RiverPark Large Growth Fund is bullish on Adidas AG (ETR: ADS) which didn’t deliver a positive performance on the stock market during the second quarter of 2018, with shares declining 9% for the quarter. Discussing Adidas in its Q2’18 investor letter, the fund noted that the company has “the potential for substantial worldwide secular growth, particularly by closing its underperformance gap with NKE in North America.” In this article, we’re going to take a look at the fund’s comments about Adidas. Here is what it said about the company:
Adidas shares declined 9% for the quarter. Although the company reported strong quarterly results and reiterated guidance, some investors perceived management’s commentary regarding 2H18 growth to be overly cautious resulting in a sell-off in Adidas’s shares. First quarter results were headlined by a 10% increase in currency-neutral sales driven by a 23% increase for Adidas North America, 26% for Greater China, and 27% for e-commerce; however, Western Europe, accounting for 28% of revenue and its most mature market, grew only 4%. A 150 basis point increase in gross margins and a 180 basis point increase in operating margin to 13.4%, resulted in EPS growth of 16%. For the balance of the year, while management reiterated guidance of around 10% sales growth, 9%-13% operating profit growth, and EPS from continuing operations growth of 12%-16%, they also reminded investors that parts of Europe were struggling and that recent market share gains in North America should not be expected to continue at such an elevated pace. We view this commentary as normal conservativism from this management team and continue to expect the company to generate strong revenue and margin gains throughout the year.
We continue to believe that Adidas has the potential for substantial worldwide secular growth, particularly by closing its underperformance gap with NKE in North America, where it also lags substantially in margin. In addition, we expect the company’s profit growth to be substantially greater than its sales growth in the coming years as the combination of greater corporate efficiency and increasing direct-to-consumer business continues to drive gross and operating margins higher.
Germany-based Adidas AG (ETR:ADS) is a designer and manufacturer of shoes, clothing and accessories. Adidas is the largest sportswear manufacturer in Europe and the second largest in the world. For the full-year 2018, the company expects sales to increase at a rate of around 10% on a currency-neutral basis, driven by double-digit growth in North America and Asia-Pacific. The company’s gross margin is forecast to increase up to 0.3 percentage points to a level of up to 50.7% (2017: 50.4%). Net income from continuing operations is projected to increase to a level between € 1.62 billion and € 1.68 billion. EPS from continuing operations is expected to increase at a rate between 12% and 16% compared to the prior-year level of € 7.05.
On the stock market, Adidas has been performing well this year, with the stock value moving up 24.96% year-to-date. The company’s share price has increased 10.44% over the past three months and 8.53% over the past 12 months.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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