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La Dolce Vita – Let’s Do Prada!

August 30, 2013

Drama. The companies in our elegant portfolio La Dolce Vita (which we manage as a Perpetual Bond™) provide most of the luxury goods of the world, and some of them have been in business for a very long time, such as the wine producer Château d’Yquem which traces its origins to 1593 – two hundred years and five generations before the French Revolution that changed everything – and is now a prized subsidiary of Moet Hennessy Louis Vuitton.

Gucci

Courtesy: Gucci/Kering SA

We would think that these companies are “recession-proof” and can thrive in both good times and bad times, absent the occasional wardrobe failure that could befall any brand. And it is said that they give great parties for their shareholders at which many of their products and latest designs can be snapped up for several tens of thousands of euros at special prices, cash and carry.

But it’s also been suggested that brands noted for low, or effective, prices (such as Dollarama or McDonalds) tend to do well in recessions, but to falter in the good times (which could be a myth), and that retailers in the middle market tend to be most affected by economics as the “middle-class” tightens its belt and defers its shopping at Hermès for a better time.

Some of the well-known brands, such as Chanel, are privately owned and raise the bar for the entire industry, but it’s a difficult business without deep pockets to weather the long cycle from idea and design to the market and its presentation or debut, and maintaining the supply-chain that can affect the materials and skills needed to produce and present these products may explain the large concentration of brands owned by just a few companies in this end of the retail business (Reuters, August 23, 2013, Big brands race to secure luxury supplies from reptiles to roses).

Restaurants & Bars

Restaurants & Bars
Courtesy: Vostochny Express

Nevertheless, we can expect that the delegates and their staff at the upcoming G20 Summit in St. Petersburg (next week) will be spending large at elegant stores and restaurants, and that the conference (and many others like it) will help our balance sheet if we already own what they’re buying now and next year in La Dolce Vita.

And one of the reasons that we are writing this story is that we, at The RiskWerk Company, don’t honestly know what a good return is, anymore.

Should we be happy with +75% from running a nondescript portfolio of eighty companies in The S&P TSX “Hangdog” Market? Or +50% with forty companies in a “budget portfolio” such as On Golden Pond? Or can we live with just +40% in the ten companies of La Dolce Vita that produce annual reports suitable for framing?

Or would it be better to simply run $100 billion into 300 companies of the S&P 500 and get by (like shopping at Wal-Mart) with just +20% (plus dividends) to help out some needy pension fund, trust or endowment fund that can’t meet its obligations?

We just don’t know. But how can we know? Hedge funds that haven’t been burnt to the ground this year, or been indicted, are shopping at J.C. Penney and Sears or trying to fix coffee and doughnuts or the common market.

There is no competition. So, let’s do Prada!

The Prada Group Corridio 300, Milan

Courtesy: The Prada Group
Corridoio 300, Milan

Prada is a family business started in Milan by Mario Prada in 1913 (on the eve of the 1st World War and during a time of massive emigration to the U.S.A. and Canada) selling leather handbags, travelling trunks, leather accessories and beauty cases, as well as jewels and luxury articles of value characterized by an exclusive design and handcrafted using fine materials. The company expanded rapidly in the last decade through 2009, with global sales of about Euro 1.5 billion, but also came under some financial pressures as sales slackened in the U.S. and Europe and gross sales in the luxury market (in aggregate) declined by about 11% in 2009 but produced the highest growth rate ever in the luxury goods market one year later, in 2010 (Prada Group, Annual Reports 2009 and 2010).

In order to help finance further growth and new markets, the shareholders of the Prada Group sold about 19% of their stock into the public market to raise about $2.1 billion in June 2011, valuing the company at $13 billion and a great deal less than the current $25 billion (Reuters, June 17, 2011, Prada prices $2.1 billion HK IPO low in weak markets).

Prada SpA (which is a holding company) has been in the Perpetual Bond™ since much lower prices of $6 to $7 in 2012 (please see Exhibit 1 below, Red line Stock Price (SP) above the Black line Risk Price (SF), and for no other reason); it’s currently trading at $10 and has a downside esitmate of minus ($1) in the stock price due to the demonstrated volatility of the previous year. It’s also planning to pay its shareholders a dividend of $295 million this year for a current yield of 1.2%.

Exhibit 1: (B)(N) PRDSF Prada SpA – Risk Price Chart

(B)(N) PRDSF Prada SpA (HK)

(B)(N) PRDSF Prada SpA (HK)

Prada SpA is a holding company which, along with its subsidiaries, is engaged in the manufacture and sale of leather goods, clothing, footwear and accessories of all kinds bearing the Prada, Miu Miu, Car Shoe and Church’s brands.

(Please Click on the Chart to make it larger if required.)

The company directly employs about 8,000 people and the core of Prada’s production employees have been working with the company for an average of 20 years “[leading] to the highest level of specialization and dedication to the brand while ensuring that know-how is handed on smoothly to younger generations.” (Prada Group Annual Report, 2012)

All ten of the companies in La Dolce Vita are currently in the Perpetual Bond™ and have returned +40% (plus dividends) since the beginning of the year. Please see Exhibit 2 and 3 below.

We also note that the portfolio (as demonstrated) is price-weighted but with only ten companies, and a wide range of prices, it would also be reasonable for us to buy an equal dollars amount in each company, in which case the return is just the average of the returns (+17%). Please see Exhibit 3 below.

Exhibit 2: (B)(N) La Dolce Vita – Cash Flow – August 2013

La Dolce Vita - Cash Flow - August 2013

(Please Click on the Chart to make it larger if required.)

Exhibit 3: (B)(N) La Dolce Vita – Portfolio – August 2013

La Dolce Vita - Portfolio - August 2013

La Dolce Vita – Portfolio – August 2013

(Please Click on the Chart to make it larger and again if required.)

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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