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💰 Nick Sleep: 921% Returns in 13 Years

5 lessons from one of the world's most underrated investors.

Written by: Ryan Henderson & Braden Dennis

Happy Sunday!

This week we’re digging into OpenAI’s latest controversy, Nvidia’s unrelenting sales growth, and a sneak peek at one of the most underrated investors of all time.

Let’s get to it.

News Roundup

🤖 OpenAI vs. Scarlett Johannson: OpenAI, the parent company behind ChatGPT, received some scrutiny this week amidst controversy with famous actress Scarlett Johannson. During the company’s GPT-4o demo last week, OpenAI debuted its new voice technology that is capable of holding conversations. However, with the voice sounding eerily similar to that of Scarlett Johannson, the actress received many calls from close family and friends. Johannson had reportedly been contacted by OpenAI’s CEO Sam Altman previously about potentially licensing her voice for the technology, but Johannson said she rejected the offer. After hearing the release of the latest voice technology, Johannson decided to pursue legal action. OpenAI has since taken down its voice technology amidst these voice similarity claims.

🎟️ Ticketmaster in Turmoil? On Thursday, the US Department of Justice (DOJ) filed a lawsuit in New York Federal Court alleging that Live Nation Entertainment (who owns Ticketmaster) has abused its monopoly power within the concert promotion and ticketing space to suppress competition and recommends that the company should be broken up. Live Nation responded to the lawsuit stating that it “ignores the basic economics of live entertainment, such as the fact that the bulk of service fees go to venues, and that competition has steadily eroded Ticketmaster’s market share and profit margin”. Live Nation’s stock dropped 4% since the news.

🏦 JPMorgan Shareholders, don’t expect buybacks: America’s largest bank JPMorgan Chase held its annual investor day this week and the company’s CEO Jamie Dimon had some cautionary words for investors. When asked about whether or not JPMorgan had plans to increase its buyback program, Dimon, who is widely regarded as one of the most successful banking executives in the country, didn’t mince words “Buying back stock of a financial company greatly in excess of two times book is a mistake… we aren’t going to do it.” JPMorgan’s stock dropped 4% following its investor day.

Quick Hits Earnings:
  • Nvidia: The company that seems to have taken financial markets by storm reported quarterly results on Thursday that did not disappoint. Despite sky-high expectations, Nvidia somehow surpassed them delivering $26 billion in revenue for the quarter, up 262% from the same period a year ago. And Nvidia’s CEO Jensen Huang didn’t attempt to temper expectations either, as he opened the company’s conference call by stating “The next industrial revolution has begun.” With Nvidia’s stock rising 13% after the report, shares are now up 3,043% over the last 5 years 🤯.

  • Target: The 4th largest supermarket chain in the US reported Q1 results on Wednesday that underperformed Wall Street’s expectations. Target’s total comp sales declined 3.7% compared to last year, which is the 4th quarter in a row of negative comp sales. Management stated that strength in the company’s Beauty category is helping to offset some of the weakness in more discretionary categories. Despite the rough start, Target’s management team reaffirmed the company’s guidance of positive comp sales for the full year. Target’s stock has languished over the last several years and is still down 45% from its pandemic highs.

  • Autozone: Leading auto parts and accessories retailer Autozone reported a mixed bag of earnings this week. The company missed top line estimates but produced better than expected earnings per share. Autozone repurchased $735 million worth of stock this quarter, which is equivalent to ~1.5% of the company’s total market cap. Between Autozone’s durable sales and earnings growth over the last two decades and the company’s unwavering commitment to repurchasing stock, Autozone has helped increased its earnings per share by more than 21-fold over the last 20 years.

Investor Profile

Nick Sleep: Scale Economies Shared

Nick Sleep is the co-founder and portfolio manager of the Nomad Investment Partnership. A firm that he and his partner Qais Zakaria ran from 2001 to 2014.

During their time managing the fund, Nomad delivered 18.4% annualized returns for investors, while the MSCI index managed to generate just 6.5% annualized.

While Sleep certainly deserves some recognition for the stellar returns his fund generated over ~13 years, it’s not the only thing that draws investors to him.

Sleep is also well known for his legendary letters. Over his time managing the fund, Sleep consistently espoused practical wisdom about how to find and hold long-term winners.

Here are 5 lessons that he offers throughout his letters:

1.) Find a firm’s true DNA

“The trick, it seems to us, if one is to be a successful long-term investor, is to recognize the sources of enduring business success, get in early and own enough to make a difference. Which raises two questions: what are the sources of success and second, if these are so readily recognized up front why are they not discounted in prices already?”

2.) Search for “Scale Economies Shared” Businesses

“Scale economics shared operations are quite different. As the firm grows in size, scale savings are given back to the customer in the form of lower prices. The customer then reciprocates by purchasing more goods, which provides greater scale for the retailer who passes on the new savings as well. Yippee. This is why firms such as Costco enjoy sales per foot of retailing space four times greater than run-of-the-mill supermarkets. Scale economics shared incentivises customer reciprocation, and customer reciprocation is a super-factor in business performance.”

3.) Ignore the noise

“Information, like food, has a sell by date, after all, next quarter’s earnings are worthless after next quarter. And it is for this reason that the information that Zak and I weigh most heavily in thinking about a firm is that which has the longest shelf life, with the highest weighting going to information that is almost axiomatic: it is, in our opinion, the most valuable information.”

4.) Selling winners too early is the biggest mistake you can make

“The biggest error an investor can make is the sale of a Wal-Mart or a Microsoft in the early stages of the company’s growth. Mathematically this error is far greater than the equivalent sum invested in a firm that goes bankrupt. The industry tends to gloss over this fact, perhaps because opportunity costs go unrecorded in performance records.”

5.) Focus on a company’s destination

“If we had our time again, we would hope not to be seduced by their (apparent) mathematical cheapness but weigh more heavily their DNA, if you like. One of the things we have learnt over the last few years is the most of our most profitable insight have come from recognizing the deep reality of some businesses, not from being more contrarian than everyone else.”

Meme of The Week

Share Buybacks

Nvidia announced this week that the company is planning to do a 10-for-1 stock split on June 10th. That means, if you are an Nvidia shareholder, you will receive an additional 9 shares for every share you currently own, however, each share will be 1/10th of the pre-split price.

I’d like to take this time to offer a reminder to all investors that share splits do not create any actual value for shareholders. To illustrate this point, let’s imagine a pizza with 8 slices. If you add 4 more cuts to that pizza, you now have 16 slices, but you don’t have more pizza. This same logic applies to share splits.