Portfolio re-balancing and selling Diageo

The rationale for worries and opportunities in all my holdings are spelled out in my previous post. Today I will just briefly announce my portfolio decisions. One little obstacle in this extremely volatile market is that in the blog execute all trades on close, this might mean quite large deviations from the levels I would have been happy to enter or exit my positions on. Anyhow, that’s how its going to be, the blog NAV is just a proxy of performance.

Some quick thoughts around my investment philosophy in this market:

  • Classical defensive holdings not necessarily defensive in a Covid-19 situation. It’s somewhat of an all bets are off situation here. One would think that Diageo with liquor sales is a super defensive stable business, not so much in this situation. Philip Morris another holding is reporting that they have to close their factory in Spain. It doesn’t matter of how defensive cigarette sales are if you can’t produce cigarettes. This market is truly hard to navigate.
  • Don’t try to be a hero in this market – focus on surviving that will give you plenty of returns long term, permanent capital loss is what will really hurt returns. I will reduce/sell anything I see risk of permanent loss of capital or dilution to shareholders due to leveraged balance sheet.
  • My small cap strategy of investing in less discovered (overlooked) stocks makes sense in a normal market. In an highly distressed market, it might as well be a large cap which is wrongly priced. I will therefore consider all-cap companies going forward. When markets have normalized I plan to go back to my small/micro cap strategy.

Selling:

  • I will fully sell my holding in Diageo, the debt levels the company has is scary in a scenario where sales significantly drops, which is surely in the cards if this continue. It’s unfortunate when a holding you bought for it’s defensive characteristics fall even more than the general market, but here we are. I should have reacted earlier and it’s probably very late to sell, at least I will re-allocate the cash into other cheap companies.

Reducing:

  • Although company proved a turned around, due to debt load and total stop in business I will reduce my holding in Modern Dental Group to a 1.5% position.
  • Reduce position in Olvi to 4%, not due to company doing poorly but just that the business will be hurt, but the stock is not trading as cheaply as many other holdings with better prospects.
  • Reduce position in Tianneng Power to 1.5%, although the company is not doing badly, this was a speculative holding now I want to focus on building positions for the long term in strong companies.

 

All in all this raises about 11.5% of my portfolio in cash

Adding:

  • Greatview Aseptic is in my view a big winner on this, people will be buying packaged food as never before. The company is already super-defensive to begin with, being net cash and very non-cyclical business. I raise this fairly new holding to a high conviction position and take the position size from 6% up to 8%.
  • I choose to double down on my oil positions TGS is increased from 2.6% to a 4% position and Tethys Oil I will increase slightly from 2.3% to 3%. This is a real pain trade to do, since in this sentiment these stocks can probably quickly drop further. At the same time these type of extreme events is when you need to dare to go against the sentiment.
  • Dairy Farm is another company where I spelled out my thinking quite clearly for that this is way oversold and actually quite defensive. I will increase my position from 4.7% up to 7% here.

This takes some 6.4% of my cash, which leaves me with roughly net +5% cash (give or take depending on today’s close prices). These 5% + ~7% in BBI Life Science (if the takeover goes through) is left to be deployed at a later stage.

 

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Portfolio update – what a difference 3 weeks make -22% YTD

My portfolio has dropped -22% year to date and it’s been a struggle how to position myself in this type of market. This still compares fairly well to MSCI World which is down -30% YTD, both calculated in USD. Talking about USD, the currency moves we have seen lately has been out of this world. I have a few holdings in NOK and SEK, in the last three weeks USD strengthened 25% vs NOK and 8% vs SEK. This means that my portfolio calculated in NOK is actually UP year to date! Such moves are way to big to ignore and must be incorporated in the analysis of the company you are buying, especially if the companies income is in USD. And then we have the oil, here I feel a bit unlucky buying into my first oil investment since I started the blog just before this epic double whammy of Corona scare and Saudi/Russia oil price war. A bit more on that later. Oil is important, but the big one has of course been the spread of the virus and lock downs around the world. First of all, I think it has been a process for all of us investors to come to grips with this. What does this all mean for my holdings and the economy? I had a head-start given I had closely followed this situation in China before most investors barely looked at it. Even with a head-start it has not been easy. Question like should I re-balance my portfolio when one holding drops unreasonably much compared to another, pops up for me on a daily basis. It’s very easy to over trade in this type of market. I will do a new quick review of all my holdings from a corona perspective. Debt levels for example become more important (I have usually been careful with this). First a few more Corona thoughts..

Further virus thoughts

First I want to say, you are probably pretty tired of reading about virus opinions from unknown readers online. Like 99.9% of these opinions I’m not an expert on virology. That said, I spent an almost unreasonable amount of time following this, listening to experts, trying to form an opinion on what is happening, long before most of you did. Not because I’m more clever or anything, it just happens that I live in a region which was close to the epicenter of this. I mentioned this many times before over the years in my blog, normally I would ignore Macro and focus on stock picking. But some events are so large you should not ignore them, this is such an event. I previously posted about how serious I thought this virus was in China. I just assumed that other developed countries closely monitored the situation and would sound the alarm if cases started to spread elsewhere. I was wrong. It’s now clear that the virus must have spread for a long time in Italy before getting noticed. But I wasn’t entirely wrong, in my post Feb 9th I wrote: “I really don’t understand why we are 1% off all time high the S&P500 when we are staring this situation right in the eye.” That doesn’t mean though that my portfolio was hedged for this scenario. I have tried to stay in defensive stocks for quite some time now, but that was defensive in a general sense, not Covid-19 defensive. In the past three weeks the whole developed world has changed and with that stock markets has totally repriced the world economic outlook. Credit/default risk and significant rise in unemployment is a certainty. The question now is not if, but how bad it will get, before it gets better? Vaccines is everyone’s big hope and that would be wonderful, but unrealistic to have before late this year. If we are locked down until a vaccine comes around then, this will be as bad as the depression in the 1920’s in my opinion. My hope stands to a medicine which significantly reduces the symptoms and the deadliness (right now malaria medicine + zinc seems like the best candidate, with HIV medicines a good second). Such a medicine could potentially reduce symptoms and would enable the younger/healthier part of the population to dare to go back to work and a more normal life. I read that most countries are now giving their patients the malaria medicine (based on the results from China and Korea). Given that governments have to find a way to at least partially normalize this situation, I see such medicines as the base case scenario, where governments can within a month or so go out and proclaim that they have a positive effect. A more bullish scenario would be an even more effective medicine, making the disease harmless, which seems unlikely to me. Then there is the depression scenario, one has to at least have a plan to survive that as well. That scenario goes a bit outside of this blog though. It means buying physical gold (which I have done and potentially I will buy more), stock up on goods at home, and hope you are lucky still have a job with cash flow coming in. I will focus less on the depression scenario, such scenario is a bit to bleak and in my view, still unrealistic, at least at this point.

2nd Corona status check on my holdings

I need to redo my Corona virus status check from Feb 9th, since the one I did a month ago was discounting “only” a significant spread in China, not a world pandemic. So here we go again (press read more):

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Buying TGS & Veoneer, Add Dairy Farm and Selling Irisity

I wrote about a month ago about my take on the Corona virus from a Asia perspective, basically my worst case scenario has come true and then some. The virus is more or less out of control in Europe and large parts of the developed world is staring into two scenarios: Either they do a shut-down like China and suffer the economic consequences of that, or they keep things running as per usual and the spread will just continue. Two horrible options to choose from. And on top of that we have a highly political situation between Saudi, Russia and USA, which knocked oil completely. My timing of buying my first oil holding ever into the portfolio Tethys Oil, could not have been less well timed, but such is investing life. I have managed to time things horribly before and I will do it again.

First my overall portfolio strategy right now, is to stay defensive and I think I have many such holdings (Swedish Match, Philip Morris, Diageo, Greatview Aseptic, etc..), the second thing is more short term tactical. We have seen a multi-year out-performance of Developed Market stocks vs Emerging Markets, just like the growth/value spread I have been wondering, when is it time for EM to shine again? Given the Corona spread in developed markets, I think this will exaggerate a mean reversion of returns (which was bound to happen anyway)  in favor of EM. So I’m happy that my portfolio already has a strong tilt to Emerging Markets and I intend to keep it that way. Thirdly currently I’m mostly worried that this virus will kick-start a (also overdue) cyclical downturn with rising un-employment. So although EM might on relative basis fall less than developed, it might all come down more from here. Finally, a market like this creates opportunities to build positions in things you would not normally consider, so I will use this opportunity to make some portfolio changes.

Selling Irisity

This was a speculative holding with a lot of potential upside, unfortunately the company has not been able to deliver what the promised. I have full respect for that things take longer than planned, but you also need to decide at some point that you waited enough. That time has come and I choose to sell my full holding. Unfortunate and I realize a loss of 50% on this holding, but I knew the risks when I invested.

Buying TGS Nopec and Veoneer and Adding to Dairy Farm

I don’t have very much cash right now in my virtual fund, which is a bit ironic going into this downturn, given that I held larger cash levels for quite a while before. With the Irisity sell I have about 6.2% of my NAV in cash. So these 6.2% needs to be spread into these three holdings:

TGS Nopec – 2.5%

My favorite blog buddy valueandopportunity has for a long term held TGS and he recently added to it in this downturn. It is a oil exploration services company, please check his blog for more info on the company. The stock is down some -60% is a short time. I think this is exaggerated, the company is very well managed, asset light operations and is debt free with some cash in the bank. Previously when oil price hit $30 the company had one single quarter with losses. I’m happy adding TGS as a new long term at these levels. I realize just like my fellow blogger said I might be early here and I’m catching a falling knife, but I don’t really care. If oil doesn’t stay at these levels for years TGS will recover. On the downside oil might stay low for years given an significant economic downturn is in the cards but then most of my other holdings will also be down more from these levels. The risk reward looks very good at these levels in my view.

Veoneer – 1.5%

This is speculative case, again looking like catching a falling knife. This company is the spin-off from Autoliv which produces the next generation safety equipment for cars. More or less everything has been going against the company lately. Car sales declining, then corona, then some delayed contracts and lost contracts to a competitor. Due to all this, its easy to forget that this is a big tech company, with a lot of skillful engineers and a lot of patents. The company recently raised 420 million USD at 17.5 USD per share, its now trading below 9 USD. So the short term capital raising risk is gone, although down the line another one might be needed in a about 2 years time. This company is now deducting cash from market cap trading at Enterprise Value of 500 million USD, for a company with a good pipeline of products, 700 staff, which to a large extent are engineers and having revenue of some 1.9bn USD this is cheap. My belief is that someone like Geely will just come and snatch this up very soon.

Dairy Farm – 2.2%

I thought long and hard about this holding, I know it very well by now. I considered to throw it out for a while as well when I feared that the company would be loss making for the coming years, due to the situation in Hong Kong (protests not Corona). The report for second half of 2019 was released and the company is not in as bad shape. I was quite positively surprised and they are executing fairly well on their turn-around in other markets. After all, this is a very defensive company, running 7-elevens and supermarkets in the Asian region. Longer term it has many things going for it. The general population growth in Asia and a larger middle-class being the main investment case. Right now with the HK situation and Corona shareholders have just decided that this is almost un-investable, which I fully understand, short term. But now the stock is so cheap, I decide to take a long term perspective again, although it might fall more before it recovers. I only hold a 1.8% after selling this down recently (at 5.71 USD per share),  now I get to buy that back at 4.33 USD per share. Going back to some conclusions I made around my investment skills, this is another example where I have to say I traded this stock very well:

November-17 buy @ 8.2
December-17 buy @ 7.91
January-19 sell @ 9.44
October-19 buy @ 5.83
December-19 sell @ 5.71

Fully invested – but..

So I’m as of today’s close fully invested, for the first time in a long while. But I do have something which I see as an alternative to cash at that is BBI Life Science, which is the buy-out event I invested in some months ago. The stock is flat lining here waiting for the offer to go through, I could sell out to a small profit and use that cash for other investments. BBI Life Science is a bit over 6% of my current portfolio.

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5 years and blog still going strong!

It’s 5 years since I started this blog and what a journey it has been so far! When I set out on a mission, of becoming a better investor through this blog, I realized it would be hard to consistently keep posting. With life having it’s ups and down it has from time to time been a challenge to do so but I’m proud to have been able to keep up the pace. I have at least posted once every month since I started, and on averaged slightly above 2 posts a month. This sometimes cathartic exercise of publicly sharing all my investment decision has really been helpful in honestly reviewing what works and what does not work. Some of you readers have been part of most this journey and some might have scrolled back through my posts. But most of you are likely readers that found my blog in the last 3 years. So let me take the opportunity to introduce how I view my journey and also highlight some older posts that might still be worthwhile for you to read.

Pre-blog days

Everyone have their story of how they started investing and how they became better investors. My early days of investing is very colored by the 2003-2007 bull market. I had fantastic returns, about 200% return in 4 year time period. I really thought I had investing figured out back then, the 2008-2009 period taught me I did not. I like explain my feelings around how skilled of an investor I am with the hype cycle:

For me I was at the clueless stage in the early 2000’s, I got naively confident around 2006-2007 and discouragingly realistic around 2008-2010. I understood around 2011-2012 that the path to “Mastery Achieved” is extremely long. I needed to find a venue to set a long term plan to become a better investor. I considered just writing a personal diary, but realized it would be hard to keep it up. At the same time, I had been doing deep research into Electric Vehicle investments, trying to understand the whole supply-chain. This theme I spent some 6 months to research and that was how it started. I wanted to write down everything I had learned about this emerging sector and share it online. I realized I could use a blog format to share such information and at the same time structure the thoughts in my head around investments. I really wanted to get on the journey towards “mastery” in investing and a blog seemed like a good way to structure it.

First year of the blog

So my first big investment theme was that Electric Vehicles would totally change the car industry, below is the post where I truly kicked off my blog. Back in 2015 people did not talk about EVs like today, most people were still great skeptics that EVs would take over the car industry, I believed after all my research that they would. I think I have been proven right by now (sentiment actually turned already around late 2016). In the same post I formed my early thoughts around what kind of edges you can have in the market. I identified that investing with a longer term horizon was one such way.

Investment Theme: Electric Vehicles

As you know by now, my blog mixes discussions about my current portfolio, sometimes dropping a shorter note on a holding and writing lengthier write-ups of stocks. One of my first lengthier write-ups was of NetEase, which has been a very strong performer in the stock market since:

NetEase – Chinese Gaming

One of my more important posts which shows that I started this blog to go on a journey to become a better investor, was the following post:

Investment styles and lifelong learning

I particularly like this point I made in the post. I will come back to this later:

“but for me personally I want to spend a few more years understanding both stock markets around the world, different sectors, as well as different investing styles. Because if it’s one thing I learnt from meeting all these great managers out there, with great track-records of alpha generation – there is not one style that is superior to others, all different styles of investing can work, if you do it right. And maybe as important, different investing styles will outperform during different times.”

Second year

I started the second year with the best analysis I probably produced on this blog. At least if you evaluate it in terms of stock price returns (I don’t count stocks I just mention, like the DNA discussion I start of the post with – CRISPR there would have been a fantastic buy). The post was followed up with an equally good commenting from many of you readers.

Nagacorp – Casino in Cambodia

I was very early on the sneakers trend in China and invested long before Anta and Li Ning moved up multiple-fold. I did get a good return with XTEP in the end, but it also shows that buying value is not always the best case. A lot of the value sits in a brand and here Li Ning for example was a much stronger candidate. I understood that during my due diligence, but instead went with what looked cheap on fundamentals. As often is the case, cheap is cheap for a reason. I have gotten better at being skeptical against cheap companies, although I still do mistakes.

Chinese shoes – XTEP

Another analysis I spent a lot of time on was YY, which recently changed name to JOYY and which I re-bought into the portfolio. I was way too quick to sell the company as it doubled after I sold (and later came back down again).

YY.com – Full Analysis

Since I started the portfolio I always had a fairly high weight towards companies with exposure in the Chinese market and often listed on the HK exchange. The reason for that has been valuation and the nice growth prospects. At the same time I’m always fully aware of the Macro backdrop, which always scared me. I’m pretty sure at some point we will see a major economical collapse in China (before they really take over the world), maybe it will come now triggered by Corona. Anyway, the first time I got cold feet was in 2017 and I wrote this post.

Rotate away from China & Portfolio changes

Well in the end I have not been able to stay away from China, I still have a lot of China exposure in my portfolio, perhaps I should take a look at that once again?

Tokmanni was a company where I did the analysis correctly, but I did not have the patients to wait for the stock to reprice (which it did in the end):

Buy the dip – Tokmanni

One of the larger write-ups and due diligence processes I ever done on a stock was Teva. That taught me a lot about the industry which was good, but it also taught me that it’s not really worth it. A large Pharma company is just too complex to value and it takes too much of my precious time. Time better spent on smaller companies. I guess my analysis is still somewhat relevant (written in two parts) and the company is still a controversial highly leveraged investment:

The Perfect Storm – Teva – Part 1

Finally in December 2017 I did another large piece on a company I still hold, Dairy Farm. The company really is in a pickle right now with Corona virus, HK protests and in generally mis-managed supermarkets. The valuation also reflects it. This post gives a good overview what the company is about:

Dairy Farm – Asian food giant

Third year and onward

Given that these are more recent I will keep a bit more brief.

I was very proud of how I combined my knowledge of China and an entity listed in Europe when I presented this idea (which turned out be perfectly timed):

Adding Rezidor Hotel Group – HNA related idea

I also want to highlight a stock a still own, which continues to trade on a very low multiple, Dream International:

Dream International – a dream investment?

One of the post I’m most proud of in terms of originality is my Art of Screening post. I took a fairly scientific approach of trying to find out which markets have the lowest retail stock investing participation and through that approach find the stock that are most overlooked. This concept has stayed with me since and is another important puzzle piece to what today is how I go about finding new investments and building my portfolio. I think I will have to follow-up on this post, there never was a Part 2 written..

The Art of Screening – Part 1

Another major stepping stone in my approach to investing came with this post, where I introduced 3 buckets of investing, Long Term, Opportunistic and Speculative:

GlobalStockPicking 2.0 – Major Portfolio Changes

Just as Electric Vehicle was this big theme I researched I in the same way researched the Dental Industry in a three part series. Unfortunately most of the investment cases were in my view priced for perfection, but I learned a lot, which will be helpful to pick up these stocks in the future if the market provides a buying opportunity. The stock I choose to invest in which I still hold is Modern Dental Group:

The Dental Industry – Part 1- Overview

2019 saw my first guest post from a friend of mine. Maybe given the current situation is worth revisiting some Macro thoughts?

Guest post about the US debt cycle

And finally, in my view another one of my very solid write-ups, Polish listed LiveChat, which so far has had a very strong stock performance:

LiveChat Software – company with a strong track record

Readers input please!

I hope you liked what I have written over the years! What were your favorite posts? What would you like to see more of and what should I spend less time on? Please comment!

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