Jim Simons ran (until his recent retirement) the most successful fund on Wall Street. His Renaissance Medallion fund produced an average annualized return of 66% from 1988 to 2019: an astonishing 31 years. The fund added a 76% return in 2020.

Simons has been called the world’s smartest billionaire. He entered MIT at 17 and earned a degree in mathematics in 3 years. He went on to a Ph.D. from Berkely. He was a Cold War codebreaker for the NSA and chaired the math department at Stony Brook University before taking up investing in 1978.

It’s easy to assume that the incredible record of success came from mathematical prowess (and we suspect that was part of it), but Simons tells a different story: in his own account, his success came mainly from smart hires and sticking to principles.

Most of us are not going to break codes or carry advanced degrees in math, but Simons makes one point that applies well beyond mathematics. He points out that while many funds now use the kind of mathematical modeling that he pioneered, many are not consistent.

“You either slavishly follow the model, or it isn’t going to work very well”, Simons says. “We never overrode the model”.

His advice could be applied to all investing strategies: no strategy will succeed if you don’t stick to it.

Let's get into this week’s report.

• A newly-public company using AI to counter the growing landscape of cyber threats.
• A leader in a stable, recession-resistant industry that’s jumping onto a tech-driven growth train.

SentinelOne, Inc. ($S)

$54.65 – Share price at time of writing

Source: tradingview.com

Summary:

• SentinelOne operates Singularity, the world’s first purpose-built AI-powered autonomous cybersecurity platform.  
• Singularity is an “extended detection and response” (XDR) platform capable of anticipating, detecting, and responding to attacks with high speed and reliability.
• Singularity runs simultaneously on all endpoint computers, servers, and every cloud location that a client uses, providing full protection for organizations with remote workforces.
• SentinelOne had over 5400 customers at the end of its last quarter, up 75% year over year. Annualized Recurring Revenue grew 127%.

What they do:

SentinelOne is a cybersecurity provider. Its Singularity platform is powered by artificial intelligence. The platform continuously aggregates and processes masses of data to anticipate threats across a client’s entire exposure range and to respond to threats in machine time, without human intervention.

SentinelOne customers include companies like Samsung, Electronic Arts, Norwegian Airlines, Hitachi, Fiverr, Autodesk, and many more.

The Singularity platform is suited to companies with remote workforces or distributed operations. It runs simultaneously on endpoints and cloud workloads.

The SolarWinds hack in late 2020 was one of the largest and most sophisticated hacks in history, compromising more than 30,000 SolarWinds customers. Not one SentinelOne client, including numerous SolarWinds customers, was breached.

AT&T has partnered with SentinelOne to provide its Managed Endpoint Security System.

The rapid adoption of the Singularity platform is driven by a combination of business trends.

• Cloud computing. An ever-increasing percentage of corporate and government work is performed in public and private clouds.
• Connected devices. IoT devices are becoming mainstream and represent a significant point of vulnerability.
• Remote work. More and more companies have distributed workforces with employees operating their own endpoints.
• Diverse operating systems. Many companies are operating Windows, Linux, and Apple devices simultaneously.

Those complications are multiplied by new threat developments.

• High-speed threats can breach system defenses in seconds, well below the response time of traditional security systems.
• Stealthy threats can infiltrate a system and remain inactive or undetected for months or years.

These factors push traditional human-dependent systems beyond their capacity limits, resulting in ever-rising numbers of high-profile security breaches. Many traditional security systems lack flexibility or interfere with process automation or workflow integration.

The Singularity platform operates simultaneously across all endpoints, servers, clouds, and operating systems, without interfering with operation or integration. The AI system continuously evaluates and anticipates vulnerability and threats, providing fully automated incident investigation and threat hunting along with full forensic recall.

What we learned from social media patterns:

SentinelOne shows a comment pattern typical of post-IPO companies, especially when the IPO attracts attention. There’s a surge in both comments and the stock price shortly after the IPO. That surge wears off as initial enthusiasm passes and the stock falls until it finds a support level.

Once the stock finds that support level, that’s an indication that the post-IPO emotional trading has worn off. Unless there are major market fluctuations or unexpected news we’d expect the next major price movements to be driven by the results for the quarter ending Nov. 2021.

Notable comments from Reddit:

“The platform is slick, has a nice UI, and is created by Israeli cybersecurity experts. It has less data to work with to correlate attacks (which will change as they add customers and time), but still has amazing potential as they have huge clients… S1 will be for companies that want to save some money but still get top tier endpoint protection, and will eventually compete head to head as the sole challenger.”

– WeReallyOutHere420

“In year 3 and never looking back. It's been great, haven't had a Malware Monday since we bought it. Complete license, 7500 assets. Couple interop issues but nothing support hasn't been able to fix. Roadmap is solid.”

– s3cguru

???? Signal: A number of prominent hedge funds and investors have held large blocks of $S shares since before the Company’s IPO, including Daniel Loeb, Ken Griffin, Tiger Global, and George Soros.

Why $S could be valuable:

The global cybersecurity market is expected to register a CAGR of 10.9% through 2028.

SentinelOne estimates that its total addressable market will reach over $40 billion by 2024, in these categories.

• Corporate endpoint security, protecting endpoints, servers, and information, is worth $9.7 billion today and is expected to grow to $12 billion in 2024.
• Cybersecurity analytics, intelligence, response, and orchestration are a $13.1 billion market in 2021 and should grow to $17.1 billion in 2024.
• IT operations management is a $5.1 billion market and is expected to grow to $11.1 billion in 2024.

Customer reviews collector by the Gartner Group placed SentinelOne’s Singularity platform at #1 out of over 50 products reviewed in the endpoint detection and response marketplace, beating key competitor Crowdstrike’s Falcon platform for the top spot.

Source: Gartner Group

Singularity also topped a recent MITRE Enginuity ATT&CK evaluation, a detailed test of cybersecurity capabilities. SentinelOne was the only competitor to emerge with 100% visibility, zero missed detections, and no configuration changes.

SentinelOne offers an auto-deploy feature that maintains constant protection with no new software deployment.

The product effectiveness metrics are backed by strong customer response. The Company’s recently concluded Q2 2022 Annualized Recurring Revenue (ARR), a key metric of contractually committed revenue, increased 127% over the equivalent quarter last year. Customers with ARR over $100,000 grew 140% to 345. Net revenue retention, a key measurement of customer satisfaction, reached a new high at 125%.

It’s difficult to compare pricing head to head. Packages are highly customizable and each potential client gets a unique quote. Multiple customer reviews indicate that SentinelOne’s quotes for the same company were substantially cheaper than those of leading competitor Crowdstrike.

SentinelOne’s June 30, 2021 IPO drew significant public attention. Shares were initially priced at $35, opened at $46, and finished the day at $42. They spiked to $72.75 on Sept 16 before dropping to the current level of $54.65.

That’s a pattern we’ve often seen after a high-profile IPO. The stock drives above its fundamentals on publicity and enthusiasm and then settles back to a fair value.

SentinelOne is losing substantial amounts of money. That’s expected in a high-growth tech company only a few months out of its IPO, but there is no clear profitability timeline. The Company has $1.7 billion in cash and minimal debt, so there’s no imminent cash crunch.

$S is showing very high valuation metrics, with a soaring price/TTM sales ratio of 105.28. It’s hard to say the Company has been overlooked. At the same time, the innovative product, very high growth rates, strongly positive customer response, and fast-growing market indicate a high potential medium to long term upside.

Source: SentinelOne S-1

What the risks are:

SentinelOne has never earned a profit. The Company expects expenses to increase and may not be able to achieve profitability.

The cybersecurity market is highly competitive. Maintaining product superiority will require aggressive and expensive R&D, which the Company may not be able to afford if it continues to show operating losses.

SentinelOne relies heavily on its reputation for successfully preventing cyber attacks. Even a single high-profile failure, real or perceived, could affect the Company’s reputation and competitive position and create liability claims.

SentinelOne’s stock value is based largely on the expectation of continuing high growth rates. Failure to sustain high rates of growth could lead to a significant decline in the stock price.

Bottom line: A cybersecurity stock less than 4 months out of its IPO is always going to be a speculative play. The data for SentinelOne shows a combination of very high growth, very high product acceptance, and strong customer support that could lead it to long-term industry dominance.

The Kroger Co. ($KR)

$39.47 – Share price at time of writing

Source: tradingview.com

Summary:

• Kroger is the largest supermarket chain in the US and is second to Walmart in overall retail.
• Kroger stores stock over 15,000 in-house brands covering premium, value, and organic products. 29% of these are from Kroger-owned food production plants.
• Kroger’s e-commerce sales doubled in 2020. Kroger is introducing automated delivery hubs that can serve online orders in a 90-mile radius.
• The $KR stock price dropped sharply after its last quarterly results despite strong numbers. Margins dropped sharply as the company held prices stable despite inflation.

What they do:

Kroger is one of the largest retail store chains in the US, offering primarily grocery, pharmacy, health and beauty, and fuel stores. Supermarkets are operated in several formats.

• Combo stores combine a supermarket and a pharmacy. They offer a one-stop shopping center including perishables like produce and seafood, natural food and organic sections, pet centers, and general merchandise.
• Multi-department stores are larger, adding apparel, home goods, outdoor living, electronics, toys, and automotive products to the combo store mix.
• Marketplace stores are between the previous two types in size and offer food, grocery, pharmacy, health and beauty, an expanded perishable mix, apparel, home goods, and toys.
• Price impact warehouses offer a no-frills warehouse experience aimed at delivering the lowest possible prices.

Kroger has 2,742 supermarkets under a variety of names. 2,255 have pharmacies and 1,596 have fuel centers selling gasoline. 2,223 stores offer online order/store pickup and Kroger offers home delivery to “substantially all” customers.

Kroger’s in-house brands represent a significant proportion of sales. These include the premium Private Selection line, the value-oriented Big K, Check This Out, and Heritage Farm products, and the health-oriented Simple Truth and Simple Truth Organic lines.

Kroger has partnered with Ocado, a UK online supermarket chain, to develop automated warehouse and delivery systems that can serve online customers within a 90-mile radius. Customer Fulfillment Centers (CFCs) are open in Ohio and Florida and are under construction in Florida, Arizona, Georgia, Maryland, Wisconsin, and Michigan.

Each CFC uses up to 1000 robots and detailed algorithms to optimize packing efficiency, reduce packaging materials, minimize damage to goods, and manage deliveries in temperature-controlled vans along the fastest and most fuel-efficient routes. Each CFC can process up to $700 million in annual sales.

Krogers’ strategy is to “lead with fresh and accelerate with digital”, using the availability of affordable high-quality fresh food to bring customers in and using a growing home delivery capacity to retain them and expand per-customer purchases.

What we learned from social media discussion:

Kroger is a classic “boring stock”: supermarkets aren’t sexy or inspiring and there’s little excitement on the investing forums.

We see a steady low level of discussion with a single notable spike coinciding with the most recent quarterly report and the subsequent price drop.

Much of the steady social media chatter is generated by short-term in-and-out options traders playing minor fluctuations in the stock price.

Notable comments from Reddit:

“There seemed to be an oversold condition on Kroger stock today. It's earning news is positive but unfortunately was released into a red market. There happens to be options expiring today as well.

So a little pickup of shares and some FD options might make you afford just the most expensive dinner you'd ever buy tonight. Target by discounted cashflow valuation on earnings: 44.33 – 44.90.”

– KoorJason

“I saw Kroger stock had a low p/e just a few months back and bought shares around 30. Now I see Warren buffet adding shares and the stock is climbing nicely. The p/e is still low kinda and therefore I believe the stock is still undervalued.”

mrfilthynasty4141

???? Signal: Warren Buffet is currently holding 61.8 million Kroger shares, purchased in 2020 and 2021.

Why The Kroger Co. could be valuable:

Groceries are a stable and resilient business. North American grocery stores grew by 12% in 2020, as the pandemic cut meals eaten outside the home and increased in-home cooking. Online grocery shopping is expected to grow from 10.2% of total sales in 2020 to 21.5% in 2025.

The current trends toward online shopping and one-stop shopping trips replacing multi-store trips favor outlets with broad national coverage, a wide range of products, and high visibility.

Kroger is on track to double digital sales by 2023. 60% of items added to online shopping carts were chosen through the personalization program, which offers consumers products based on their order history and the items currently in their cart.

Kroger is using advanced algorithms that analyze shopper loyalty, delivery window popularity, route optimization, and order lead time to improve margins on its delivery business.

Retail is inherently a low-margin business and margins are even lower when delivery is included. Large organizations that can harness vast data streams to improve efficiency have an inherent advantage over smaller entities or large online entities that don’t have an established grocery distribution network.

$KR stock was on a steady uptrend from a low of $21.48 in July 2019 to a high over $46.00 in August 2021. Since then it has plummeted 16% to under $40. That drop was triggered by the Q1 2021 quarterly report, combined with concerns over inflation.

That decline is slightly surprising since its financial results were generally strong.

• Revenue was up 3.9% from the pandemic-pumped equivalent quarter in 2020 and up 14% from 2019.
• EPS grew at a 28.4% compound annual rate since 2019.
• Revenue was 3.2% above analyst estimates and earnings were a 25% upside surprise. The Company has now beaten analyst earnings estimates for 4 consecutive quarters.
• The Company raised its full-year earnings guidance to $3.25 to $3.35/share.
• Kroger bought back $349 million worth of shares in the quarter ($751 million for the year).
• Kroger raised its dividend payout for the 15th consecutive year, by 15%.

Normally you wouldn’t expect results like that to drive a 16% dive in a stock price. Investors appeared to focus on the downside. Krogers’ cost of goods sold grew from 77.2% of sales to 78.6%, and gross margin slipped from 22.8% to 21.42%. These differences seem small but retail businesses operate on razor-thin margins and any drop is significant.

$KR made up for part of the rise in the price of goods by cutting selling and administrative costs. Earnings still grew. The same factors affect the entire industry, and they are not likely to be permanent.

Part of the margin decrease was caused by a policy decision: Krogers kept price increases minimal despite rising costs. That trimmed margins but increased customer traffic and could lead to a lasting increase in market share.

$KR is priced well below its competitors (which face the same inflation-related issues) in a number of key valuation metrics.

Source: Nasdaq

These figures indicate that Krogers is significantly undervalued relative to its peers. Kroger has a dominant industry position, a strong foothold in the booming online grocery business, and a strong growth rate for an established retail company.

Krogers operates in a largely recession-proof and crisis-proof industry and offers a solid 2.13% dividend, which the Company has increased for 15 consecutive years. The payout ratio is a sustainable 47.68% which limits potential downward pressure on the stock price.

Source: The Kroger Co. 10-K

What the risks are:

Krogers faces significant competition both from traditional retailers like Walmart and Target and from Amazon and other online vendors. Competition may further compress margins and limit earnings.

Krogers has a significant amount of debt. So far the company has managed the debt without meaningful stress. If margins continue to slip. Earnings could decline, potentially forcing a dividend cut.

Recovery from the pandemic could boost eating out and lead to flat or reduced sales in supermarkets.

Most Kroger employees are union members, and Krogers is a party to 350 collective bargaining agreements. Upward pressure on wage, pension, and healthcare costs,  or work stoppages, could have a significant impact on the bottom line.

Kroger relies on numerous complex supply chains to bring goods to its shelves. Supply chain disruptions or shipping constraints could have an adverse impact on business.

A continued period of high inflation could reduce consumption and cut margins even further.

Bottom line: Krogers is an undervalued dominant player in a vital industry that has high resilience to economic and market downturns. $KR also has a solid foothold and substantial competitive advantage in the fast-growing online grocery sales market.

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