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In this email:

• Another Victim 🥀

• Resurrect the Magic Mouse ✨🐭

Another Victim 🥀

Another victim of the Carry Trade Saga 🥀 

Bank of Japan (BoJ) raised interest rates on July 31st which made the Yen spike. We’ve been promised no more rate hikes by the BoJ during all the volatility so the market is calming down a little.

But the drop that it caused has left us with a bunch of buying opportunities for great stocks at great prices.

Especially for a Japan-based-giant like Toyota Motors.

They dropped just over 17% on the day of the news & have recovered about 5% since then.

Just to bring you up to speed in case you missed it & haven’t heard about the Japanese Carry Trade dramas; hedge funds borrowed money at super low interest rates in yen to buy up stocks in stronger currencies. But now, with BoJ interest rates going up & the yen getting stronger, paying back those loans is getting expensive, causing a bit of a panic sell-off. For a bit more detail, read this.

So why Toyota if there’s been a bit of market-wide sell of?

Well, when stocks drop they’re only a bargain if the underlying value is there.

Otherwise, you’re just buying cheap junk.

Toyota is one of those stocks that’s undervalued based on a few metrics & this sell off only made it more of a steal.

P/E ratio is at 6.6x which is a great place to start. For context, the 10 year average for Toyota is closer to 10x. And if we use the Graham Number Formula from the Godfather of value investing himself, the fair price comes out somewhere around $290. At current prices, that gives 70%+ upside. Even if we conservatively aimed for previous highs, we’re looking at 50%.

Recent earnings back up the charts & my sentiment too.

They sold fewer vehicles but increased their revenue by 12.2% to $75.9 billion. Net income rose as well. This tells me Toyota have the ability to maintain profit margins by passing on costs to consumers. 📈💰

You can’t indefinitely squeeze pennies out of your customers by raising prices in the short term but it looks like they’ve found the sweet spot.

From the Yen increasing in value, there’s also a few strategic positions they can take advantage of because of their global presence.

Most Toyota’s sold in the US are made locally. It means the impact of yen appreciation on import costs is minimal. But their Japanese sales benefit from higher dollar values due to the stronger yen. So when they report their numbers in USD it should all look a little juicier.

Looking ahead, the biggest valuations are coming from EVs & AI. Looking at you, Tesla. Toyota haven’t jumped in feet first with EVs but strategically focusing on hybrids and lithium battery tech. The balanced approach gives them the best of both worlds - stability from existing markets & slowly expanding into future growth. 🚗🔋There’s also headlines of an EV battery they’re going to start mass production on that charges in 9 minutes & has a 600 mile radius to go into their premium Lexus vehicles.

RIP Tesla 💀

It’s not all without risk, though. Before the BoJ announcements, Toyota were on a bit of a skid from a safety scandal involving certification tests. It sounds pretty serious but unlikely to have a meaningful impact on sales. Litigation costs are probably the biggest risk factor but strong fundamentals & loyal customer base should help them ride it out.

I think the risk & downside is far outweighed by the potential upside. You’re getting a stock trading at 2021 prices with 2024 fundamentals. 📈🚀

Toyota already make up 0.5% of the portfolio. I’ll be looking to scale this up & bring down my average buy price.

PS Dividend yield is currently at 2.57% which is a nice bonus to have too.

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Resurrect the Magic Mouse ✨🐭

You know who I’m talking about, right?

Everyone’s favourite mouse has lost his sparkle since the start of April. Disney are down about 30% since then but I think this is a great opportunity to buy in.

Bob Iger, Disney’s CEO, has been on a crusade to scale streaming & make it profitable to drive growth.

And it looks like it’s working. 👀

Disney’s Direct-To-Consumer (DTC) segment showed 15% revenue growth this quarter.

Let’s take a look at where that’s coming from 👇

- Subscription Boosts: Disney+ cracked down on password sharing which is good & bad for me. It boosts the stock I own but no more free Disney movies. This, coupled with new streaming bundles & expanding internationally, increased subscriber numbers by 11.9% year-on-year. 📺🌍

- Advertising Surge: Domestic streaming advertisers jumped over 20%, thanks to automation & programmatic advertising. I call that the Meta Model. More ads = more revenue! 💰

- Price Hikes: Starting mid-October, Disney+ and Hulu prices are going up by $1-$2 per month. Hulu will see a hefty $6 increase! There’ll be some attrition but overall this will definitely boost revenue. 📈💵

Domestic parks are usually a solid constant on the Disney balance sheet but they’ve not been so magical lately. The blames being put on high interest rates cutting back consumer spending. 🏰 Theory says Disney parks will bounce back once interest rates drop & families flood back to the happiest place on earth & I think that’s a reasonable expectation.

If they can get both cylinders firing at the same time, then we’ll see the overall growth & stock price come back in a big way, in my opinion. They’ve got it down on the DTC streaming, just need the parks & cruises to get it together.

Looking ahead for the rest of the year, Disney are looking to tap into mid-teens for more DTC growth from the new streaming bundles I mentioned & continuing the international expansion.

ESPN has had a steady 5% growth rate domestically & internationally & they’re expecting that to continue. Parks & cruises aren’t pencilled in for much other than 1% growth but no shocks there.

Fair value with conservative growth estimates should bring us out somewhere around $110. Technical analysis with previous resistance level’s could be closer to $120 if we get the growth & momentum. From current price, that’ll give us a 30-35% upside.

All that said, I think Disney does come with a fair amount of risk. They have $47billion in debt which is pretty hefty & if they aren’t able to maintain growth in the streaming space or the parks don’t make a comeback then I think it’ll flatline the upside potential. We haven’t broken below $80 (which is 7%ish more to the downside) since 2014 so if I see a strong breakdown there, I’ll likely get out completely & re-evaluate my position.

But let’s not forget, Disney has been around for nearly a century & has navigated through tough markets before so with a 5:1 risk reward ratio (35% upside to 7% downside) I think it’s worth a go with a small amount of my portfolio.

Someone hand me my Mickey ears.

That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️