Portfolio changes

I made a mistake..

when I bought XXL 1.5 month ago. The Norwegian sporting goods retailer is expensive without continued growth that I knew. But how solid is the ground in their home markets? After both visiting one of their stores and not having the same positive feeling as before (maybe too much Peter Lynch here) and reading an article from one of their competitors about the very tough environment I started to turn more skeptical.A podcast that I followed woke me up to the fact that I have probably overpaid. I realized today I have probably underestimated the risks in the company. Luckily I’m in USD terms able to come out at a very slight loss. So I reversed my decision today and selling the full position as of today’s close.

Something that I did right..

was buying Skandiabanken when I started this blog. Not my fastest, but a very steady and my largest gain (+120%). During this time the stock has gone from trading at a slight discount to the large banks, to today trading at a good premium. Just as it should be in my opinion, with it’s superior growth rate. But this bank is almost entirely reliant on the Norwegian housing market, which has been in a slide for some time now. Nothing major, and probably it is fine but for the first time I see some clouds on the horizon. Judging from how hot the Swedish property market is and I know the Norwegian one is in a similar state, there is some worry. Any kind of further outside shock which creates higher unemployment could trigger something very nasty. Now it’s up to the company to keep executing and stealing market share from the big boys. I think they can do it, but any failure will set the stock price back now. So I will reduce this holding just before their earnings release, take some handsome profit and keep a smaller position as a long term case. I sell 60% of my holding as of today’s close.

A new defensive..

..in my portfolio. Already as a kid studying finance, I found out that I could increase my Sharp ratio by adding Swedish Match to my portfolio. It didn’t have the highest returns, but it had this wonderful characteristic of being negatively correlated to the rest of the market. That did wonders in terms of risk adjusted returns. Swedish Match does not anymore have a negtive Beta, but it is very defensive and very well run company. There is some huge political risk if for example the European Union would manage to ban snus in Sweden, but I see it as highly unlikely. I start with a small position of 4% and I intend to look at more tobacco companies going forward. I would also be very interested to hear your thoughts on the E-cigarette/Vaping industry, if you believe in that, what would be the best way to gain an exposure?

3 thoughts on “Portfolio changes

  1. There have been a couple of US listed e-cig/vaping penny stock plays over the past few years but they were both pretty terrible situations (the breakthrough was always just around the bend) and never saw any substantial results. You are spot on noting that all the big tobacco players have their own e-cig brands currently which gives them exposure to that market (if it ever really scales to become a profitable channel).

    To me, the heat not burn play is probably the next evolution in tobacco consumption and the existing big tobacco names (MO, PM, BATS LN, 2914 JP, IMB LN) all have a developmental leg up (e.g. MO alone has invested $2B+ in R&D on brining iQOS to market) vs the multitude of competitors across other tobacco alternatives including snuff, snus, and ecigs/vaping.

    Scandinavian Tobacco Group (STG DC) is an interesting European listed play…not really a grower but solid dividend support and opportunity to add leverage for capital return purposes. STG is a sort of anti-cigarette play in that they make/sell multiple forms of combustible tobacco except for cigarettes (think cigars, pipe tobacco, roll-your-own, etc).

    Schweitzer-Maudit (SWM US) is a lateral tobacco play but suffers from secular volume pressures…they have two primary businesses making cigarette paper/wrappings and making reconstituted tobacco leaf as filler that goes into cigarettes. The stock caught a bid in the early 2010s on the expectations that new EU regulations were about to force the cigarette industry to broadly adopt a new kind of technologically advanced cigarette paper that would extinguish itself after a brief burn period without a proper “draw” by the smoker (vs normal paper which just keeps burning slowly if it is lit causing fires if ppl fall asleep while smoking). That being said, it has been basically treading water since 2014.

    I think the biggest value creation shift over the long term for the big tobacco companies will really kick into gear once marijuana is eventually legalized across all 50 US states. Then they should be able to pivot their production capacity to accept marijuana as the input and the entire cigarette cycle basically reverts back to 1960-era growth as consumers can soon just walk into their local 7-11 and buy a pack of the newest flavored weed. If combustibles are out of favor by then, big tobacco can probably just layer on all the iQOS/reduced risk/snuff equivalent, etc opportunity onto marijuana instead. The current hype cycle around Canadian listed marijuana stocks is frankly a joke that will (imo) end poorly over the next few years.

  2. Generally, I try to lean towards riding on “mega trends”, one being personal health and well-being. In that regards I’m a bit reluctant towards tobacco companies in general. But on the other hand, E-cig/Vaping, Snus etc, while not healthy per se, are healthier than smoke so maybe it might even fit into some sort of “middle-ground” in that trend play, in lack of a better word.

    With that being said, I rather like Swedish Match as a defensive play, they have stood the test of time, continuous share repurchases and a nice dividend. Actually, as tobacco companies across the board got hit badly by that FDA comment about lowering nicotine levels “combustible cigarettes to nonaddictive levels”(https://www.fda.gov/NewsEvents/Speeches/ucm569024.htm), I bought some Swedish Match myself (trading a bit lower right now after the overall decline in the markets). Contrary to the stock behavior, my interpretation of that FDA letter was NOT “bearish” SWMA, rather the opposite, if they can achieve snus as a “less harmful” product with the FDA.

    The legal stuff could really swing both ways, I’m not really worried about an eventual ban of snus in Sweden, I think the odds rather are on SWMAs side with an eventual lift of the ban in EU. But as with all bureaucratic, time moves slowly.

    Other than that, I lack a good overview of E-cig/vaping exposure plays

    1. I watched this documentary about E-cig/Vapin, called “A Billion Lives”. They make a pretty strong case about it being a much healthier alternative to smoking, and also reference for example Snus. And for many many people the only realistic option to actually quit regular smoking. I agree with you on Swedish Match and I also entered at this moment for that reason.

      The big tobacco brands have also realized this potential of e-cigs and are now creating their own products. For example Imperial Tobacco owns the Blu brand, which is one of the largest e-cigs.

      Then we have Philip Morris, which technology is almost more interesting for people that want to smoke (and not just find an alternative to quitting), where you smoke almost a regular cigarette, called IQOS, which I think personally might be a winner in this.

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