Notable

• With more than 100 billion servings sold each year, it is estimated that the global instant ramen market is worth $42 billion.

• According to Altos Research, number of single-family homes currently for sale in the US is 389,000, representing just 0.18 percent of total inventory—the lowest figure on record.

• Haven, the Amazon-Berkshire-JPMorgan joint venture focused on employee health care, is disbanding after three years.

• Fed Governor Lael Brainard recently stated, “Federal Reserve staff analysis indicates that unemployment is likely above 20 percent for workers in the bottom wage quartile, while it has fallen below 5 percent for the top wage quartile.” The COVID-19 pandemic has highlighted and exacerbated the dramatic bifurcation of the US labor economy.

• Entertainment venues—including Citi Field in New York, and both Dodger Stadium and Disneyland in Los Angeles—will become mass vaccination sites as the availability of (and public access to) vaccines increases.

• In the last two months, the cost of shipping a forty-foot container from Asia to Northern Europe has increased by more than 450 percent (from $2,000 to more than $9,000) due to a pandemic-driven shortage of empty containers.

Company Highlights

• PepsiCo (PEP) now sources all energy for its US operations from renewables.

• Madison Square Garden Sports Corp. (MSGS) has a current market cap of $4.3 billion. The NY Knicks—a team owned by MSGS—was recently valued $5.42 billion.

• Johnson & Johnson (JNJ) published promising interim results from its ongoing Phase 1-2 COVID-19 vaccine trial in the New England Journal of Medicine: the one-dose vaccine generated neutralizing antibodies. J&J is slated to report its Phase 3 trial results imminently. The company’s massive manufacturing capabilities will significantly help to boost worldwide vaccine supply.

• American Tower Corporation (AMT) recently announced it will acquire Telxius Towers, the former communications tower unit of Telefonica, S.A. The deal, which appears to be the largest in AMT’s history, dramatically increases AMT’s footprint in Spain and Latin America and positions AMT as the only independent communications tower operator in Germany.

• Nvidia Corporation (NVDA) announced that NIO, China’s premier electric-vehicle maker, selected Drive Orin (Nvidia’s software platform for autonomous vehicles and robots) for its new generation of electric vehicles.

• Apple Inc. (AAPL) sold approximately 18 million units of its iPhone 12 in China during the fourth quarter, gaining over 20 percent market share and exceeding market expectations.

On Our Minds

The Tangible Thing About Intangibles

We try to avoid financial jargon in our communications, but there are some fundamental concepts and terms you should know to help you better understand your investments. Just as a primary care physician assesses your overall health by studying a range of vital data, such as your heartbeat, pulse, and weight, we gauge the health of a company by studying a range of internal and external factors. Our analysis always begins with a company’s balance sheet. A balance sheet has two categories: assets and liabilities. Each of these is composed of various subcategories, such as property (an asset) or accounts payable (a liability). Careful analysis of these subcategories helps us measure the strength of a company’s balance sheet. Having too much debt can be a sign of poor fiscal health, and the consequences of misstating or inflating assets can be dire. Two important asset subcategories are “tangible assets” and “intangible assets.”

Tangible assets are physical assets, such as cash, land, buildings, equipment, and inventory (to name a few). Intangible assets, on the other hand, are nonphysical in nature; patents, logos, copyrights, customer data, goodwill, trademarks, and domain names are all examples of intangible assets. While intangibles may seem straightforward, there is a caveat that investors should know: internally created intangible assets are not carried on the balance sheet—in other words, they are not counted as assets even when they are extraordinarily valuable. One could easily argue, for example, that the domain name “Google.com” is worth billions of dollars. However, it is not listed on Alphabet’s balance sheet as an intangible asset because it was created by early Google employees and developed in-house. (Fun fact, Google was originally called “Backrub.”) On the other hand, when an intangible asset is purchased directly, or acquired as part of a larger acquisition deal, it does appear as an intangible asset on the balance sheet. (When Microsoft purchased LinkedIn, for example, the domain name LinkedIn.com was carried onto the balance sheet as an intangible asset.)

Within the intangible asset category is a subcategory that requires special attention: goodwill. Goodwill is the premium between the book value of an asset (the value that is listed on the balance sheet) and its market value (the price a company actually pays for the asset). Over the years we have found that companies tend not to adjust the value of their goodwill assets in a downward direction, even when those assets have clearly dropped in value due to failed acquisitions.

Understanding intangible assets is critical in today’s economy. Some estimates suggest that for companies in the S&P 500, the aggregate value of intangible assets is six times (6x) greater than the aggregate value of tangible assets—up from 4x in 2005 and 2.5x in 1995. The rising value of intangibles can be attributed to the digital industry’s continual growth and the asset-light technology companies that make up the industry.

An increase in intangible assets is neither “bad” nor “good,” but should prompt analysis. Ironically, the tangible thing about intangible assets is that—because they are illiquid—their value can rapidly plummet from billions to millions. This may occur if a company’s product is supplanted by new technology, for example, or if its owners realize they overestimated the value of a brand they acquired.

We pay close attention to intangibles as we conduct our due diligence because they are a significant presence on balance sheets today. Intangible assets are not inherently positive or negative—they create compelling investment opportunities but also expose investors to heightened risk. Guided by our overall investment philosophy, we prefer companies that grow organically rather than through acquisitions. As such, our portfolios tend to be made up of equities whose intangible assets comprise just a small percentage of their total assets.