Hussman Strategic Advisors is the advisory firm to Hussman Funds. In its most recent 13F filing for the fourth quarter of 2022, the firm reported ~$614 million in U.S. common stock holdings.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
This firm focuses on investing into mostly U.S. stocks with a reasonable valuation that have favorable market action regarding the stock and/or the industry it is in. Dr. John Hussman (Trades, Portfolio) is the founder, president and principal shareholder of the firm.
According to its latest 13F, the firm purchased shares of many different stocks in the fourth quarter across various industries from biotech to construction and technology. In this article, we'll take a closer look at what I believe to be the most promising of Hussman's fourth-quarter buys.
1. Etsy
Etsy (ETSY, Financial) is a popular e-commerce company which specializes in connecting buyers with independent sellers. We all know Amazon (AMZN, Financial) dominates the world of e-commerce and captures ~50% of the market, according to Statista, but Amazon caters to those who want efficiency and the lowest prices on fairly standard and non unique items. Etsy on the other hand offers more unique and creative items. It's like the difference between a major chain store and a bespoke “mom and pop” shop. I believe Etsy has found a niche in the market and has the financials to back it up.
Growing financials
In the third quarter of 2022, Etsy generated strong financial results. The company reported $594 million in revenue, which jumped by 11.7% year over year. This may not seem like amazing growth, but keep in mind this is during a cyclical downturn in the e-commerce industry after a major boom in 2020. The company also improved its “take rate” from 17.1% to 19.8% year over year.
These results were driven by customer focused product feature innovation, which helped to drive higher basket values and improve retention rates. The number of buyers who make regular repeat purchases has increased by a rapid 125% over the past three years. On the downside, total buyers have now started to flatline at ~88.3 million after previous boosts during the lockdowns of 2020.
Despite the solid top line growth, Etsy still continued to suffer with profitability and reported an eye-watering operating loss of $955 million, which declined by nearly $84 million year over year. The only silver lining is its losses were enhanced by non-cash expense related to a goodwill write-off of $1 billion.
Etsy has made a number of acquisitions over the past couple of years. From the second hand fashion app Depop (based in the UK) to Elo7, the “Brazilian Etsy,” acquired in 2021, the company has been spending a lot. I believe these acquisitions were fairly aligned with Etsy’s core business. However, due to a major valuation compression across the entire market, we are now seeing goodwill write-offs.
A positive for Etsy is the company has a strong balance sheet with over $1 billion in cash and short term investments compared to total debt of $2.389 billion, the vast majority of which is long term debt and thus manageable.
Valuation and guru investors
Etsy trades at a price-sales ratio of 7.41, which is over 26% cheaper than its five-year average.
The GF Value chart indicates a fair value of $241 per share, making the stock “significantly undervalued” at the time of writing.
Hussman Strategic Advisors increased its position in the stock by over 8% in the fourth quarter. The quarter's average price was $114 per share, and the stock has increased by ~25% from that level. In total, the guru has ~40,300 shares.
2. Ubiquiti
Ubiquiti (UI, Financial) is an electronics focused IT and software company which specializes in a range of networking products. The company has developed a range of wireless access points, security cameras, phone and even door access systems. The beautiful thing about Ubiquiti's systems is they can all be connected wirelessly via a smartphone application to both monitor and control devices. For example, if you want to see what security camera A is showing at your office you can simply click a button, or you can even lock or unlock a door remotely. So far the company has shipped over 85 million devices across 200 countries globally.
The company is poised to benefit from the increase in internet connectivity and Internet of Things devices. The IoT industry is forecast to grow at a rapid 26.4% compounded annual growth rate and reach a value of over $2.49 trillion by 2029, according to predictions from Fortune Business Insights.
Solid financials
Ubiquiti recently reported solid financial results for its second quarter of fiscal year 2023. Revenue was $493.6 million, which increased by a solid 14.4% year over year. This was driven by strong growth in its Enterprise Technology platform. In addition, the company has continued to grow its service provider software platform. The revenues from the service provider technology platform increased compared to the prior quarter but declined from the comparable period a year ago.
Ubiquiti has also continued to generate solid profitability as it reported earnings per share of $1.86, which increased by 11.65% year over year and was in line with analyst forecasts.
The company has a strong balance sheet with cash and short term investments of $159.7 billion vs. total debt of $956.2 million. The vast majority of debt ($869.9 million) is long term debt and thus manageable.
Valuation and guru investors
The company trades at a price-sales ratio of 9.56, which is close to its five-year average level.
The GF Value chart rates the stock as "modestly undervalued."
In the fourth quarter of 2022, Hussman Strategic Advisors increased its position in Ubiquiti stock by 25% to bring its total to 7,500 shares. During the quarter, the stock traded for an average price of $297.60 per share. This is slightly higher than where the stock trades at the time of writing.
Final thoughts
I believe Etsy has positioned itself well as a niche marketplace which has attracted a loyal amount of over 88 million customers. Management has a robust product lineup, and the team continues to innovate. Ubiquiti on the other hand offers a series of innovative IT networking products which is poised to benefit from the growth in the internet of things (IoT) industry, as well as our increased reliance on the internet.
