Coho Capital Gushes Over 5 Stocks With Unassailable Moats, Significant Earnings Growth

Coho Capital Partners just released their annual investor letter for 2016, and the fund made 6.3% for the year versus the S&P 500’s rise of 12%. Long term, Coho Capital has beaten the market, averaging 20.2% CAGR versus the S&P’s CAGR of 14.7% during the same time frame.

As a hedge fund, Coho Capital invests in inevitable, wide-moated businesses. We share Coho’s comments concerning five of its favorite investments, Alibaba Group Holding Ltd (NYSE:BABA), Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG), Visa Inc (NYSE:V), and S&P Global Inc (NYSE:SPGI), below:

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When it comes to Alibaba Group Holding Ltd (NYSE:BABA), Coho Capital writes that Alibaba ‘has a lot of things we desire in a business: network effects, switching costs, scalability, and latent pricing power’. Coho notes that Alibaba has immense users — 493 million active monthly users across its three main platforms — and that the company is growing rapidly — revenue grew 54% year-over-year in the most recent quarter. Coho feels that Alibaba’s cloud division, Alicloud, and its partly owned finance unit, Ant Financial, are particularly promising. Alicloud is already at a $1 billion run rate and is growing fast. Meanwhile Alipay is China’s preferred online payment method. Coho Capital adds, “despite its dominant position and compelling growth opportunities, Alibaba does not have a demanding valuation. We think Alibaba’s core business should trade at least 25x forward earnings given its inherent operating leverage and projected annual sales growth of over 28% over the next few years. This results in a stock price of $114. If we add $15 per share for Alibaba’s investments and stake in Ant Financial, we arrive at a stock price of $129”. Of the 742 elite funds we track, 86 funds owned $5.9 billion of Alibaba Group Holding Ltd (NYSE:BABA) and accounted for 2.70% of the float on December 31, versus 104 funds and $8.27 billion respectively on September 30.

As it pertains to Facebook Inc (NASDAQ:FB), Coho notes that the company has ‘1.8 billion users with 1.2 billion of those users, or a sixth of humanity, using the service daily’. Due to its addicting nature and strong network effects (the greater the users, the more utility for Facebook surfers), the fund thinks that Facebook ‘is still early in its monetization opportunity with inherent operating leverage and multiple pathways to drive profits through software enhancements and enhanced data utilization’. Given that the global market for advertising is $700 billion and Facebook’s revenue is just 4% of that, the social network could have substantial room to grow. 146 top funds had a bullish position in Facebook Inc (NASDAQ:FB) as of the most recent 13-F reporting period.

On the next page, we find out what Coho Capital had to say about Alphabet Inc, Visa Inc, and S&P Global Inc.Coho Capital also likes Alphabet Inc (NASDAQ:GOOG), noting that the company’s Google division is ‘one of the most relied upon utilities in the world, with over three billion searches a day. According to NetMarketShare.com, Google has a 78% share of global desktop search and over 90% share in mobile search’. Coho also likes Alphabet’s  YouTube division, which reaches more millennials than any single cable network. Given its huge cash pile, Alphabet is very affordable, trading for around 17x 2017 estimated earnings. 126 elite funds were long Alphabet Inc (NASDAQ:GOOG) at the end of December, down 8 funds from the previous quarter.

Apart from Alphabet’s Google, Coho Capital views Visa Inc (NYSE:V)‘s business model as the best that the fund has seen. To Coho Capital, Visa ‘is essentially a royalty on global spending’ and is ‘the ultimate network effects business, with retailers dependent upon the vendor with the most users (billions of Visa cards issued) and users wedded to the vendor with the most points of purchase (over 44 million merchants)’. Coho thinks that Wall Street isn’t properly modeling Visa’s opportunity for more pricing power in Europe and that the stock could have more upside. 111 top funds had a bullish position in Visa Inc (NYSE:V) as of the most recent 13-F reporting period, down 4 funds from the previous quarter.

Last but not least, Coho Capital notes that S&P Global Inc (NYSE:SPGI) and Moody’s are basically a ‘government sanctioned duopoly with each company controlling 40% of the market for credit ratings’. To Coho, the credit ratings business is very attractive given the recurring revenues, high margins, and strong pricing power. Coho thinks there are a number of upside earnings drivers for the credit ratings industry over the next half decade as over $2 trillion of annual debt needs to be refinanced and as emerging markets (particularly India) increase their presence in the debt market. The number of elite funds with holdings in S&P Global Inc (NYSE:SPGI) rose by 9 quarter-over-quarter to 50 at the end of December.

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