Terry Smith, Netflix, hindsight, 50%+ price falls and actually holding a 210-bagger

"The fund has dropped 10% since year end. Should we panic?"

Terry Smith (TS) was asked that question during the Fundsmith shareholder meeting the other month (1h09m42s):

TS said the fund “seeks to invest in businesses” and highlighted Apple and how its shares dropped 57% during 2008, only to multi-bag thereafter. Co-manager Julian Robins highlighted Netflix and how it suffered numerous significant price drops since 2010…

…on the journey to a +5,922% gain.

Such resolute tales of great stocks always help reassure nervous fund holders. But as far as I am aware, Fundsmith has never held either Apple or Netflix, and therefore we will never know whether TS would have actually held on to both shares during the drawdowns.

Maybe TS could have used a share owned by Fundsmith as an example of holding through the ups and downs – although perhaps none of Fundsmith’s picks has suffered the volatility of Netflix!

The problem with looking back at great stock performances is the distortion created by survivorship bias. Yes, Apple has been a winner – but what about the countless other shares that fell 50%+ during 2008… but never recovered let alone multi-bag?

Judging whether to hang on is much harder when you hold a share, the price has come off 50%… and you do not have the benefit of hindsight!

Back to Netflix. Since the TS video Netflix has dropped 50% following news of lower subscriber numbers. Do we still keep hold for the long term? Or does this new mean it is time to sell? (Anyone any idea?)

Take the table below, which lists the 63 UK companies with £1b-plus market caps with share prices 50% below their 5-year high:

Name Market Cap.(m) Price 5 y high %Chg since 5 y high
Hammerson PLC 1,275 29 278 -89.6
Evraz PLC 1,182 83 709 -88.3
Polymetal International PLC 1,175 248 2050 -87.9
THG PLC 1,476 108 799 -86.5
Micro Focus International PLC 1,275 380 2739 -86.1
Harbour Energy PLC 4,667 504 2872 -82.4
ASOS PLC 1,397 1398 7730 -81.9
Boohoo Group PLC 1,030 81 415 -80.4
TUI AG 3,755 230 1,137 -79.7
Just Eat Takeaway NV 4,764 2,211 9980 -77.9
Rolls-Royce Group PLC 6,969 83 375 -77.8
Carnival PLC 15,127 1,287 5380 -76.1
TP ICAP PLC 1,040 132 493 -73.3
Currys PLC 1,088 93 342 -72.7
Wood Group (John) PLC 1,546 223 796 -71.9
Deliveroo Holdings PLC 2,057 111 395 -71.9
International Consolidated Airlines 7,149 144 482 -70.1
Babcock International Group PLC 1,549 306 970 -68.4
Ocado Group PLC 6,946 924 2895 -68.1
Alphawave IP Group PLC 1,001 150 452 -66.8
Burford Capital Ltd 1,487 684 2045 -66.6
AIB Group PLC 4,762 173 511 -66.1
Wise PLC 5,623 395 1150 -65.7
S4 Capital PLC 1,694 305 870 -64.9
ITV PLC 2,991 74 212 -64.9
Bergenbio ASA 1,591 18 51 -64.5
Eolus Vind Ab 2,605 105 294 -64.3
Marks & Spencer Group PLC 2,698 138 378 -63.6
Old Mutual Ltd 2,994 64 175 -63.4
SSP Group PLC 1,889 237 646 -63.2
easyJet PLC 4,252 561 1,512 -62.9
Hargreaves Lansdown PLC 4,351 917 2433 -62.3
Centrica PLC 4,683 79 209 -62
Ashmore Group PLC 1,588 223 570 -60.9
Hutchmed (China) Ltd 2,122 246 624 -60.7
Centamin PLC 1,059 92 232 -60.5
Boeing Co 88,059 15455 39160 -60.5
Network International Holdings PLC 1,463 261 650 -59.9
Melrose Industries PLC 5,164 118 290 -59.3
Dr. Martens PLC 2,130 213 515 -58.6
Genus PLC 1,655 2516 6070 -58.6
Mediclinic International PLC 2,738 371 887 -58.1
Oxford Nanopore Technologies PLC 2,522 307 716 -57.2
Banco Santander SA 41,155 233 535 -56.5
Countryside Properties PLC 1,266 251 572 -56
Darktrace PLC 3,038 434 985 -55.9
Imperial Brands PLC 15,834 1666 3763 -55.7
RHI Magnesita NV 1,133 2400 5350 -55.1
Fresnillo PLC 5,714 775 1725 -55
Liberty Latin America Ltd 2,036 932 2,035 -54.2
Fevertree Drinks PLC 2,115 1815 3956 -54.1
ITM Power PLC 2,032 331 717 -53.8
Xvivo Perfusion AB 6,269 213 454 -53.1
Ceres Power Holdings PLC 1,422 745 1588 -53.1
Associated British Foods PLC 12,718 1,607 3371 -52.3
Virgin Money UK PLC 2,523 175 364 -52
Flutter Entertainment PLC 14,304 8130 16915 -51.9
Liberty Latin America Ltd 2,177 998 2,075 -51.9
Calliditas Therapeutics AB 3,980 75 155 -51.8
abrdn PLC 4,128 189 391 -51.6
Mitchells & Butlers PLC 1,361 228 471 -51.5
Lancashire Holdings Ltd 1,035 424 850 -50.1
Signet Jewelers Ltd 3,334 3,097 6,206 -50.1

Which of these 63 will eventually recover and multi-bag? Hard to say for sure without hindsight.

But no doubt some names in that table will do well from here. And if you know your companies and have real conviction about their products, people, profits and potential, then soldiering on through today’s tough market could one day pay off.

Inspiration perhaps to stick with great companies and plunging share prices comes from this fascinating podcast:

Unlike TS, UK private investor Luke Hallard (LH) bought Netflix during 2007 and actually held on to the shares until October 2021. The result was a 210-bagger. Asked about how he held on to Netflix during the ups and downs, LH said he took a long view and liked Netflix’s leadership, but sold when he felt the streaming-service market had become saturated and was worried about ‘loss-leading’ competition from Disney+. (Listen from 5m to 10m)

Not sure I could hold on to a 210-bagger. But with any great investment you have to hold your nerve during the inevitable rough times. I currently own three shares – System1, Tasty and Tristel – that are down 50%-plus from their 5-year highs… but I doubt any of that trio will go on to deliver Apple-type gains. Would be fascinated to hear your ideas of knocked-down shares with better multi-bagger potential!

Maynard

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2 posts were split to a new topic: Hargreaves Lansdown (HL)

Great post, Maynard. I hold TSTL and, in the past few months, I am on record as wondering if the management know what they are doing. I still hold Halma. SPX and Segro and Knos, who have multied for me but I really don’t know about TSTL. Do you have a TARDIS?

Hi Maynard, I hear this all the time at the moment. Stocks are down 50%+ in many cases and many investors are selling up to avoid the pain.

My approach to avoiding that is to make sure I understand the difference between price and value. Price is the share price, which is set when two random investors decide to buy and sell to one another, while value is the discounted present value of future cash returns to shareholders.

Obviously most investors don’t create discounted dividend models for their holdings, but the basic idea is that you should have a good idea of what you think the company is worth, and if the market disagrees then so be it. Yes, a 50% decline should prompt you to revisit your valuation estimates, but you have to decide what a company is worth, not Mr Market.

As Buffet has said a million times, Mr Market is there to serve you, not to guide you.

I own some of the companies on that table and they’re down a lot, but that doesn’t matter in the long-run. What matters is that the intrinsic or fair value of the company heads upwards over the medium and longer-term, and in most cases I think the intrinsic value of my holdings remains intact. And if the intrinsic value remains intact, why would I want to sell at a low price? From that point of view it makes no sense.

But of course it’s hard to stick to that sort of long-term view when the sky is falling in, as seems to be the case today.

John

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Hi John,

I would think this week’s share price falls may be base-rate expectations related, pushing up the cost of equity and reducing the present values of the NPV? (I’m unsure how this interacts with your discounted dividend model, however - probably in the same way?).

Can I ask what cost of equity do you use currently? 6%?
Discount rate of 10%?
How many years into the future before perpetuity?

I need to get this right if I am ever to re-open Crinkley Bottom theme park! :grinning:

Many thanks,

MrBlobby

Hi MrBlobby,

I use a discount rate of 7% for “fair value” as 7% is approximately the UK’s long-term annualised return and 10% for “good value” as that’s my target return (or better, of course).

I don’t base my discount rates on interest rates because that doesn’t make sense to me. I have a target rate of return and I don’t really care what interest rates are (unless they’re above 10% in which case I might be interested in bonds!)

I model each of the first ten years individually and then switch to a perpetual rate after 10 years, although I do have one holding where I have three-stage model, with the first ten years done individually, the second ten years at a 10%+ growth rate and then the perpetual growth at 5%, as this company is Asia-focused so I expected higher growth for longer.

On the other hand, some holdings (e.g. Unilever) are already running at more or less their perpetual rate.

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Thanks, John.

I broadly agree with your approach, focusing more on total cash return rather than dividend return, but I do see the merits of your approach.

The stock market is a device which transfers money from the impatient to the patient.”
—Warren Buffett

MrBlobby