Anabatic Fund recently released its Q4 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -11.7% in 2020 (net of fees) compared to the S&P 500 Index which returned 16.3% in the same period. You should check out Anabatic Fund’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the Q4 2020 Investor Letter, Anabatic Fund highlighted a few stocks and Nintendo (NYSE:NTDOY) is one of them. Nintendo (NYSE:NTDOY) is a consumer electronics company. In the last three months, Nintendo (NYSE:NTDOY) stock gained 9.9% and on January 26th it had a closing price of $75.30. Here is what Anabatic Fund said:
“We established a new investment in Nintendo (NTDOY) during the second quarter of 2020, and it is now our third-largest investment. E-sports and video games are a hot sector right now, and the pandemic helped. “Nintendo Switch” was the #1 search on Amazon as the pandemic took hold – “Laptop” and “Airpods” came in 2nd and 3rd, respectively – but the Switch was a runaway hit before the pandemic and should be a mainstay for years to come.29
Our investment is based on a few simple ideas that have roots going back several decades. Nintendo may be trendy right now, but it’s an old company that has managed an impressive blend of long-term stewardship and continuous innovation. Nintendo’s portfolio long-lived characters and intellectual property should produce a growing stream of earnings and cash flow for many, many years. In this investment duration is clearly on our side.
A recent change has put Nintendo in an even better place than it was historically. After decades of hardware cyclicality – release a new console, ride a year or two boom-to-bust sales, rinse and repeat – the company has developed a durable hardware platform that can be refreshed and updated over time. The Switch, Switch Lite, and future versions (Switch Pro?) enable flexibility, growth, and renewal without having to start over.
The company has also made an important and overdue switch to digital sales. From almost zero several years ago, Nintendo grew digital sales to 25% of all game software in FY 2019 and 47% in the six months ending in September 2020. That number should grow over time and could approach 60-70% within a few years. Importantly, those digital sales come with much higher margins. On a game that might sell for $60, the shift from physical to digital media might capture $5 to $10 of gross margin that was previously lost to retail middleman and the physical cost of goods sold.
Nintendo’s growth has been impressive, and it is reasonable to expect the company to compound its sales growth at 10-20% per year for many years. The financial performance is already impressive – operating margins have crossed 30%, with free cash flow margins better than 20% – and results should improve further due to the operating leverage on incremental sales and the favorable shifts in the business model.
The balance sheet is pristine, with net cash on the balance sheet equal to almost 20% of the equity market cap. There is also potential in other assets: Nintendo theme parks, stores, and media productions, as well as minority stakes in Pokemon, Niantic, the Seattle Mariners, and others.
This is an investment I should have made a year or two ago. I have followed the company for years and had done enough work to have seen the emerging opportunity as early as 2018. Thankfully, the “nirvana fallacy” didn’t take hold and we now have a meaningful investment that I hope to own for years.”
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.