It's been a while since my last post - things have been hectic with my main job and personal life lately. Despite the time constraints, I wanted to share an update on my investment positions and thoughts, as promised earlier this year. So, let's dive into a quick review of my Q3 investments.
Q3 2024 Portfolio Update: Staying Ahead of the Curve
In my Q1 portfolio update, I shared my three main holdings: Amazon, Tesla, and Palantir. I'm happy to report that all three have performed well, with Tesla and Palantir driving significant gains. As mentioned in my Q3 update, I planned to increase my cash position. This was achieved primarily through external sources, rather than selling off existing stock.
Performance Snapshot:
As of September 30th, 2024, my cumulative investment return stands at 201.81%. This outperforms both the S&P500 and NASDAQ 100 over the same period (2020 - Q3 2024), as illustrated in the graph below.
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2024. 09. 30
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It's also worth noting that my year-to-date (YTD) performance has finally surpassed these benchmark indices. While, I lagged slightly behind in Q1 and Q2, the strong performance of my portfolio in Q3 has pushed my returns higher. Hopefully, this trend will continue for the remainder of the year.
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| 2024. 09. 30 |
As of September 30th, 2024, my portfolio allocation is as follows:
- Cash: 29.5%
- Bonds: 7% (split between long-term and short-term bond ETFs)
- Equities: 63%
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| 2024. 09. 30 |
Tesla, Palantir, and Amazon, which I either initiated or increased positions in this year, make up a significant portion of my equity holdings. My position in Alphabet, a long-term holding, has been reduced to below 10%.
Investment Strategy:
While my goal is to reduce my cash position to around 20%, I'm currently holding back due to a lack of compelling investment opportunities. I generally avoid market timing and focus on long-term investing. However, I haven't found any stocks that I'm particularly excited about adding to my portfolio at this time.
I remain optimistic about the continued growth of AI and plan to maintain my focus on innovative growth stocks while managing risk through diversification and a healthy cash position.
A New Addition: Capri Holdings
Recently, I've increased my position in Capri Holdings. I'll delve into the reasons behind this decision in the next section of this post.
Diving into M&A Arbitrage: A Bet on Capri Holdings
Last August, Tapestry, the parent company of Coach, announced its intention to acquire Capri Holdings (CPRI), the owner of Versace, Jimmy Choo, and Michael Kors, for $57 per share. This dear, valued at roughly $8.5 billion, sent CPRI's stock price soaring from around $35 to $54 on the day of the announcement.
However, the Federal Trade Commission (FTC) has filed a lawsuit to block the merger, citing concerns that it would create a monopoly in the "Affordable luxury handbag market" and harm consumers through higher prices and reduced competition. The lawsuit is ongoing, with a preliminary decision expected before the end of the year. If the FTC loses, the merger will proceed, and CPRI's stock price is likely to reach the acquisition price of $57. This presents an interesting opportunity for M&A arbitrage.
Assessing the FTC's Case
The key factors determining the outcome of this lawsuit are:
- Market definition: How the court defines the "Affordable luxury handbag market."
- Market share: The combined market share of Tapestry and Capri Holdings in this defined market.
- Barriers to entry: The ease with which new competitors can enter the market.
Let's analyze each of these:
Market Definition:
The FTC's focus on the "Affordable luxury handbag market" is crucial. Defining this market requires considering price points and brand positioning. For instance, the FTC might define it as handbags priced between $300 and $1000, positioned between mass-market brans and ultra-luxury brands.
However, I believe separating "Affordable luxury" as a distinct market may not accurately reflect consumer behavior. Consumers often consider a wide range of handbags, regardless of specific price points or brands. Someone considering a Coach bag might also look at Michael Kors, Tory Burch, and even more affordable or higher-end brands. This fluidity makes it difficult to isolate "Affordable luxury" as a separate category. Furthermore, luxury brands themselves are increasingly offering lower-priced items to appeal to a wider audience, blurring the lines further.
Market Share and Barriers to Entry:
If the court accepts the FTC's market definition, the combined market share of Coach, Kate Spade, and Michael Kors could potentially exceed 50% within a specific price segment, supporting the FTC's monopoly claim.
However, the rise of digital platforms has lowered barriers to entry, allowing new brands to emerge easily. The fast-paced, trend-driven nature of the fashion industry also makes it challenging to maintain dominance. Established players like Tory Burch, Furla, and Longchamp, along with emerging brands like Polene and By Far, all compete in this space.
Historical Precedents:
The FTC has successfully blocked mergers by narrowly defining markets in the past. Examples include Staples-Office Depot (1997) and Whole Foods-Wild Oats (2007). However, handbags are less essential than office supplies or groceries, and the dynamic nature of the market offers consumers more choices. This weakens the FTC's argument, in my opinion.
Why I'm Betting on Capri:
Given the factors above, I believe the merger is likely to proceed. This has led me to take an M&A arbitrage position in CPRI, a strategy I don't typically employ. Furthermore, David Einhorn, a renowned investor, also holds a position in CPRI. After reviewing the FTC's lawsuit and the companies' responses, he believes the FTC is likely to lose.
Risk/Reward Assessment:
Of course, there's risk involved. If the FTC wins, CPRI's stock could fall below $33, given its recent underperformance. Currently trading around $42, CPRI offers a potential upside of 35.7% if the FTC loses. However, a loss for Tapestry and Capri could result in a downside of over 20%.
Conclusion:
Despite the risks, I believe the potential reward outweighs the downside in this M&A arbitrage opportunity. The FTC's case appears weak, and the potential for a significant return if the merger goes through makes CPRI an attractive addition to my portfolio.
Wrapping Up Q3: A look at My portfolio and Strategy
In today's post, I provided an update on my portfolio performance for the third quarter of 2024 and shared insights into my investment strategy, including a new long position in Capri Holdings. This post is intended for informational purposes only and should not be construed as investment advice.
Remember, all investment decisions carry inherent risks, and it is essential to conduct your own research and due diligence before making any investment decisions.
Thank you for reading!
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