and Europe.

Let me know what you think, is now a good time to pickup Lyft and how does it stack up against Uber as an investment.

Thanks again everyone for the suggestions and readership!

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Really enjoying these analysis, keep them coming kind sir :smile:

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Thanks for the kind words!

I’m looking at what to write about today, I’ll have a peep for anything interesting!

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Aston Martin? Maybe you could find out why it appeared in the most bought stocks last week. It runs out of money more than I do :laughing:

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Wow, I just gave them a quick look and it looks like a nightmare! :scream:

I think their cars hold better value than the stock. This could be an exciting one to look into!

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Got another favourite please - Legal & General!

My last remaining hope for any dividends this year.

Another one for you if you have the time - a deep dive in home builders: Barratt vs Taylor Wimpy

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Aston Martin Lagonda Global - AML (Sell)

For my next analysis, I wanted to look at Aston Martin after @jamesr 's suggestion. The stock has been in a downward spiral since it became publically available back in October 2018. Let’s see who is in the driver’s seat and where they are going.

Who is Aston Martin Lagonda?

Aston Martin Lagonda is an independent luxury car group. Over 100 years of experience across two brands. One of the few British car companies left, much less publically listed.

Aston Martin, created in 1913, is named after a race when Lionel Martin took on the Aston Clinton Hill Climb in and won. They brought Lagonda in 1947. Both companies have a rich history of racing and fast luxury cars. We’ll find out if that is enough for them to survive in the modern world.


Source: Aston Martin Investor Information Strategy

AML makes its money by making luxury cars such as the DB range. They don’t have as robust an organisation as some of the manufacturers who control more of the supply line to a wider audience. Their sole focus is on producing and selling new cars, both to wholesale and retail (online and with their showrooms.)


Source: Aston Martin 2019 Full Year Results

Aston Martin has also recently (rejoined) Formula One, however, this is not a revenue opportunity, rather an exercise in brand exposure.

The Starting Line Up

Not all car manufacturers are equal, and some have a bit of a head start when it comes to their fundamentals. To keep it brief and help frame the investment, we’ll give each firm a quick MOT.

Aston Martin


Source: Genuine Impact
Horrifically poor quality, high debt, no shareholder payouts. Even with the massive share price slashes, still an expensive buy. An extremely weak outlook for future revenue and earnings.

Ferrari


Source: Genuine Impact
A good comparison as both companies are luxury brands focused on racing. High profitability but also heavily loaded with debt. Very expensive to buy shares right now. Also, an extremely weak outlook for future growth.

Volkswagen


Source: Genuine Impact
Not as profitable as their peers but paying money out to shareholders makes this more attractive. They are considered very cheap to pick up right now as well. They have a weaker outlook but still mildly better than the others here.

We also have Ford, BMW, GE, Daimler, and even Tesla. Aside from Tesla which doesn’t follow the fundamental rules, the larger companies largely follow the same pattern of Volkswagen. Currently at a discount due to COVID-19. However, Aston Martin is not considered cheap like it’s peers.

Potentially this is done to the “awareness” of Aston Martin, while it might be synonymous with James Bond they have not been mentioned where it matters. In past 62,560 rap and hip-hop songs from the 100 Greatest Rappers of All Time as well as any rapper who has appeared on the Hot 100 chart in the past decade. Mercedes (Daimler), Volkswagen, and Ferrari all dominate the top three and they have stronger fundamentals than Aston Martin, take that analysis as you will.


Source: Genius What Are The Most Popular Car Brands In Hip-Hop & Who Is Rapping About Them?

The Share Price

I mentioned the declining price since they became a public company.


Source: Guardian Aston Martin’s troubled flotation

Plagued with false starts and cash flow troubles, Aston Martin finally had some good news in 2018 when they reported their first-ever profitable year. However, the rose-coloured IPO was short-lived.

What has been causing the recent issues though? How hard hit was Aston Martin?

Aston Martin Lagonda confirms that it will be raising gross capital proceeds of £536m through an equity raise, including a private placement of shares for £171m to the Lawrence Stroll led Yew Tree Consortium (as part of their total investment of £262m) and a subsequent rights issue.
Source: Aston Martin Investor Relation Rights Issue

Show Me The Money

Why have they raised additional capital? The share price woes lead us perfectly onto the financial situation at Aston Martin. In the same announcement, AML had to share some uncomfortable news.

COVID-19 has hit them hard and stopped all production on the new SUV, delaying their entrance into the market even more. Given how much is riding on this and not letting customers cancel their pre-orders, it’s a touchy time.

It gets worse. Due to the regulation, a company is either has enough working capital for the year or it doesn’t. There is no middle ground. Aston Martin has been forced to announce they do not have enough working capital and the investment was part of a cash injection to solve these issues.

They have a few options to help provide some comfort. Additional funding facilities of approximately £150 million. The option until 8 July 2020 to draw up to $100 million of the Delayed Draw Notes issued on 8 October 2019. Discussions with the UK government concerning the potential support packages available to businesses to trade through the pandemic.

When it comes to financing you want to make sure you have the best people on the job. Mark Wilson, the Chief Financial Officer, has now stepped down. Aston Martin currently has an interim CFO. Additionally, three directors are stepping down and not seeking re-election. Meaning the company setup is no longer compliant, thus a new search for independent board members is underway along with trying to source a CFO.


Source: Aston Martin 2019 Full Year Results

After some heavy investment into a new factory, and with pre-orders for their first SUV sold out, this is the worst time for Aston Martin to deal with a lockdown.


Source: Aston Martin 2019 Full Year Results

The lack of diversification across their revenue lines, and issues with potential customer cannibalisation, are all impacting their ability to sell more cars. Compound this with the financing issues and they can’t make the new cars to sell.

In 2019 they also started a voluntary redundancy and early retirement programme actioned which resulted in a 22% reduction in year-end headcount. The main is by 2021 to save over £10m in operational costs. With an operating profit margin of 0.05%, they are not in a strong position when it comes to profit generation.

With £19m cash flow from their operations and £243m coming in from financing activities, cash flow conversion is a serious issue for them. They are currently in almost £1bn worth of debt and currently reporting a pre-tax loss.

Buy While It’s Cheap?

Sometimes buying a distressed company means you can pick it up cheap. As Mr Buffett likes to say, buy a great company at a good price.

Sadly, due to the loss-making nature, high revenue, and poor cash flow, Aston Martin is not an attractive company based on its share price ratios. Price/book of 27.28 and Enterprise value/EBITDA 28.50, these figures can die another day.

First Place Finish In The Future?

Often when I talk about distressed assets I talk about it as an opportunity for a long term investment. Taking a risk now to buy the company on the cheap to enjoy its future growth.

This is not the case with Aston Martin.


Source: Genuine Impact

With very weak future revenues, (the deposits for the new cars have already been taken and it’s assumed a large number will convert already.) Earnings in the future are also very weak, the operational issues have not been solved and the margins are too tight.

Aston Martin need to streamline the business and they recently did some expansion, plus losing key members is not helping the transition.

The sell-side analysts have a very disappointing outlook. With many showing a lower target price than Aston Martin is currently trading at.

With the Q1 2020 results expected this Wednesday, 13th May 2020, we’ll see the full scope of the damages.

Why A Sell?

If I was holding Aston Martin I would be looking for my moment to sell sooner than later. I have a very low expectation for the announcement this Wednesday, and I don’t see a recovery any time soon, if ever.

The best outlook for Aston Martin would be an acquisition. However, who would want to buy the brand while it is heavy with debt and struggling to optimise its business?

The added brand exposure from the Formula One is unlikely to move the needle and might be a bigger expense than expected. The bottom teams are paying more money than they make, and that’s likely how Aston Martin will start the session.

Let me know what you think about my write up and analysis. Any parts you would want me to focus on, or bits you want me to cover?

Stay safe and thanks for reading!

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Thanks for the write-up mate, and thanks for all the others you’ve shared with us on this thread.
I agree with your finding the stock as a sell, but i wont be selling mine anytime soon!
This is only because i bought some shares in February at £4.50 ( :open_mouth: ) and now they are at 42p! :sob: - Thankfully, i had only purchased 5 shares.
I then got another 20 shares at 30p each through the rights issue which has brought my average price per share down to £1.1443.
So even though it seems pointless holding them, i don’t see much point in selling either due to both the current price as well as the size of my investment. Will hold for now and sell if the price ever improves.
Thanks again for the analysis.

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That sounds tough, completely understand your stance though.

The biggest challenge is always when do you cut off a downward stock and do you let the winners go. Never simple when it really come down to it.

Hopefully my analysis is wrong or there is some upside like a potential buyer!

I’ve essentially written that investment off and would sell if i had a bigger holding and put the money to work elsewhere. This was one of my first purchases on Freetrade and i got sucked in by the glamour of the company, rather than fundamentals. I’ve learnt a lot since then and hopefully i will be able to avoid falling for the same trap again.

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@jcksmith850 what’s your take on Toto Wolff’s £37m investment in Aston Martin?

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That’s a great attitude and when you look at it like that it’s an acceptable learning fee. We all made mistakes when it comes to investing and some of us have certainly lost more than £25. Hopefully your next investments will be more successful! :+1:

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Great write up thanks. :+1:

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Enjoying the reviews, thanks.

To complete the quote from Mr Buffet: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

From the 1989 Berkshire Hathaway annual letter

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These are brilliant!! Would you consider doing Halfords? Think it’s an interesting one given the current climate! Their share price rose 25% just today!

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