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While some might say that you should “sell in May and go away,” we are decidedly not in that camp here at The Motley Fool. And instead of just paying lip service to a regular schedule of investing in quality companies, I’m putting my money where my mouth is.
The stock that I’m going to be buying this month is focused on offering “the best possible automobile buying experience,” to Chinese citizens, and it has three major characteristics that I look for in a potential investment.
Borrowing ideas from best-selling author and Wall Street trader Nassim Taleb, here are three reasons why I think Bitauto (NYSE:BITA) is a compelling buy at today’s prices.
A barbell strategy
One of the key tenets of Taleb’s work is that people consistently underestimate how bad they are at predicting the future. But instead of shying away from investments because of that, he proposes taking a barbell strategy, where we focus 85% of our time and energy on safe investments, while experimenting with high-risk/high-reward ventures with the other 15%.
Bitauto got its start by focusing on connecting car buyers with car dealers via the internet. Its platform allowed dealers to build virtual showrooms that Chinese consumers could peruse from their mobile devices. At the end of last quarter, there were 23,700 subscriptions from new car sellers, and 3,100 from used car dealers in China.
For much of its operating history, this business was its bread-and-butter. It represented the “safe” side of the barbell.
But over the past two years, something remarkable has happened: The company’s experiment with offering transaction services has exploded. This software-as-a-service (SaaS) platform, dubbed Yixin, connects consumers with banks, auto financers, and insurance companies. It is quickly gaining momentum.
The fact that Bitauto was able to pivot into this new line of business, and the fact that it’s mission of “offering the best possible auto buying experience” lends itself to multiple futures, give me confidence that the company is agile enough to evolve in the future.
There are two facets to “redundancy,” and they might sound confusing, but hear me out.
When it comes to capital allocation, efficiency is actually overrated. Cash sitting in the bank is considered a waste by many people on Wall Street. But over the long run, Taleb argues the opposite — by having some redundancies in place and not focusing on maximal capital efficiency, there’s a level of safety.
That’s because every company, at one point or another, is going to face difficult economic times. Those that enter such times with lots of cash on hand have options: buy back shares on the cheap, acquire distressed rivals, or — perhaps most importantly — offer their services for cheaper to drive the competition out of business and grab long-term market share.
If a company is maximally efficient entering such crises, there usually aren’t as many options. Cash is tied up in projects that either have to be abandoned, or spun off to offer capital to help the company make ends meet.
Over the past 12 months, Bitauto hasn’t substantially gained or lost any free cash flow — largely because it is investing in its transaction services platform. But the firm has over $1.2 billion in cash on hand versus approximately $850 million in debt. While that’s not the healthiest balance sheet in the world, it’s good enough for a growth company.
The second facet to consider is customer concentration. When a company relies upon a few customers for the bulk of its business, its entire future could be changed by one person’s decision. As I referenced above, Bitauto doesn’t have to worry about that: It has over 25,000 subscribers, and no single customer accounts for more than 10% of all revenue.
Skin in the game
Finally, we get to a less-talked about variable: skin in the game. No one knows about the potential and hidden risks of Bitauto better than management. That’s why it’s vital that they have their own skin in the game — in the form of stock ownership — so they are exposed to downside risk the same way that shareholders are.
The company was founded by William Bin Li over a decade ago, and he still serves as CEO. Taleb would call this having his “soul” in the game, as the company one founds is often viewed as an existential extension of the founder, further incentivizing him or her to build long-term greatness.
More concretely, Bin Li currently owns 11.1% of shares outstanding. Combining him with all officers and managers of the company, insiders own 13.4% of shares — a hefty chunk by my standards.
While I’m well aware that there are risks to this investment — notably weakness in the Chinese economy and the unknown effects of the move toward autonomous driving — I’m sufficiently confident in these three characteristics and will be putting (more) of my money behind Bitauto when The Motley Fool trading rules allow.
While I don’t suggest “backing up the truck” on a such a volatile stock, I think it’s definitely worth investigating for growth investors looking for international exposure.