GlobalStockPicking 2.0 – Major Portfolio Changes

Before I start this post, I just have to comment on the last months terrible portfolio performance. After being comfortably ahead of the MSCI World benchmark, I’m now behind by almost 5% on the year. The portfolio is down nearly -8% in 1.5 month. Some of it, is company specific stuff, like the gaming halt in China (NetEase). Some of it is just general Emerging Markets and China sell-off, versus how strong USA (which I’m heavily underweight) is in comparison. A picture says more than a 1000 words:

MSCI World_USA outperf

Now over to something more fun than my under-performance, which I’m not too worried about, its bound to happen, especially when you have such large regional tilts.

GlobalStockPicking 2.0

In a recent post I laid out my new and hopefully improved portfolio construction/allocation. I summarize my new portfolio construction in the following three buckets:

GSP_3buckets_20180917

Long Term

The idea is to keep the main focus on the long-term portfolio. This bucket contains about 15 stocks and carries the majority weight (65-90%) of my total portfolio . Given a 5+ year holding period, this implies that I should not change more than 3 holdings in a year. I did not put that as a strict requirement, because sometimes more action is needed. But the Target Holding Period defined above is really there to imply that this should be a low turn-over portfolio of great long term holdings.

Opportunistic

I have been following stocks and the market so long now, that I see stocks that are miss-priced for one or another reason. When I see the risk/reward as favorable, I now have the flexibility to take part on a more short term basis. The analysis on my side here could be anything from very deep to more shallow.

Speculative

I’m not sure if this the gambling genes in me that likes this so much, but I just love speculative stocks. I added this investment bucket for two reasons:

1. I spend quite a lot of time researching and reading about these kind of stocks. I think I sometimes actually have an information advantage (that is yet to be proven).

2. Because its fun. Investing is mostly serious business, but it should also be fun and exciting.

Portfolio Changes – Selling 3 holdings

It will take some time to have a portfolio that is fully in line with the above buckets. I think for example the Opportunistic cases I present today are not the strongest ideas ever. Nevertheless I think they are good enough to enter my new and shiny three bucket investing strategy. Below I will go through what has to leave the portfolio. At a later stage there still might be 1-2 long term holdings that needs to be evaluated if I’m really comfortable holding long-term.

Kopparbergs – Sell Full Holding – 5% investment return

Since I bought into Kopparbergs I spent quite a lot of time, Peter Lynch style, looking at cider products in stores around the world. Walking around daily life, like in a supermarket is just full of investment opportunities don’t you think? In fact this is in general something I draw quite a lot of inspiration from. The more important step in that process is both figuring out what you think of the product compare to its competition and more importantly, how other people feel about it. In the case of Kopparbergs, I think that competition has stepped up significantly and consumers are now having choices similar to Kopparbergs. Kopparbergs more or less created a new cider segment, with very sweet cider. From what I see in stores, although less sweet, for example Carlsbergs Sommersby cider is extremely popular. My case was that Kopparbergs cider had a good chance of being a hit in the US, I now changed my mind about that and see it as less likely. Kopparbergs product offering is not strong enough to really stand out in this competition. Another important factor is that selling these products is as much about distribution and network as in having an awesome product. For all the above reasons I decided that the likelihood of Kopparberg continuing a strong growth journey in cider sales, is low.

Original Kopparbergs investment case

ISS – Sell Full Holding – 15% investment loss

A behemoth in property services, mainly related to cleaning with almost ½ million staff is an impressive entity. My investment thesis was a turn-around in free cash flow after paying down debt and after that a significant dividend increase. That didn’t really play out as planned and the stock market has also been as disappointed as I. Selling this holding is for totally different reasons though and that for me is too low growth opportunities. This is a steady (potentially) high dividend paying company. Although high dividend stocks have many nice characteristics, it’s not really what I look for in a long-term investments. There has to be both growth and dividends. Mature businesses which are just fighting with operational efficiencies is not what I believe will generate alpha long term. It might do so in a bear market, given the stability and quality of the company, but I’m not going to hold ISS as a timing play on a bear market.

I will have to expand what I look for later, in my Part 2 of the “Art of Screening”

Original ISS investment case

Radisson Hotel Group – Sell Full Holding – 39% investment return

I’m usually pretty tough on myself and my investments failures. That’s because I’m not here to brag, but to become a better investor. But now I will do a bit of bragging. Damn it feels good when you are spot on in an investment idea. I painted out a investment scenario whereby HNA would be forced to sell it’s position in Rezidor (now renamed to Radisson). On top of that I had listened to a 3.5 hour investor presentation on how the hotel group was going to structure it’s turn-around. So it was a double whammy turn-around + bid case. As it happened the market started to believe the turn-around, especially when it already started to show in the latest results. Then came the bid by a Chinese hotel company: HNA sells Radisson Holdings to Jin Jiang-led consortium.

Unfortunately this bid did not give as much of a stock price bump as I had hoped. There is still some un-clarity around how much Jin Jiang will need to offer the minority holders, but they might low ball investors and keep the stock listed. There still might be more upside here, but my investment case has played out and I’m happy stepping off here, overall a great investment which returned 39% in less than 6 months.

Original Radisson/Rezidor investment case

New Holdings – Adding 5 holdings

I will at end of trading today add 5 new holdings to the portfolio, and after selling the 3 above holdings, this is what my new 3 bucket portfolio will look like:

GSP_3buckets_Holdings_20180917

Short comments on new holdings

Obviously this will need to be expanded over multiple posts, but here is the quick and dirty on these 5 new holdings:

Amer Sports – Opportunistic – 4% position

Since my previous investment in Xtep, I have both researched and followed the Chinese sportswear and sport shoe producers in China. I invested in the one (Xtep) that was trading cheap on all kinds of metrics. If I had taken a more long-term approach, perhaps I should have considered the local champion Anta instead. Anta which is a 13bn USD MCAP company recently showed a tentative interest in bidding for Amer Sports, a Finnish holding company for a long list of attractive brands/assets. The tentative offer was at 40 EUR per share and the stock quickly after repriced from 29 EUR to 36 EUR, but has after that come down to 34 EUR. If one wants to play mathematics on that, one can say the market is pricing about a 50% probability of this bid actually going through.

My investment case is two fold:

  1. I liked Amer Sports already before this bid and had already done a quick due diligence on the stock. Even if the bid falls through, I’m not in panic mode holding this stock, it could convert to the long-term time bucket if I did a deeper due diligence and like what I see even more than I already do. There has already been other speculations that Amer might spin-off parts of its business to unlock value.
  2. The market is way too skeptical on the bidder in this case. I take this as typical “China fear”. This investment, so makes sense for Anta. If and when it goes through I will be very compelled to add Anta to my long-term holding bucket, I think they would do great things with Amers portfolio of companies. We have Winter Olympics coming up in Beijing 2022 and Amer holds several “winter” assets. Anta has the network in China to actually being able to grow these brands in this tricky market, in the past Anta has bought the China rights to the at the time quite poor brand Fila in 2009. They have totally re-positioned the brand in China over these years, growing it into a real success, from 200 to over 1000 stores in the country. I put the probability of Anta being serious with this bid at 90-95% and I take the probability of a successful takeover somewhat lower (85%), since there is some overhang with for example USA wanting to meddle in this, given that many of the brands under Amer are tightly related to USA.

My own expectation is that this should be priced at 85%*40 + 15%*29 = 38.35 EUR, giving about 12.5% upside on current market price of 34.1 EUR.

JD.com – Opportunistic – 4% position

In this pretty brutal China sell-off I have been scratching my head if and when I should poke my hand in trying to catch any of these “falling knives”. I somewhat randomly felt that now would be a good time to catch one of the stocks I have been looking at for quite some time. JD.com is the case of a quickly growing e-commerce company with tremendous revenue growth. The company plows all of the cash back into investments in its own business and other businesses. For example it’s a co-investor in Yonghui Superstores, which my largest holding Dairy Farm owns 19.99% of. For a primer on JD.com I kindly refer to Travis Wiedower who presents the case in his investor letter: JD.com in LetterEGREGIOUSLY CHEAP blog.

What has taken this fall into another gear, is what happened recently to the CEO of the company: Richard Liu of JD.com Was Arrested on a Rape Allegation, Police Say

A pretty disastrous allegation having hanging over you, I will refrain from speculating in the probabilities of this being true. The main point here is that at this stage the company is bigger than Richard. Yes, Richard built this company and yes this will have a negative effect on JD’s perception among the Chinese. What did Richard do in the US when he got arrested? He was actually studying at Carlson School of Management to complete the American residency of a US-China business administration doctorate programme. Having time for these types of studies shows that other people are running the company by now. There is some issues with the governance structure if Richard would be imprisoned, but we very far from that right now, he is not even charged yet. Richard has built a fantastic business in China, in many ways better than Alibaba’s model. My best guess is that these allegations will die out and JD.com will on a 1-2 year time horizon trade significantly higher. When/if this allegation overhang is removed, this might move into my long term time bucket.

Irisity – Speculative – 2% position

The company listed in 2013 under the name Mindmancer. The idea was to provide smart camera surveillance systems to construction sites, schools and such. The whole package of software imagine recognition, cameras and installation was provided by Mindmancer. They had some success and have installed this in numerous places over these last ~5 years. The problem was that the business model didn’t scale and it was hard to keep the company profitable. There was also management issues, where one of the founders, a very young an enthusiastic guy was the CEO. He probably had the heart in the right place, but was to inexperienced to run and grow this company. The largest shareholders which is connected to the University in Sweden where the company started, decided to appoint a new CEO, change the name of the company to Irisity and do a rights issue (24 MSEK at 7.8 SEK per share) to strengthen the balance sheet. After that the new CEOs strategy has been to go for scalable sales model, just selling the software they develop. The software is proven in all the live conditions where it has been installed already. They are going for so called Software as a Service (SaaS) model. Somewhat surprisingly this quite quickly has got a lot of interest from market participants, both G4S and several of the worlds largest camera producers.

A somewhat sloppy google translate of one of their press releases recently (Irisity press releases):

“Irisity AB (publ) signs license agreement with Hangzhou Hikvision Digital Technology Co. Ltd.

Hikvision is the world’s largest supplier of innovative video surveillance products and solutions. With 20,000 employees, including nearly 10,000 in R & D, the development of intelligent cameras leads. Hikvision is listed on the Shenzhen Stock Exchange with a valuation of USD 46 billion. The company shows a strong YoY 32% growth, with sales of USD 6.6 billion (2017). In collaboration with Hikvision, Irisity now evaluates embedded integration of IRIS ™ AI software in Hikvision’s camera platform.

–        Hikvision is a wish party to Irisity, we already have our AI with several of their IP cameras, but are also looking forward to creating a Linux embedded solution right in the camera. This is the future, since very few cameras will be delivered without built-in AI! Comments Victor Hagelbäck, CTO on Irisity.”

What is not mentioned in the press release is that Hikvision produces almost 100 million cameras per year, so the potential is gigantic if these companies really like the Irisity software.

So to summarize, the company has a proven product in the Nordic markets. They are currently trying to convince huge players, that its software algorithms are good enough. In a best case they would want to pay Irisity to embedd them in their products. Right now this license agreement is not worth any money, its just shows that Irisity has got to actually showcase their products and on some level for example Hikvision (several other big companies are doing the same) is evaluating their product. I find Irisity (valued at about 35m USD) at a very attractive risk reward right now, even if the probability is very low to see large orders. This is truly speculative, one of these lottery tickets, but with much better odds than playing the lottery.

Scorpio Tankers – Speculative – 2% position

This is a fairly simple case, market analysts seems to think that Day Rates should normalize. They have not done so, so far. Equity markets have given up and stock is tanking (ha ha). Taking the long term view on day rates, its seems plausible that they would increase from these levels. I’m a firm believer in mean reversion. Scorpio has a attractive fleet of new vessels, as long as day rates recovers somewhat, they are highly cash generative. Let’s see if that happens or not.

Scorpio_day_rates

UR-Energy – Speculative – 2% Position

Canadian listed Uranium miner, that I actually owned already back in 2006-2007. At the time, it was the only junior Uranium prospecting company, that actually came out on the other side of the bull and following bear Uranium market. They are now a small scale Uranium producer, with a large portion of their production hedged at higher levels. I will have to write another time about Uranium, but its a very special market and a strong case can be made for long term increases of as its called yellow cake. I’m choosing UR-Energy as my Uranium proxy, because they have excellent management, a very crucial detail in the mining industry, which is full of crooks and cheaters.

Please comment what you think of my new holdings and I will try to follow up with more details in later posts!

 

20 thoughts on “GlobalStockPicking 2.0 – Major Portfolio Changes

  1. Great article!

    I really like the idea with different categories, and it is a healthy dose of Peter Lynch-style investing. My only objection is that I’ve tried this myself, and I am easily losing sight of my most important holdings. The other less important portfolios may become a distraction, so to say. But this is very much depending on personality and the ability to focus your mind and thoughts.

    It is logical and more fun to work with different portfolios, but maybe not for me. Or, I have to find the right way to do it, and your clear portfolio rules might be just the way!

    1. Thanks Gustav, to be very honest Im still experimenting with finding my style of investing. Time is definitely an issue in regards to what you should focus on. If i keep on top of my current holdings its hard to find time to research new stocks and vice versa. Adding these two additional buckets is because its closer to the way i currently actually look at stocks. I get really excited by holdings like Irisity for example :) Another example would have been the genome sequencing theme i taked about early 2017, if I had this speculative bucket back then, those would have been great investments. But lets see how this pans how. Speculative holdings will do worse in a bear market..

  2. Great post, as always! :-) . My portfolio also got hit quite hard! I also took a position in JD (before the CEO rape charge). After the rape charge, guilty or not, I started to doubt the bull case. Have you read this article ?

    https://www.gurufocus.com/news/737348/reflections-on-jdcom

    I think he points to some serious issues.

    Lui’s ego getting bigger and bigger (bold claims etc). And now the rape charge. Is this the visionair modest entrepeneur I’ve envisioned.

    Regarding logistics moat, competition did not sit still. Alibaba’s Cainiao Network has caught up with JD. How strong is JD’s moat ?

    JD’s stepping out of its circle of competence in offline efforts. They are building at a bizar speed ; 1000 convenience stores per day ?! What do you think about this move. Will they stores get profitable ?

    I’m still invested in JD but I’m more cautious and haven’t doubled down on my investment.

    Also on a different note, I think the Macao Sector is looking pretty cheap right now. I’ve increased my position in Las Vegas Sands and have a strong believe that Japan will follow through for them. Also still a long term holder of Netease, Tencent.

    1. Hi Bart, thank you and thanks for the JD link.

      I’m actually not tuned in enough on Liu’s character to say if I agree or not on him changing his style. But with the rape allegation, it probably is a big question mark right now around Liu and that obviously seriously affects the shareprice. I think point on competition, with Pinduoduo is also valid. But I mean this is always how it is, there is not going to be a huge market potential, with no competition. So far JD has executed well, that is fact in my book. Will that continue now with some question marks around Liu, well remains to be seen. Maybe I should I put this holding in the Speculative bucket rather than Opportunistic :)

      Regarding the Cainiao network, I do not think that means Alibaba has caught, not if I have understood things correctly. JD still has much more reliable delivery timings.

      Yes I have been taking a peek at the Casino stocks too, I have had them on my list of stocks I look at daily for maybe 7 years now. Agree that they are really taking a beating, but then again, how much longer will China let Macau take all the spoils of Chinese populations gambling, it could be gone anytime. They already emphasized to Macau Gov that there should be less focus on gambling and more on recreation.

      The Japan angle is very interesting, but I don’t know enough about it. Long time ago I invested in a HK listed Pachinko company, doing that DD I understood that the Japanese are as gambling crazy as the rest of Asia, so there is definitely potential From what my Japanese friend told me it will likely be similar to Singapore, that it would be very limited local people going (by charging high fees to enter), it will mostly be for tourists.

      1. thanks for your reply. I don’t see Macau’s casino moat disappear anytime soon. Chinese government makes a lot of money on them and also what to keep a tight grip on gambling. Threats like Hainan are imo not of real concern. Location is not ideal, also to support VIP gaming a lot of money needs to be invested. Also as a side note, I hold Nagacorp and I view this holding also as a hedge on Macau crackdowns. With a yield of 4.9%, forward PE of about 17, Las Vegas sands is a major holding in my portfolio and I view Japan as a real opportunity with Sands holding the best cards (Sheldon). Indeed probably it will be mostly for tourists, but tourism is growing to Japan and still local people will gamble there.

        1. So you like Sands more than Galaxy? Galaxy has always been the Casino darling over these last 6-7 years..

          What’s your view on Nagacorp’s Russia expansion? I saw some sell side research attributing about 1 HKD/share value to Nagacorp due to its Russia expansion plans. Like I posted before I think I attribute a negative share value due to these plans :)

          1. Yeah well that’s indeed a difficult one, I think Galaxy is also a great stock. I chose Sands in the past because I think Sheldon is a terrific leader. If Japan follows through I think Sands has the biggest chance to get a license. Galaxy acquired a 5% stake in Wynn probably to land a license as well. I would love to own both, but I hold a significant portion in Nagacorp as well, so if I do that I get to much exposure to Macau and the sector.

            About Nagacorp, I tend to agree more with your line of thinking. I think 1 HKD/share is way to much. However I tend to consider it neutral now, I’m not really negative about it. I think there are some factors that could be positive. Naga has of course experience in working with shady governments. Also there relationship with Suncity could help. I’m still concerned with Chen and his deferred bonuses. I don’t really know his plans. He increased his stake last week again…

          1. I never looked at these guys, you mean the danish global fund i pressume? Only overlap I have with the fund is Diageo. They seem to go for quality and compounders just by looking at their holdings? Gambling, all credit card companies

  3. Very good article. Have felt similar pain recently, topped with tech downs also in US, but having a much broader portfolio (50 holdings), less in %-terms. Also talking to friends in China, i am still VERY confident in where long term market growth and potential lies… (hope not too much confirmation bias…)

    1. Hi Johan,

      I have quite a number of years under my belt now, following the China markets and Hong Kong listed stocks in particular (given that the stock connect has not been open that long). I have to say I have grown more skeptical over the last 1-2 years. Emerging Markets are very tricky markets to invest in. One really has to know the pitfalls. Just because the country does great, doesn’t mean your investments will do the same. EM is classical that somehow all this amazing GDP growth and wealth creation does not reach your pocket as a equity investor. Then you have governments coming in destroying your investment, like now with NetEase/Tencent and new games being halted.

      I’m going to be more selective in the future with my EM stocks, but right now its so hard to not allocate even more there, since the valuation spread to USA is so large

      1. Very fair point. Add to that also the currency risk (or opportunity…) makes it very complicated. I may probably be a bit fresh with less than 5 years in EM investing so have not seen it all yet… Still as you state, lack of options perhaps and a bit of portfolio thinking still drive me towards making investment in, and studying EM more and more.

  4. Nice portfolio approach!

    Regarding Radisson, I have been in the stock for a long time and keep holding. Don’t you think it is still super cheap?

    I’m also in Uranium, this is probably becoming the opportunity of a decade.
    Several names are in my focus if you are interested. Ur Energy is certainly a good choice though.

    1. Hi, yes maybe Im again too early selling. I just think its still fairly cheap, but not the monster discount to peers as it was when I first took a position. I guess I mostly sold because short term triggers had played out and also I dont have high conviction on this as a long term holding. This holsing has infact been classical Opportunistic bucket

  5. Glad to see somebody getting the kevlar gloves out of the drawer so I don’t feel so alone (JD.com). I mean, the company is selling at about 0,5x 2019 Sales, assuming a very modest growth rate of 20% – That’s WMT’s valuation, which is its partner btw… Sure, will the company EVER be profitable? That’s basically the bet here. I very much think so. But it will take a while. But even if doesn’t, just do a sum of the parts valuation and you won’t be disappointed. Here is the best investment write-up I could find on it – https://oraclefromomaha.wordpress.com/2016/05/05/jd-com-a-multi-decade-compounder/
    And if you ever visit Tier 1 or 2 cities in China/have the chance to talk with someone living there, you can tell that JD is almost a synoym for fast and reliable shipping, which of course shines through their market share in the 3C category. Just think that you can get big bulky or small items delivered to your apt’s door in less than 24 hours and without the hassle of offline retail (especially if you happen to live on the last floor with no elevator). And since you have all this male customers on your site, maybe they can start bringing the wives to the apparel category, which is way more profitable. And services are just now starting to be explored as another source of income. Time will tell.
    Also, I agree with you on your Amer Sports (Centric Software based as well) thesis, but I’m already on the same segment with JD Sports (I know, one would think there are other 2-letter combinations available when starting a LLC), which I don’t intend to sell, for numerous reasons.
    Diageo is also in my portfolio, next to BUD (same line of thinking as yours in ISS).
    Regarding Inditex, I’m on the fence, Are you averaging down?

    1. Hehe, kevlar gloves indeed :) Isn’t it the case as with Amazon, they could be profitable tomorrow if they choose to? I think the bet is if Liu will get through this crisis around him as a person and secondly how they continue to fare in the competition.

      Yes I agree that fast reliable shipping seems to be an important point for choosing JD, I think less counterfeit goods is another. Which is a big thing for Chinese, they are rightfully skeptical about everything. You can see that in the comments sections about products, that people tell this cream should have this color, or this honey looks like this and so on. When even rice can be fake, you need to be wary.

      Inditex I really can’t decide what to do, great company, market leader, but the sector headwind seems to massive, that the valuation might just be too high, even for a longer term perspective if this headwinds persists, which its likely to do, when the cycle finally turns. It’s one of my weaker holdings right now actually, but its such a well run company, love their products and how they keep pushing the fashion frontier with cheap stylish products, with decent quality.

  6. I’m following your porfolio management, which is being managed actively.

    My strategy is more on macro-trend investment mix with value-growth investing. Some gambling mathematic algorithm is used to handle my investment holding.

    I would set to be bearish for 2nd half. There’s high chance the market is at peak now, near to next crisis. It’s hardly to predict crisis time. Looking at Fed’s strategy – increase the interest rate. I would prefer to wait pessimistic trend coming, top up my position slowly.
    Currently, i have 80% cash on hand. Pocket most of my investment profits on hand.
    My porfolio:
    10% in Fixed Deposit.
    5% Short Emerging Market Index
    5% equities in China A share.
    Avoid any USA stock at this moment. The “start” index may fall anytimes. Upside 20-30%, downside is 50%. Avoid this kind of low margin bet.

    1. Hi CL Lee, I fully agree with you. Actually I have been pessimistic on equity markets for quite some time already. Already when I started this blog i kept much of my money in cash, that has been very unfortunate given the returns over these 2.5 years. What China A shares do you hold currently?

      1. SIIC Environment HOlding limited – Dual Listing in HK & SG.
        This counter is currently trading below its asset value. Fundamentally strong management + cash management.

        Macrotrend – China may need to improve their water treatment system over the long run. Population may increase after cancelled the birth control policy in China.

        1. Thats a funny coincidence! I looked at water stocks a few years ago and I kept this on my radar since. Just a few days ago I noticed that Value Partners had a big stake here, so I actually looked closer at this stock just a few days ago. The thing here is that there is so much debt, that you as an equity investor is riding on this huge leverage. The equity could easily be wiped out or go up 5x. The mitigation is the stable cash flows and low funding cost due to concessions. But still electricity price or raising interest rates could really damage the business. Any thoughts on this?

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