3D Printing Part 1 – Hype has died, time to invest?

The Gartner hype cycle in the picture above can be used in many situations in life. For example I would draw a very similar curve of my perceived knowledge of equity investing. Starting at a low level back in 2002-2003 as a total beginner. Quickly I reached a peak of disillusion around 2007, when all my investments had done great for 4 straight years. I was master of investing and yearly returns of +30% seemed likely. Like another famous expression, do not mistake a bull market for actual investing skills. In early 2009, all my illusions had been shattered and quite a lot of my bank roll as well. From there onward I have been a more humble investor, knowing how little I actually know about investing. Humbly crawling up thew slope of enlightenment is a fun exercise and what this blog is about. Maybe you have gone through a similar cycle?

But enough about our investment psyches, let’s talk 3D-printing.

3D printing and the hype cycle

As probably most of you are aware, we had a big hype in 3D printing a number of years ago, where do you think we are now on the above Gartner curve?

Let’s look at the share-price performance of two of the largest pure-play 3D printing companies.

It looks like a long term shareholder got a very wild ride above, but most likely no returns so far. And its clearly a boom-and-bust hype cycle we have seen in 3D-printing. But as with every hype, there is usually quite a lot true business opportunities hidden behind all the hype. There are numerous examples of investments that after a hype has died become very profitable. Probably the most famous examples are all after the IT-bubble burst, picking up the survivors like Amazon would have been a good decision. A less famous example would be the extreme hype we had around Clean-tech up until 2008. Since it coincided with the Lehman collapse it’s perhaps slightly less obvious. But winners did emerge here also, like Vestas Wind, which bottomed in 2013 and has from that bottom reached back to around pre crisis all time highs, giving bottom fishers a return of about 17X their money.

To believe that there is something real underlying in a hype, one has to read up on the use cases of 3D printing. And I have to say, the more I read, the more I realize this is actually all around us already and it’s not going to get smaller.

Obviously there is no telling where we are in the cycle, but I would put 3D printing right now somewhere at the earlier part of “slope of enlightenment”. But then thinking about it in more detail, is it really relevant to put everything under one 3D printing label? Probably not, Gartner actually splits up the universe of 3D-printing and maps out all sub-segments onto the curve:

As you can see the graph above is almost 1 year old. So if Gartner is spot-on on all these observations, everything should now be shifted 1 year ahead on the curve. I find the light blue dots especially interesting, since that indicates technology being some 2-5 years from reaching a mature stage. Some of my first question seeing the above graph was, how big is this industry? And are there any examples of a mature 3D printing business? Let’s look at those two questions:

Size of 3D printing industry

For this I’m referring very much to this article: Worldwide Spending on 3D Printing Will Reach $13.8 Billion in 2019

It’s seems to be a very healthy growing industry: “3D printing (including hardware, materials, software, and services) will be $13.8 billion in 2019, an increase of 21.2% over 2018. By 2022, IDC expects worldwide spending to be nearly $22.7 billion with a five-year compound annual growth rate (CAGR) of 19.1%.”

 

Examples of 3D printing businesses

The first and most cited example where 3D printing has taken over the industry completely is hearing aids. According to this article, already in 2017 hearing aids produced in the western world where all literally 3D printed: Phonak 3d printed hearing aid. I find that fascinating, that one large hearing aid player (Sonova) moved to 3D print and within years the whole industry moved to it.

The next example is a tangent to my previous posts about the dental industry. The dental industry has multiple examples of 3D printing or “milling” machines that create custom made products for the mouth. But I think the most telling example is Align Technology, who were able to revolutionize the experience of teeth correction, with it’s invisalign products. Sometimes a video says more than a thousand words:

The third area of 3D printing is not where the technology entirely taken over or redefined it’s product area, but rather high tech production, where 3D printing is a superior technology to save weight, create complex shapes, etc. Again a famous example are the 3D printed parts that started to go into airplanes: Boing Dreamliner with 3D printed parts

Conclusions

So the more I researched and thought about 3D printing, I found 3 broad categories of 3D-printing services/companies:

  1. Creating something unique with a custom fit being the selling point. Most often in someway related to the human body.
  2. Creating a better performing product, by either creating shapes impossible to otherwise produce, with the aim the to increase performance, weight savings, etc.
  3. Software products, machines and 3D printing base material/ingredients.

When talking the 3D printing hype, much of the focus has been on category number 3. But so far, almost all of the actual value creation has been in category 1-2. Align Technology being the shining star example. If you invested in ALGN at 3D Systems share price peak in Aug 2014, you would have returned 460% by now. With that knowledge, probably a good area to search for new investment cases would be in new such 3D printing disruptions and not the 3D printing machine makers themselves. On the other hand, if we are seeing a bottoming of these companies, maybe the also have decent upside from here on. I will be back with at least one investment case in this area in the not too far future.

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Guest post about the US debt cycle

A good friend of mine, who is the one I bounce ideas the most with, asked if it was possible to do a guest post. Without this guest, my discussions and investment ideas over these years would not have been the same. So I’m very happy to present some Macro thoughts from my friend – the first guest poster!

Has the US debt cycle come to an end?

Until this week, the equity market has been holding up fairly well despite the trade war, slowing demand in China and Brexit. But there is something on the horizon that suggests we should sell
equities and wait for a better entry point – the debt cycle in the US seems to have come to an end. A rate cut from the FED during the second half of 2019 would confirm that theory and should be a negative catalyst for equities.

I’m sure many of you have read and heard about Ray Dalio, founder and co-CIO of Bridgewater, one of the largest hedge funds in the world. He describes how the “economic machine works” through the debt cycle. Simply described; both companies and households spending consist of two factors; Income and Credit. Income tends to be fairly stable, growing a few percentage points per year, and is the base of a households´ and companies spending. Credit on the other hand tends to vary over time, perhaps you use credit to buy a new, larger house, or a new car while a company might use it to expand manufacturing capacity. Thus spending can increase faster than income by using credit.

A person’s spending is another person’s income – an important aspect in a debt cycle. This means if you are using credit to consume, another person’s income will increase. With increased income the second person can increase their credit thereby expanding their spending power. This chain of events can continue for years, until the debt cycle stops i.e. when households and companies stop expanding their borrowing. As the cycle turns and less is being spent due to lower credit growth, it means another person’s income is falling. That person will therefore not be able not borrow as much since their income is falling thus decreasing their spending power. The chain of events goes both ways creating the debt cycle. You will find a great summary of Ray Dalio’s theory of How the Economic Machine works here:

I’ve thought a lot about this and tried to quantify the debt cycle with the help of the 3m US treasury yield. We start with the simple assumption that if the demand for credit is high, the price of credit i.e. the interest rate, will rise. When demand for credit slows the interest rate goes down. The reason I’m looking at the 3 month yield is that it says a lot more about the credit demand right now compared to for instance the 10 year yield which factors in a lot of expectations about future inflation and economic growth.

By looking at the y-o-y change in the 3m UST yields we can see how the demand for credit has changed over the last year. This is what we typically do when looking at a company`s specific data, we compare the order book, revenue and EBIT with the same quarter last year to see if it’s gotten better or worse. The chart below tells us that the 3m UST yields are about 50bps higher than a year ago, meaning demand for credit has gone up.

S&P500 vs 3m UST y-o-y (bps)

US Corporate Debt growth y-o-y (%) vs 3m UST y-o-y (bps)

A general thinking when looking at Capital Goods companies is that when the second derivative in organic order growth turns negative it’s usually a good time to sell the stock. It tells us demand is about to stabilize i.e. order growth will go towards 0%. In the same way a positive second derivative, when organic order intake is negative, would be seen as a sign that order growth is about to
improve.

Applying the same methodology on the 3m UST yields a negative second derivative would tell us that the demand for credit is slowing, a strong indicator the debt cycle is coming to an end. The y-o-y change in the 3m UST started to stabilize by mid 2018 and has recently started to go down as a result of the lack of rate hikes from the FED. The Fed Funds futures market indicates we will have at least one cut from the FED during the second half of 2019 and another one in 2020. A cut in interest rates from the FED in the second half of 2019 would confirm the end of the debt cycle which would mean the start of a bear market.

FED FUNDS Future Aug19-Dec19

S&P500 vs 3m UST y-o-y (bps) including a rate cut in October

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Sell Edgewell, adding to Nagacorp and other thoughts

When investing in a company I do my best to understand the products the company is selling. I want to understand the environment the company is operating in, competitors, brand value, together putting the company into a context. I try to understand the management of the company and where they want to take the business. I then try to look long-term if the industry has headwinds or tailwinds and how much sales is affected by the general market cycle. All this and more goes into my valuation of the company. But even when I try to cover all bases, the stock market keeps throwing curve balls left and right, I had my fair share and there will certainly be more in the future. The other day it felt like I was dealt another curve ball.

The management of Edgewell Personal care, went out bought a shaving company start-up called Harry’s for 1.37bn USD. Edgewell with an Operating Income of some 300m USD, net debt of 1.1bn USD and Market Cap (pre announcement) of some 2bn USD, thought it is in a good position buying a start-up for 1.37bn USD. Worse than that, they pay 1.085bn USD in cash and very little in stock. This brings debt levels to seriously tough territory, at a time when I at least believe we are close to the peak of the cycle. I thought I bought a low risk defensive company, it suddenly transformed into a equity position sitting on a huge debt rocket.

Deal details can be found here: Presentation

Harry’s is one of the competitors (Dollar Shave Club being the other) that I mentioned i my analysis of Edgewell when I invested. They are taking market-share from Edgewell, Gilette and BIC over the last years, particularly in USA. Harry’s top-line revenue is expected to be about 325m USD in 2019 (growing at 30% historically).

This article explains the Harry’s story quite well: https://www.inc.com/magazine/201605/bernhard-warner/harrys-razors-german-factory.html

They do own their factories and it has been an impressive growth case, so of course it isn’t a worthless investment, it’s just a combination of overpaying and overstretching Edgewell’s balance sheet.  I’m so disappointing in Edgewell throwing in the towel to create this themselves organically. By acquiring Harry’s it’s like admitting to not being able to compete with these guys. That speaks volumes to me about the management of Edgewell. At today’s close, I sell my full holding in Edgewell. Obviously I wish I never invested in the first place, given that I now take a -16% loss on the holding, but I never saw this coming. Investments really can surprise you in so many ways..

Other thoughts about my holdings and the market

Markets have come off a few percent from their highs and my portfolio has under-performed quite a lot the last few weeks. Some of that poor performance obviously is related to Edgewell, but there have been other holdings performing poorly too. Trade war is a big worry, especially for my portfolio that feels fairly exposed to this. I’m not very positive on us seeing a deal anytime soon, there is too much pride in China for that. At the same time I changed my mind about the so often cited coming China crash. I still think it will come, just not this year. My bets are on a pretty ugly 2020 in China, with serious deterioration in their economy in the later part of next year. These things are impossible to predict, but from everything I read and hear, it seems like we have already passed the peak. It will just take a while for slow moving things like the property market to start to wobble and finally fall.

My more defensive companies like Philip Morris, BATS, Swedish Match, Diageo, Dairy Farm, Gilead, Inditex and Essity has not really done that much lately. They have more or less performed in line with the market or slightly better. Below I instead focus on the more high risk holdings:

Tonly Electronics

One of my largest holdings, the quite illiquid company Tonly Electronics has traded down. This is quite warranted given the Trade War that to some extend will affect the company. I’m still hopeful that the company will be able to improve margins during this year, which really is the key thing to be watching in the next report for the first half year. The fairly good dividend yield, which was paid out yesterday, at about 5% yield is also reassuring. Tonly was an opportunistic investment where I see a very deep value case, but not necessarily something I want to hold for another 5 years, as long as some of that value is unlocked at some point.

Nagacorp

A holding that has been a long term holding, but where I numerous times discussed if it really should be. Nagacorp came through with how they plan to finance the third stage of their expansion in Cambodia. After reviewing the terms, I actually think they are quite fair this time. So I decided to increase my position size here and for now throw away my doubts and really firmly put this in my long term holding bucket. I increase my position size to a 7% holding, nearly doubling the position size, more or less back to where it was before I started to reducing my holding. Somewhat ironically the average selling price of my shares is exactly where the shares are trading at now, 8.96 HKD per share. But the situation was different then, I very much doubted that the majority owner would come through with a decent deal for everyone. Now that he did, it changes a lot for me. I many times stated I would be happy to have a very large holding here if I just could trust management. The trust gauge is not really at 100% yet, but it’s much higher than before and this money printing machine feels like a stable holding at 7% weight.

Coslight Technology

One of my original holdings since I started the blog. As explored the Electric Vehicle theme back 2015-2016 most signs pointed to that the real S-curve effect would start around 2020. I remember telling colleagues back in 2015, isn’t it cool that in just 5 years all big car companies most likely will be launching full EV line-ups. That more or less have come true, maybe with a 1 year delay until we really see them in every car dealership. Even if I got the EV theme correct, the company Coslight has not turned out as I planned when I invested more than 3 years ago. Now when EV sales numbers really are starting to climb, I don’t think its the right time to sell this company. I’m down significantly, on not really any news. The company still also has its game software development which is a profitable cash generating business. There is a lot debt here as well, which has been my main oversight when investing. So I might get wiped out from the debt, but somewhat stubbornly perhaps, I want to see this through.

Irisity

Finally my speculative holding Irisity has lately been on a bit of a roller coaster ride. But fundamentally on the company, I’m even more bullish than before. First quarter sales on Monthly Recurring Revenue was fairly solid showing continued strong growth (from low levels). The latest news about HikVision also being banned, just like Huawei, plays perfectly in the hands of companies like Irisity. The largest competitors in this space for sure are the Chinese, with companies like Sensetime having huge software development teams on video-surveillance. If western companies avoid or even are banned from using Chinese tech in this area, a lot of the competition in the market is removed. I’m considering to increase my holding further, but will stay put for now and hope I can increase and a better entry level.


That is all for now. I’m trying to find time to publish a real deep analysis of some new ideas I have had for some time now. But you will have to wait a little bit longer for that. Comments as always are appreciated!

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Sell UR-Energy and All-time-high!

The portfolio reached a new all time high on Friday last week. It’s not very long ago I wrote a post where I shared my thoughts around the market. I thought then that we had started a cyclical downturn and the bear market had started. Suddenly the market feels stronger than ever again. My gut is telling me to sell everything and run nowadays (my gut is always early). Well I will just continue to pick stocks and do my best to outperform, whatever the markets generally decides to do. That being said, with the sell of Cheetah Mobile and now UR-Energy, I am lifting cash levels again, making the portfolio more defensive, at least for a short while.

My portfolio as of Friday last week:

UR-Energy

So why am I selling my full holding as of close today? I didn’t even come around to write a post about this, as I probably earlier promised to do. First of all, this was a speculative holding, just as Cheetah Mobile. Second, the spot Uranium price really is stubborn. Even though so many fundamentals says its bound to go up long term, it continues to stay at rock bottom levels. A holding like UR-Energy then becomes like a far out of the money call option, which is bleeding time value as I’m waiting. Now I believe the stock has moved up only for the petition they have sent in, that USA should secure some yellow cake production from North America, and not rely on places like Kazakhstan for the supply of uranium to it’s power-plants (and perhaps nuclear weapons). So, maybe this will go through – I honestly have no idea. If that happens, there is probably much more upside here, but I have no clue to guess the chance that this petition is accepted. Also that was kind of a kicker in my investment case, not what I built my speculation on. My investment case was  built on, that the world would wake up to nuclear and how much we really need it. To meet climate goals and as base power source when moving more to wind and solar. But no, it does not seem to happen at the speed/pace I was hoping for. Lastly I have some new upcoming investment cases that I will present in due course, I need the cash for this/these investments. I’m happy to take some money of the table here, netting a 10% gain on this speculative position.

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Cheetah Mobile (CMCM US) – Value or a trap?

I bought into this company knowing that there was some issues, but believing they issues very minor compared to the values hidden in this company. There were claims the company had conducted click injection in many of its apps. When looking for cheap companies, you sometimes get entangled in some pretty hairy investment cases. In the past I managed to get stuck in companies where there were some serious doubt about their business practices, for example Criteo and Dignity. After some serious contemplation on my side, I in the end decided to exit both those investments. In the case of Criteo, which is trading at all time low, that has been a wise decision. Dignity is trading close to a ten year low, so also in this case, thus far it was the right decision. I think in my speculative investment bucket I have hit another such investment in the case of Cheetah Mobile.  Basically this case boils down to if this company is a fraudulent in its accounting and business practices, or not. If not, it’s an exceptional value investment. I present a short investment case below, short because I ended my due diligence when I had decided if to keep the investment or not.

Summary

+ Large player in the android app space, lately successful mobile game launches.

+ LiveMe #1 Live stream app in the USA, long runway for growth.

+ Historical high profitability of some 80 MUSD/year in cash from operations.

+ Share repurchase program of US$100m over a 12 month period starting in September 2018. Current MCAP 924 MUSD, with 430 MUSD Net Cash.

+ Big strong majority owners (Kingsoft, Tencent)

– Eccentric CEO who always moves into a new things instead of developing the present better.

– Accused of click injection: Click Injection

– Short thesis (Muddy waters style) released on the company: Prescience Point – Cheetah Mobile

Background

The company was established in 2010 when Hong Kong listed Kingsoft acquired Conew Image and merged it’s Security division with Conew. The company mainly based out of China, focused on internet security software, where mobile became the revenue driver. In 2014 Kingsoft spun off this division and floated Cheetah Mobile on the Nasdaq, selling 12 million ADS at US$14 per share. Kingsoft has kept a majority stake in Cheetah Mobile and appointed the previous Conew CEO, Fu Shen, as CEO for Cheetah Mobile.

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JD.com out Swedbank in

JD.com

JD.com was a tough investment case, continuing to fall sharply after I bought into the company at 25.7 USD per share. This was an investment in my Opportunistic bucket, after allegations against the CEO and majority owner Richard Liu.  I thought the stock looked extremely cheap and had a unique position with the logistics network of warehouses and quick deliveries. Far better than what Alibaba could muster. This has proven not entirely true, this article sheds some light on the situation: JD vs Alibaba in the last mile: what’s happening behind the Great Wall.

Bottoming around 20 USD per share, JD.com now has rebounded trading around 29 USD per share. A nice bounce and also a gain for the portfolio, which during the same period is more or less flat. What I spent the last few months to consider is if JD.com is a worthy long term holding in my portfolio. I have come to the conclusion that it’s not. First of all the whole allegation against Richard does leave a bit of bad taste in the mouth. Maybe more importantly, Richard Liu seems to have fallen somewhat from grace in Chinese circles. In a country built on relationships and government contacts, this should not be weighted lightly. Secondly, just some personal reflections I got from people that know this company more from the inside. JD.com apparently is not at all as culturally open as many other tech companies, Richard himself does not come from a upper class background where he studied abroad at a young age. This seems to be reflected also within the company from what I hear. In many other tech companies it is common with droves of Chinese who lived/worked/studied abroad and recently returned to the “motherland”. I think this is an issue long term for an innovative company. Thirdly this space is so extremely competitive, that although a current low valuation, this does not make it into my long term portfolio as it currently stands. Therefore the opportunistic case kind of has played out, perhaps I could ride the positive momentum a bit longer, but I think I found a more interesting case. Therefore today I sell my full holding in JD.com to instead buy a position in..

Swedbank

From one controversial investment to another. Today is the last day Swedbank trades including a dividend of 14.2 SEK per share, with a current price of 142 SEK, that gives exactly a payout of 10%. I have followed this case very closely, it actually rather started when the Danske Bank money laundering scandal came out. Swedish television has after that followed up with a number of programs, exposing Swedbank. Partly it is a risk of BIG fines, but partly this has also been poor communication from Swedbank management. Today the CEO of Swedbank, Brigitte was kicked out and the CFO becomes the acting CEO until they find someone to take the permanent role. The whole thing is pretty much a shit show, right now its very hard to say where the share price will bottom. I think we are at attractive levels now. The money laundering that has been done in Swedbank, is not nearly in the same scale as Danske Bank. Danske dropped some -45% in total during their scandal, Swedbank is now down some -31% percent, but the bank stocks had already traded down a bit on back of the Danske scandal, so I would say Swedbank is down some -36% to compare it with Danske’s drop. This is in my view too much for one of the most profitable banks in the world. So this becomes my new Opportunistic holding, taking the cash from the JD.com sell and buying into Swedbank as of today’s close for the same amount. The SEK is also traded pretty weakly, so one can hope that that could also give a bit of boost in returns, if it’s strengthens.

 

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Quick update on portfolio changes

I will follow-up later with a longer post explaining my thinking behind my portfolio changes. For now just getting on paper the changes effective as of market close today:

  • Reduce Nagacorp position to 4% of portfolio.
  • Sell full holding in Scorpio Tankers.
  • Increase position in Irisity to 4% of portfolio (still Speculative).
  • New holding Cheetah Mobile at 3% of portfolio (Speculative bucket).
  • For the remainder of my cash (about 7%) buy equally into Philip Morris and British American Tobacco (Long Term bucket).

This means I will be fully invested. Going forward for something to go in, something has to go out or be reduced.

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New holding Edgewell Personal Care, Reduce in Dairy Farm

I have been looking for a long time for some defensive consumer staples companies, with strong brands and a reasonable valuation. Many of the companies with strong brands are based in the US and the recent sell-off has created some opportunities in this space. As of close today I take a 4% position in Edgewell Personal Care (EPC).

Edgewell Investment Thesis

The investment thesis is two fold:

  1. Attractive valuation for a very defensive portfolio of strong consumer staples brands. The company is taking efforts to reduce overhead cost and reinvest in the brands. From conference calls I sense a urgency from management to turn this around. But from a valuation standpoint a larger turnaround is not needed, even with no growth, the company is fairly valued at current prices.
  2. The Gillette commercial will in my view strengthen sales of razors and blades for all competitors. Edgewell will most likely be the competitor that benefits the most, given geographical sales and how Edgewell’s brands are competing head to head with Gillette in physical stores.

I also reduce my Dairy Farm holding in half. Below is a shorter summary of my thinking around this two investments:

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2018 Summary and Review

For 2018, the Global Stock Picking portfolio is down -2.5%, that compares to MSCI World Total Return (i.e. including dividends) down -8.2% on the year. My return is also including dividends but no trading fees deducted. In the counterbalance to fees, I do not calculate any return on cash, which has averaged around 9% of my portfolio. Given my fairly heavy China tilt I have in the past compared myself with Hang Seng, down -10.5% on total return basis. During the first 9 months of the year I struggled to keep equal steps with MSCI World, given the benchmarks high weight to the U.S. When U.S. markets sold off sharply towards year end I increased my alpha quite significantly against the benchmark. As you can see in the graph below, I was flat performance wise from mid-October to year end. This meant that my cumulative alpha reached it’s highest level towards year end. Total return is 47% since inception vs 22.8% for MSCI World. Although a negative year is not very encouraging, I’m still happy with the results, given how exposed I have been to China, which has had a terrible year.

Significant Portfolio changes over the year

Funeral investments – Dignity and Fu Shou Yuan

I entered into my demographics investment case beginning of 2018. It did not play out as planned, I changed my mind and sold both holdings in late November.

Brewery and liquor companies – Olvi, Diageo and Kopparbergs

Olvi and Diageo I still hold, I see them as defensive good companies, 2018 performance wise has been unspectacular. Probably Diageo is a bit too big company to deliver outstanding returns, it would be better to find something smaller, like Olvi, which I like a lot. My best investment was the one I sold, Kopparbergs, good return and the stock has totally collapsed after I sold. I think this was a case of my being a bit lucky with the timing, but also being ahead of the market understanding the cider business fairly well. Behind the scenes I have done a lot of research on other cider companies and how the big breweries are ramping up their cider offerings. I also done a lot of on the ground research, always checking stocks in stores around the world and in pubs of course. All of this made my change my mind on Kopparbergs prospects, selling has so far paid of very well.

Larger portfolio reshuffle – Selling Tokmanni, Microsoft, Catena Media and Criteo

This selling was partly due to my change in investment style. One reason was that these companies are hard to understand and grasp, therefore hard for me to have an edge against the market. Hard to grasp also means high maintenance to keep on top of what is happening. Performance wise selling these holdings was neither good or bad, on average they are about flat since i sold. So overall they were not bad stock picks, given that flat performance is also out-performing the market.

Special Situations – Radisson Hotel and Amer Sports

Radisson was my HNA related turn-around idea, which played out like clockwork. Somewhat luckily I bought at absolute bottom (24.1 SEK) and the stock repriced upwards before the bid for the company came. I choose to sell out before the actual bid at 35.8 SEK, whereas in hindsight, like one my readers has pointed out, it would have been better to keep holding it. Currently trading at 42.4 SEK.

Amer Sports was just that I had pretty good understanding of the Chinese company Anta, which had indicated a bid for Amer Sports at 40 EUR per share. The market did not really believe this, I saw it as something that made total sense for Anta. I got my shares for 34.1 EUR and sold at 38.37 EUR 1.5 month later, currently trading at 38.75 EUR.

HK listed small caps – Tonly Electronics, Dream International and Modern Dental Group

I have invested long enough now on the Hong Kong exchange to have confidence enough to invest in the smaller companies listed in Hong Kong. It’s pretty dangerous waters, mis-pricing can last for very long periods of time and many of the companies are not run with shareholders best in mind. Anyhow I found three companies which I believe had few of these dangerous characteristics, low valuations and fairly bright future prospects. To summarize, so far so good, all companies have out-performed the market, although under very low volumes. All these stocks are easily manipulated up/down 10% on a single day. When I bought Tonly and Dream Hong Kong was one of few exchanges that had sold off, and these stocks were in my view uniquely cheap. Now when valuations are coming down everywhere, they seem less and less unique for each day that goes by. It might come a point when these are still good investments, but there are safer options that are valued as low as these. Still I think there is some way to go before we are there.

Speculative/Opportunistic holdings enter the portfolio – UR-Energy, Scorpio Tankers, Irisity and JD.com

The timing (mid Sep) of me buying more speculative, loss making companies was not really fantastic. Just when the markets really started to tank. Given that it’s no surprise that these stocks have not performed very well, all of them being a significant drag on performance. Currently I have most hope to Irisity which is making some acquisitions, trying to consolidate Swedish knowledge on video/camera detection software. Given the market climate I might make some changes and lower the weight towards these type of companies, it might get very brutal in a bear market.

JD.com is also an interesting case, the rape charges were thankfully dropped. On the other hand China feels much more wobbly now than 6 months ago. I’m a few dollars under water on this position, a bit hesitant if I should keep it, due to this being 100% China exposure. As argued earlier, with stocks repricing, there might also be better opportunistic investments than looking for a bounce in JD.com.

Thoughts about 2019

I believe we have entered a bear market. Opposite to a bull market when the market grinds higher and has sudden drops downwards, I think one can start to see that markets rather grind downwards and have large jumps upwards. That is for me the strongest sign of a typical bear market. 2008 was a bit special, since that was more of a collapse. I don’t believe in collapse this time, rather a longer grinding bear market, like in 2000-2003. It’s not going to be very fun performance wise in the next few years if I’m right. It’s also going to be frustrating finding a good investment case, just to see it trade down another 20%, becoming even cheaper. On the upside, it will be like a kid in the candy store, with a lot of great investments and fantastic prices. Probably all of this will not play out in 2019, but continue into 2020 (if I’m right). As always these things are impossible to call and I will just try to hold my long portfolio through it all.

I recently read a book with the title: China’s Great Wall of Debt – Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle. The author definitely has a negative bias on China but it struck a cord with me. I had not read the book when I wrote this post: Rotate away from China. He of course summarizes it much more nicely in his book, but he brings up a lot of points, which is just in line with my own observations. Reading the book it kind of re-emphasized that something pretty bad is lurking in China and when it turns, it’s going to be ugly. On the flip-side China still has many weapons to fight a downturn. Just the other day PBOC announced a Reserve Ratio cut for the banks which will release a lot of liquidity into the Chinese market. I think the big bad ugly China crash is still some years away, probably dependent on how much of a downturn we now will see in the rest of the world.

 

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