June 24, 2024

An Attractive Setup In Stocks

Authored By Louis Stevens

An Attractive Setup Delineated

In the interest of maximizing the value of your time, we will dive right in. The setup could be summarized via just three points:

  1. Stable, profitable legacy business
  2. Rapidly growing, more dynamic new line of business
  3. Healthy balance sheet

The stable, profitable business protects downside (what some would call risk, i.e., beta, i.e., volatility), and the rapidly growing, more dynamic new line of business creates "huge upside."

  • There is nuance here, of course. For instance, finance academics would define "risk" as "beta," but risk is a matter of product-market-fit, culture, execution, financial realities, etc., and not the volatility of a business' stock price.

Let's now explore a few interesting "attractive setups."

Apple Circa 2018

In 2018, Apple (AAPL) was what some might call the holy grail of "attractive setups." Over the last 5 or so years, it has perfectly illustrated the setup.

  1. Stable, profitable legacy business (Apple's hardware business that included the iPhone, iPad, Mac Desktop, Macbook Laptop, and more)
  2. Rapidly growing, more dynamic new line of business (Apple's services business that included iCloud sales, Apple Music sales, App Store Ads, and more)
  3. Healthy Balance Sheet (At the time, Apple had just repatriated ~$200B in cash as a result of the Trump Administration's tax cuts. The company announced that it was committed to achieving a "net cash neutral position," which suggested that it would return all of that $200B in the form of buy backs and raise cheap debt, with which it would buy back even more stock, to achieve a "net cash neutral position" such that total cash = total long term debt)

Apple was the quintessential "attractive setup" at the time.


Amazon (AMZN) has been another fantastic example of this setup.

  1. Stable, profitable legacy business (Amazon ecommerce)
  2. Rapidly growing, more dynamic new line of business (AWS & Ads)
  3. Healthy balance sheet (Amazon already has achieved a net cash neutral position on its balance sheet, such that its cash balance and debt burden are equivalent. That said, it has a very healthy balance sheet generally speaking.).

Let's explore a one more example briefly, and then I will share some concluding thoughts that will help you on your journey of discovering setups such as these in the future.

Sea Ltd.

Sea (SE) has likewise become a controversial business, but, as I mentioned, so, too, was Apple in the 2010s.

Sea could be seen as an "attractive setup" through multiple prisms as of today, but we will consider its original attractive setup.

  1. Stable, profitable legacy business (Sea started as Garena, a very successful, and, today, double-digit growing, gaming studio that found early success with the globally popular Free Fire franchise. Today, Free Fire is no longer as big, but the studio still produces ~$1.2B in free cash flow for Sea per annum. This creates stability for the entire conglomerate and a platform atop of which it can grow and evolve.)
  2. Rapidly growing, more dynamic new line of business (Atop Garena, Sea built Shopee, and its growth over the last 9 years has been nothing short of astronomical, which has taken Sea from a $10B enterprise to a $40B enterprise. Interestingly, Garena and Shopee could now be seen as the stable, profitable legacy businesses. The next rapidly growing, more dynamic new line of business is SeaMoney, which is a FinTech platform that's currently growing sales at ~25%, with a user base of over 50M. I believe Sea possesses a spawner culture, and these lines of business could one day be seen as the profitable, legacy businesses, with yet another new, more dynamic business still to come. The next line of business to note is fulfillment by Shopee. Amazon's FBA produces ~$120B per annum in sales, so this is a business for Sea that has huge potential).
  3. Healthy balance sheet (Sea has about $5.8B in net cash (~$8.6B of total cash; $2.8B of long term debt).
Concluding Thoughts: L.A. Stevens' Third Foundational Investment Framework

In each case study, the businesses fit within LAS' third foundational investment framework. Companies that fit within this framework possess cultures that consistently and methodically produce new lines of business that compound the growth of the existing lines of business, leading to the stunning value creation we've witnessed from Amazon and Sea over the last decade[s].

Companies that fit within LAS' third foundational investment framework create new products that ultimately find S-Curves of adoption and, over the long run, these new products become "stable, profitable legacy businesses."

We also refer to this process as "going multi-product," and virtually every business I share with you has gone multi-product and remains in the process of "going multi-product" by virtue of its propensity to produce new lines of business as a result of its corporate culture.

From Coupang (CPNG) to Axon (AXON) to Adyen (ADYEY) to Meta (META), the last of which just released its latest LLM as a new product, which is now growing on its S-Curve, many of the companies I discuss with you are "attractive setups" with stable, profitable legacy businesses alongside rapidly growing, new dynamic lines of business, atop giant cash hoards.

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