Selling LG Chem – My last holding from my first investment theme

Over the years as I have become more confident in my investment style and invested less and less through themes. A theme can still be a good backdrop for the investment case, but I want to pick a specific company, not get exposure towards the overall theme. When I started the blog in 2016 I still bought companies to get exposure to a theme, without having very high conviction on the specific companies. In 2015 I identified the Electric Vehicle theme as an exciting change in the industry and I wanted to profit from being early investing into companies that would benefit from this shift. Today the great champion of EVs – Tesla, is trading close to 1000 USD. The best option for sure would have been to just invest in the most obvious choice back in 2016, but seldom has my investment path been such. I have always tried to find the overlooked and hidden companies. I’m not sure if LG Chem qualifies for being hidden, but many other of my investments in this space definitely were. Nevertheless LG Chem was the company I held onto the longest, almost 4 years. After a very strong re-rating recently I think its time for holding to finally leave my portfolio. There are of course many positives with the company, but here are the reasons I sell:

  1. The EV hype is currently very strong and not very healthy. I think Elon is a super cool guy, I even read the book about him back in 2017, but Tesla at 1000 USD per share is in my view ridiculous. Some of that hype must have rubbed off on LG Chem.
  2. Like many other markets, Airlines, Solar-panels etc, competition often eats away at margins. Looking at sell side research which aggregates the available battery cell supply, it looks like a fairly oversupplied market for quite some time. I’m afraid the EV market is important to the Chinese to champion that they will subsidize away healthy margins for battery cell producers, like LG Chem. China’s aim is to be a leader in production of Electric Car’s. I think for example Geely will be one of the players in this space.
  3. We now have fairly good visibility of EV models coming out for the big European carmakers. Back in 2015 it looked like 2020 would be the “big bang” year for EVs. There will probably never be a big bang event, but I would today put that date at 2022 perhaps. I think the positive market sentiment has been discounted quite heavily into the shareprice of LG Chem.
  4. LG Chem has taken on a lot of debt to finance their big battery cell production expansion, I’m wary of owning companies with high debt, especially given the Corona market we are in.
  5. LG Chem is still mostly a Chemicals company and it’s a beneficiary of the low oil price, I see this a cyclical upswing which wont last (although hard to time).

As of Friday I sell my full holding in LG Chem.

This is what my portfolio looked like just before selling, sorted after Holding period (in years):

I’m happy to announce my portfolio now has taken new all time highs, but maybe even more importantly significantly outperformed the market. My out-performance against MSCI World is a total of 39.2% over this 4+ years. This means my alpha compounded at about 8% per year, an incredible figure which I don’t expect to keep over time. After all I run a diversified portfolio of some 20 holdings. We are indeed living in strange times when the portfolio can perform so well, when in the real economy people are losing jobs and struggling.

14 thoughts on “Selling LG Chem – My last holding from my first investment theme

  1. GPACK / DFI update … since 1st July promotion of Meadows products gone nuts, both in store and across the Internet. All Wellcome staff are now wearing Meadows aprons. It seems according to the Wellcome website that the Meadows range in HK is now running at almost 200 SKUs. Even more interestingly, I saw Meadows UHT milk for the first time today …. can you guess whos packs they were in ? GPAK of course. I would expect fruit juices and fresh milk to follow at some point. It sure looks to me that Jardine Group is building a regional food brand not just an own brand product range.

    1. Thats funny, I had started to draft a blog update on this topic just yesterday. I have tried to research what own branded products does for margins for other grocery companies historically. But its hard to get a clear picture, since many other factors happened, which changed margins. For example around competition from budget chains

  2. I want to add regarding risk. I don’t regard calculating risk based on stock price volatility meaningful. I understand it’s the golden standard, but imo it’s massively flawed in the space where I invest in. I tend to invest in companies that are undervalued, hence the companies I invest are not priced correctly. So I don’t agree with the efficient market hypothesis. If the underlying business is in trouble.. now that’ a risk…. I think the whole covid situation must get you thinking that the efficient market hypothesis is at least flawed…

    1. I dont think you need to believe in efficient market hypothesis just because you measure risk by volatility though. That the underlying business would be in trouble is impossible to quantify with a factor. There are also today a lot of examples of companies where underlying business is fine, but not in relation to the incredibly high valuation the market puts on the business. A lot of people that has been successful the past 2 years have such portfolios. How should we quantify that risk, great business – crazy valuation!?

      1. We probably have a different perception about what risk is. I think more along the line of Buffet, risk is the probability of a loss and the amount of money I could lose. I don’t care about stock (market) fluctuations and temporary underperformance. Your example about overvalued companies with a good underlying business… I try to not buy overvalued companies, so I don’t take that risk and in that case the worst that could happen is it would return to correct value or undervalued (in which case I might add to my position). But indeed if something is severely overvalued like what we are seeing now with some stocks, I consider trimming..

        1. Actually I think we have fairly similar view of risk, I agree with you. But how can I quantify this risk to measure how I do versus the benchmark? I think the conclusion in your way of thinking is to not benchmark at all. The risk is rather that you/me are incorrect about that the company is undervalued, meaning we wont get the return we expect long term

          1. It is interesting to see how you hold up against the benchmark, I agree. And I understand that you do it on your blog. However I think as “value” investors (this is a dirty word now, but you know what I mean) we should not focus too much on it and probably focus more how ofter our hypothesis about our investments come to fruit and if we can learn about that. For instance, we might be happy about our outperformance against the market, but if we focus on the individual results of our investments we notice that we are still not happy with our results; that we underperform our expectations so to say

          2. Good point, should focus a bit more on evaluating business outcomes, especially for holdings I held 2-3 years

  3. Nice review, probably a good decision and surely a nice performance, BUT…
    Regarding the alpha:
    I think your (back on the envelope) calculation is too simplistic, and in the above way you would fool yourself (on purpose or accidentally). In general, you should expect the market performance, adjusted for higher (or lower) beta, standing for systematic risk. Without reviewing your systematic porfolio risk, it is not possible to calculate your alpha, I believe.

    (I hope this comment is taken as constructive feedback! I also hope I did not miss sth.)

    Best and happy investing, s4v

    1. I agree, it was a simplistic way to evaluate performance. Beta has its issues as well though, given that my portfolio has very little overlap with the benchmark, a lower correlation might reduce Beta. But I should for sure look at my returns given the amount of volatility my porfolio has. Say that my standard dev is twice the markets, then the performance is less impressive. I will come back with a calculation of beta and std dev vs benchmark..

      1. I want to add: I am not such a big fan of the beta (systematic risk) approach, but in some way we should evaluate our returns in relation to risk (whatever that is… For many of us it might not be the Volatility of prices)

        1. I think your porfolios volatility says something about risk although not perfect. Another approach would be more risk factor based, which gets very complicated to be accurate. Then you can look at how your portfolio performed historically given how those factors moved in the past. Factors could be on different levels, like growth/value, small/large-cap, or factors like oil, interest rate levels etc. Somtimes alpha can be explained by just loading up a lot on one single risk factor that worked very well over the past year or so..

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