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🗞️ Most Underrated Investor of the 21st Century

How Nick Sleep finds great investments hiding in plain sight.

Written by: Ryan Henderson & Braden Dennis

Happy Sunday!

This week we’re digging into Rivian’s much needed lifeline, big tech’s European headwinds, and analyzing the frameworks used by one of the best investors of the 21st century.

Let’s dig in.

News Roundup
  • Rivian 🤝 Volkswagen: On Tuesday, German automotive giant Volkswagen announced that it is investing $1 billion in the electric truck maker Rivian, with plans to invest an additional $2 billion in the coming years. On top of that, Volkswagen stated that it is investing yet another $2 billion into a joint venture software company that will use Rivian’s existing technology to help power future vehicles for both companies.

    In total, this could amount to an extra $5 billion in cash for Rivian, who seems to be in need of it. After coming public in 2021 at a $66.5 billion market cap, Rivian’s stock has collapsed by 86% as the company has burned through the majority of its cash balance. This tie-up with Volkswagen might just be the lifeline Rivian needed to help get to profitability.

  • Apple & Microsoft Could Face Big Fines: This week, the European antitrust commission filed complaints against two tech giants in Apple and Microsoft over alleged anticompetitive behavior. In an accusation made Tuesday, the EU claimed that Microsoft illegally connected its chat app Teams to other Microsoft Office products, while limiting the ability to interact for competitors like Salesforce’s Slack. If found guilty, Microsoft could face a fine of up to 10% of its annual revenues.

    Apple was also charged this week by the European Commission alleging that the iPhone maker violated the EU’s new Digital Markets Act. The allegation specifically takes aim at Apple’s anti-steering provisions which prohibit app developers from showing customers alternative ways to pay. Similar to Microsoft, if Apple were found guilty, the tech giant could face a fine of up to 10% of revenue, which would amount to ~$38 billion as of Apple’s latest numbers.

  • HIMS Short Report: Online pharmacy Hims & Hers Health was on the receiving end of a short report published Thursday by Hunterbrook Media. The report claims that Hims & Hers Health, which makes it easy to get prescriptions for a variety of over-the-counter drugs, has been making a push into the popular weight-loss drug category by partnering with a “shady supplier”. Additionally, the report claims that Hims & Hers allows customers to get prescriptions without having to speak to a doctor or submit any medical records. HIMS stock dropped 7% after the report.

Investor Profile

Nick Sleep: Compounders Hiding in Plain Sight

Nick Sleep is one of the best investors of the 21st century.

From 2001 to 2013, he averaged 21% returns in his investment partnership.

While the MSCI World Index earned just 6.5% a year.

Here are 3 mental frameworks he used to find new investments:

1.) Scale Economies Shared

The now famous term coined by Sleep refers to companies who have cost advantages thanks to their size and choose to pass those cost savings back to customers.

This is a common framework Sleep looked for and found with Costco.

"Most companies pursue scale economies, but few share them. It's the sharing that makes the model so powerful. But in the center of the model is a paradox: the company grows through giving more back. We often ask companies what they would do with windfall profits, and most spend it on something or other, or return the cash to shareholders. Almost no one replies give it back to customers... That is why competing with Costco is so hard to do."

2.) Robustness Ratio

A company's Robustness Ratio refers to the percentage of excess capital that goes to shareholders vs. customers vs. employees.

Companies that prioritize returning capital to customers tend to grow the long-term free cash flow per share at a faster rate, as customers reciprocate by spending more.

"The robustness ratio is a framework we use to help think about the size of the moat around a company. It is the amount of money a customer saves compared to the amount earned by shareholders. This ratio is more appropriate for some companies than others... At Costco we think the customer saving is around five dollars, compared to shopping at most supermarkets, for every dollar retained by the company."

3.) Price-to-Value Ratio

This simple formula referred to the price of securities in the fund compared to what Sleep and Zakaria thought those securities were truly worth.

Sleep aimed for companies with a Price-to-Value ratio of 0.5x. As he describes it: "When we evaluate potential investments, we are looking for businesses trading at around half of their real business value.”

And Sleep would use the price-to-value ratio of his holdings as his measuring stick. He avoided raising new capital if he didn't think he could bring down the Price-to-Value ratio of his fund.

In other words, if he didn't think he could find stocks that were as cheap as his existing holdings, he wouldn't take on new money.

Meme of The Week

Amazon officially crossed a $2 trillion market cap this week after the company announced a further push into the primary care market by combining its Amazon Clinic with its recent acquisition of One Medical.

Amazon’s stock closed up 5% this week bringing its total return for the last year to 54%. In total, the magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) continue to defy expectations despite being some of the most well-covered companies around the globe.

Each one of the companies in the Mag 7 have generated at least 20% annual returns over the last 10 years and now account for ~33% of the entire S&P 500 index.