Reducing Fear

Jeff’s Random Words

In this week’s episode, we talked about things we’re afraid we're wrong about. At one point we got specific about individual stocks. I expressed my concern that I might be wrong about two of my favorites, Boston Omaha (BOC) and Outset Medical (OM). I’ve been thinking more about this aspect of our conversation. I would be willing to bet that many investors spend more time than is healthy worrying they’re wrong about individual stocks. The thing is, you might be, and I might be. I think that’s the strongest argument for a well-diversified portfolio. You can afford to be wrong about some stocks because you’ll (hopefully) be very right about other stocks.

But I want to talk about the two specific stocks I mentioned because I spent time this weekend looking at their financial results. I did this because this is what I have always done, and I think it’s a helpful exercise. Essentially, I see it like this:

1. Know why you own the stock

2. Go see how that thesis or story is playing out

Let’s start with Boston Omaha. I like how the business is built on the three pillars of billboards, insurance, and broadband, with cash generated from those businesses being used to acquire more companies or build out the asset management part of the businesses. So how is that going?

Here’s the revenue growth for those segments in Q2 of 2023:

• Billboard Rentals - 10%

• Broadband Services - 8%

• Insurance Premiums Earned - 44%

• Insurance Commissions - 20%

• Investment & Other Income - 607%

I’m especially interested in the “investment and other income” part because that’s where the asset management stuff is. Not only did that grow 607% in Q2, here’s the last several quarters’ revenue growth:

• Q2 2022 - 26%

• Q3 2022 - 84%

• Q4 2022 - 160%

• Q1 2023 - 324%

• Q2 2023 - 607%

Now, this segment only accounts for 2.6% of total revenue, so I can’t get too excited. But it shows the basic plan is working. Steady “boring” businesses like billboards, insurance, and broadband, help fund the more exciting stuff.

The bottom line is that things look on track to me. There’s obviously more stuff to consider but this is a short newsletter…

Ok, turning to Outset Medical. They have a really cool device for kidney dialysis that can be used in an acute medical or home setting. It’s cheaper and easier to use than traditional dialysis machines. It drastically improves the quality of life for those who need kidney dialysis.

At this point, all they really need to do is keep selling more machines. That’s what I’m watching. Because they only report their install base at the end of each fiscal year, we basically just have revenue and profits to watch. In Q2 revenue increased by 44%, which is the highest it’s been since Q4 of 2021. The company is still unprofitable and burning cash, but that’s okay for now. They need to get adoption for their device and grow the install base.

One bright spot has been the massive improvement in gross margin. In Q2 of 2022, Outset had a negative gross margin and in Q2 of 2023, its gross margin was 43.7%.

Again, there’s much more I could dig into, but my point with both of these examples is that by going back and looking at the actual financial results, I am reminded why I like these companies and see that they’re both on track. There are impatient investors who have sold their shares but from where I sit, these are just two companies in the early innings. Patience is my advantage and it helps me worry less.

Jeff

Jason’s Random Words

I never played soccer. Never really watched it much either, frankly, I have always found it profoundly uninteresting. So of course, I’m now coaching a soccer team. I won’t bore you with the details, but as a parent you find yourself becoming very interested in things you wouldn’t otherwise.

Anyways.

So I don’t really know soccer that well. But I’ve coached plenty of kids doing other sports, and I know how to coach. Keeping six and seven-year-old boys engaged and motivated for 75 minutes is a challenge, no matter the sport or activity. But man, it’s HARD teaching kids something you’ve never done. Luckily I have some good coaches who know soccer on the pitch (see Lou Whiteman? I know soccer words!) with me. It’s allowed me to thrive and add value in an unfamiliar and uncomfortable at times situation.

I’m sure most of you are wondering what the point is.

I think it’s a couple of things. From a life perspective, I think it’s important to be willing to put yourself in unfamiliar and uncomfortable situations every so often. You learn a lot, especially about yourself. And that can be very helpful when you’re investing too. There’s a saying: nobody rises to the occasion. They sink to the level of their training. And when you’re in an unfamiliar situation as an investor, the same is true. Feeling FOMO for a stock making the social media rounds? Worried about the latest macro news and a recession causing a market crash? The market will throw new and novel ways to be worried at you all the time.

But you can handle these unfamiliar situations when you leverage your skills and knowledge. They may not seem like they apply, but they probably do more than you'd expect. Like a baseball guy coaching soccer.

Huh. Someone should make a TV show about it.

Jason