ZimVie completed it’s spinoff from 29bn USD MCAP Zimmer Biomet (ZBH) in March 2022 and traded around a 800-700m MCAP + some 600m USD of debt after spinoff. The MCAP has since then shrunk to around below 150m USD and lately rebounded to 350m USD. The company is active in two segments: Dental (main product teeth implants) and Spine (main products spinal fusion and disc replacement).
Zimmer Biomet comes from a long history of spinoffs, mergers and acquisitions. Zimmer was spun off from Bristol-Myers Squibb in early 2000’s. Including in the spinoff was the dental business which back then was a main segment within Zimmer (now part of ZimVie). In 2016 Zimmer Bio acquires LDR Holding for about 1bn USD, with the flagship product being Mobi-C artificial disc, which now belongs to ZimVie (current EV of ZimVie less than the Mobi-C purchase).
ZimVie is a small company holding unique assets and in a unique position. To establish products on a global scale like ZimVie’s has you need a massive sales network, this is something normally only large companies have the muscles to do. ZimVie coming from large Zimmer Bio has the benefit of being a small company but with that reach pre-established by a large company. Now the question is they can right size their business and leverage the advantaged they have. Press More to read the full story
I promised in my “Summary 2022” to comment on the holdings that contributed most positively/negatively in 2022, they happen all to be Hong Kong stocks and among my largest positions.
Best stocks in 2022 – PAX Global and Vinda
Worst stocks in 2022 – Modern Dental & Greatview Aseptic
All four stocks have been reduced somewhat to raise cash during Jan/Feb but they are still high to fairly high conviction position. So without further ado let’s jump into discussing these for stocks. (click read more for a mega post)
In the early days of my blog I talked a lot about my investment process, how I tried to combine top-down analysis of long term trends with bottom-up stock picking. I still think the best ideas comes from this approach, you identify something the market has not fully appreciated yet and then you find the best company in that something area and you buy that. Hopefully you both got a discount because the company is trading cheap and you get exposure to an area/theme which in general is trading at a discount because the market has not priced in the outcome you see. As both these things re-price you get a double re-pricing effect, which can be very powerful. In this case this trend is not news, but I think I found a pocket of this trend which is not appreciated how much it will grow. Also unfortunately the company is not cheap on trailing multiples, but it is at an infliction point where growth is pulling up margins quickly, so a few years out it does not look too expensive.
Now that I have been doing this for quite a while, I can start to evaluate my track record also on my top-down analysis. Maybe somewhat surprising I feel have got the long term trends more correct than my actual stock picking. Expressed a different way, even if I figured out where the world is going, betting on the right companies that benefit from that has often been far from easy. So what I have tried to become better at is the stock picking part and not get too excited about the top-down analysis. If no good enough company presents itself at the time, I will keep my world view in mind and keep my eye out for a suitable investment, but I won’t force it. For this top-down analysis I have definitely taken my time and it has taken me an incredible 2.5 years to find two investments to express the very long term tailwind I see from the theme of (excessive) smartphone usage. That I found both stocks almost at the same time was partly by coincidence and partly that the growth sell-off has given me opportunities to buy stocks which otherwise were too expensive (not enough margin of safety).
This post is really the part 2 of the investment theme idea started 2.5 years ago, so it’s essential to read what I wrote back then first.
The Part 1 goes into detail of problems for the neck (cervical spine) I will below expand on the issues related to myopia (not being able to see objects far away). After that I will do two separate posts to present the investments I made in two US companies to benefit on these strong tailwinds. One of the investments I already revealed and invested in ZimVie, which is related to neck issues. The other will be revealed towards the end of this post and is then obviously myopia related. So let’s get going on the Myopia background (press to read more)
This has been one of the most eventful years since I started investing, I would say only 2008 tops it for me. War in Ukraine, crazy inflation, huge rate hikes, collapsing currencies and China who locked in their population to keep dynamic zero. And with all these events happening, my return for the year is anything else than spectacular – a meager -3.5% (but great vs MSCI World at -18.3%). Last year I dodged being down with a slim margin, but this year, unfortunately, became my first down-year since the blog started. I’m actually surprised I fared as well as I did given I was down 20% in October but with the strong Hang Seng rebound I was back in the game by December. One can try to be a stock picker like me, but in the end Beta matters a lot for your performance. Being allocated mostly to European and Chinese stocks I’m proud how much I out-performed these markets both this year and previous years (since the blog started MSCI World Excluding USA is up 17% and I’m up 123%). At the same time it has been such a big mistake to be so underweight USA previously. 2022 was the first year in a long time where Hang Seng did actually not perform worse than MSCI World, so finally I did not fight a headwind and as such I was back to printing alpha!
So without further ado here are the 2022 results (as always results in USD)
The share with holding period less than 1 year where bought during 2022 (best purchase Vitasoy, worst purchase Anicom).
Best stocks in 2022 – PAX Global and Vinda
Worst stocks in 2022 – Modern Dental & Greatview Aseptic
Instead of making a massive comment about these stocks here I will do a separate write-up of these four holdings, this also ties into my topic below about exposure to Chinese stocks – to be continued!
A number of holdings were sold during the year:
Overall the holdings I sold gave a positive contribution to my 2022 performance of about 3.5%. (press to read more)
After a fairly long period of lower activity both on the blog and holding wise, in these past weeks I have sprung to action to make some changes. Others like Swedish Match were force upon me, now to be fully bought out by Philip Morris. This is a quite a dramatic change to the portfolio and Swedish Match leaves both very big shoes to fill and a lot of cash to deploy. I also have a new holding to reveal, so let’s go through the changes. But first let’s start with some brief thoughts about the market and all craziness that happened during this year.
Time to reveal my first investment in a truly Japanese company (that is bought with Yen and only listed in Japan). What really triggered me to pull the gun was the significant JPY weakening we have seen lately, with only domestic sales I’m fully exposed to the Yen in this holding, let’s dig into Anicom Holdings!
Elevator Pitch
Dominant insurance company in it’s niche of pet insurance in Japan (estimated 44% market share).
Strong growth: 10 year Revenue CAGR of 14% and 5 year of 6%.
Founder led with CEO who still holds about 8% of outstanding shares.
Core of the thesis is really about Japanese mindset change of the role the pet has in the family. This will over time increase insurance penetration.
Moat built from highest coverage of direct settlement of bill at veterinary as well as regulatory barriers for insurance companies.
Pet industry in Japan
Anicom has been responsible for much of the growth in the Japanese pet insurance market over the years, however there are still relatively few pets covered by insurance at this time. According to figures from a 2020 Japan Pet Food Association survey of dog and cat ownership, there are roughly 18.1mn dogs and cats kept by Japanese households as pets, and only about 12% of these are covered by insurance. The UK has 16.5mn dogs and cats (8.5mn dogs, 8mn cats; about 25% of the human population in 2017) but pet insurance covers more than 25% of UK pets. So adjusted for population, UK has about twice as many pets and twice as high rates of insured pets. If Japan overtime would reach UKs level of number of pets as well as insurance penetration that is a four fold increase of the market.
As you will see below, the number of pets owned in Japan is in a rather steady state (dogs decreasing, cats increasing). Considering that the population has decreased with a few percent in this timeframe and will continue to do so, is a natural headwind. As a tailwind is that interest in pet ownership is up, but somewhat held back by the supply of especially dogs. There is a more interesting story than the steady state of pet ownership and that is around the mindset of the owners. As you also can see below the industry keeps growing in size although number of pets is not growing. We can only attribute this to the changing mindset around pet ownership. More and more pet owners puts the pet in a family position, where no costs are spared for the pet to have a good life. As a US pet insurance CEO put it: In the past 20 years pets have moved from the backyard to inside the house, and now they are moving from the house into the bedroom and even on to the bed. Press to read more..
It’s been difficult six months to try to find somewhere to hide, I have taken some hits but managed to navigate the downturn decently well.
My portfolio detracted -11% in the first half of 2022 vs -20% for my main benchmark MSCI World Total Return, both denominated in USD. Never fun to be down, but after a very weak 2021 I’m of course pleased to finally stay ahead of the index. I have talked a lot about the US market and the USD in the past. Being underweight the US market has for a very long time been a big mistake. This is probably the first half year in a long time when its been positive. The USD itself feels like one of the main macro factors to mention for this period as many compare their returns in their local currencies, which of course comes out favorably if one compares returns in a currency that lost a lot to the dollar. The USD is just insanely strong right now, this has been a big detractor for some of my investments denominated in Swedish Krona, Polish Zloty and Euro.
Returns for first half 2022
Below is the returns for my holdings during 2022 and the ending weights (not including dividends). For example Swedish Match has been a larger position but has been sold down over the past months and Modern Dental has been increased after it already fell. My position sizing and buying/selling has had a major positive contribution to the outcome.
Returns since inception
Quick comment on each holding
There is a lot to say about this half year in terms of Macro etc, but I will try to keep it as brief as possible with some thoughts on all my holdings. I hate to be so non-humble but my “everything is a bubble post” from January this year was timed almost perfectly for the start of the downturn. Ok bragging over, press more and read all thoughts on my holdings:
It is not every day your largest position get a takeover offer at 40% premium. Surely something to be celebrated – or?
Philip Morris International Inc. (“PMI”), has today announced a public cash offer to Swedish Match’s shareholders, offering SEK 106 per Swedish Match share in cash.
Fantastic for my more than slightly bruised portfolio to get a quick win but long term is this what I want?
A look in the rear-view mirror
Swedish Match (SWMA) entered the portfolio in August 2017 at a fairly modest position size, this is what it looked like back then:
Portfolio in October 2017 when Swedish Match was a new position
Over the years I have slowly doubled my initial position. Although the stock has been a good performer, for a long time my average portfolio actually did better. The difference has been that most other winners have over the year left the portfolio, but Swedish Match always stayed. Only Nagacorp has been there longer. I have been so impressed with how ZYN developed in the US and the defensive characteristics of the company. With that I was happy to keep this as a high conviction position, especially into a overheated market (as I strongly argued in my recent everything is a bubble post). With the money from selling my RaySearch shares, I luckily even re-allocated a little bit of that to Swedish Match just a few weeks back. With the additions over the years, and strong stock performance Swedish Match was my largest holding when the takeover offer came in this week. My portfolio as of Friday (before the offer).
Portfolio as of May 6th 2022
I have a decision to make
Like all shareholders I have a decision to make:
Sell my shares now, trading at roughly 103.5. In this price there is the risk that the deal breaks which would then be mitigated, I get something guaranteed very close to the offer. But selling at this price also foregoes all call options that the bid would be increased, or another bidder would come in to challenge PMI.
Wait and accept the offer, that implies a nice cash yield of 2.4% until the money arrives in September. One could argue that I should then even increase my position and put my cash in Swedish Match for a nice yield on cash. That is if I believe there is zero risk that the bid is withdrawn. I would then also enjoy the upside potential that there would be a bidding war.
Not accept the offer. I come to the conclusion that this is a stink bid and Swedish Match is actually worth more. My hope then is basically enough other investors come to the same conclusion and PMI either fully takes back the offer or buys a so small part (could still be majority owner) so the company stays listed. This is tricky in many ways, because if PMI becomes a majority owner and I’m left with shares in something that now is fairly illiquid and the majority owner wants me out. It could be a long bumpy ride, perhaps something I’m willing to do with a normal sized position but it would be hard with my absolutely largest holding (consider the 12.8% weight above is pre-offer). This makes me conclude there is a 4th option:
Reduce position size (take partial profit) and not accept offer with smaller position.
Attacking the above one by one:
1. Sell my shares now
In fact I have already sold about 8% of my position on Monday to slightly de-risk, this was before the bid level was confirmed. Further than this I’m not considering this option anymore. I see it as highly unlikely that the offer fully falls through.
2. Wait and accept the offer
For the time being I’m definitely waiting, I think there is a small chance that a competitor or even VC/PE fund will come in with a bid. As as another bid is that a lot of larger shareholders would be in talks with PMI over the coming months, making them understand that the offer will not go through on this level. PMI would then be inclined to increase the offer.
3. Not accept the offer
Even if this is not a stink bid, it’s actually not far from it, why? Because the SEK is weak as hell against the USD now and the bid is in SEK whereas the attractive parts of the business they are buying is USD based sales in USA. The refer to the 40% premium to the share price but this is not at all the case from a USD investors perspective, as I am and PMI are as well.
As you can see from the above graph, if investors were happy with the offer valuation, we had plenty of opportunity to jump off at price levels close to this price during last year. But OK, markets are down since then so surely one can’t expect ATH levels and then a premium on top of that. Well yes you kind of can, because SWMA was not a stock that participated in the growth hype category. This was a stock that was very unloved, who wanted to own a tobacco company in these past years – well basically nobody.
Looking at it from a valuation perspective it looks even worse, since the company keeps perform well. The bid is basically at a mid valuation over the past years. This graph was actually the reason I added to the stock just a few weeks ago, it felt very defensive and trading close to its 10 year lows in terms of EV/EBITDA multiple.
4. Reduce position size and not accept offer with smaller position
Given how tricky this situation is, getting potentially caught in a less liquid stock among a smaller group of disgruntled investors with PMI perhaps owning 60-70% of the shares, the best option might be the last one. De-risk a bit, celebrate the nice gains but actually keep a decent position waiting to be actually properly paid. And what is properly paid then? Well given the synergy values this has for PMI, arguable SWMA should have a higher value than it has for the general market. Given that we historically traded at 19X EV/EBITDA, I would say 20X EV/EBITDA is some type of minimum for not being called a stink bid. Which would imply about 25% higher offer than the current value, so in the range of 130 SEK per share if you use a forward looking EBITDA estimate.
For an actual really attractive premium which I believe most would agree is fair and good we are talking 150 SEK per share. That feels highly unlikely though given the 106 SEK they are offering now, so perhaps if more people feel like me, this bid will actually not be successful after all.
Others do agree its a stink bid
John at Bronte who was kind enough a number of years ago explain his deep insights on the company, does definitely seem to think its a stink bid.
Hearing from other informal sources other professional investors do feel the same as John.
That said there are also big players like Capital, who own 10% of SWMA and are large owners also in PMI, given them sitting on dual shares one would guess they are inclined to agree to the offer. It’s a tricky situation indeed.
Conclusion
For the time being I’m keeping my shares, hoping for a better offer. If no such offer comes I might sell some shares close to the offer deadline and probably keep some fighting for a better price together with John and others. All of this could of course change given what the market does. If the market falls 30% in the next few months, this offer will relatively look better and vice versa if markets rally from here. Finally SWMA presented their latest report today and it was incredible to see how they just keep growing and even taking market share with ZYN in the US. This picture gives a pretty nice sneak peek of how Total US could develop over the coming 3 years.
Disclaimer: This post is for general information purposes only and does not constitute investment advice. Always do your own due diligence. Please see full disclaimer on globalstockpicking.com.
Elevator pitch
Only independent software company in radiotherapy for cancer treatment with very strong product offering, never lost a customer.
Founder led company which spent more on software R&D than the current market cap of the company.
Although their product is good, a strong R&D push which reduced profits + previous aggressive accounting and now Covid-19 has hammered the stock from 260 to 45 SEK.
New CFO in place and CEO/CFO has promised focus on cost control (for the first time).
With a stronger software offering, hospitals are going back to business as usual, latest report confirmed early signs of turn-around.
RaySearch has 70% market share in proton therapy, which has a very strong outlook the coming ten years.
With very conservative estimates more than 60% upside and a weighted valuation pricing gives 85% upside.
Background
RaySearch is a Swedish medical technology company that develops software to improve cancer treatments. RaySearch software is today used by over 2,600 clinics in more than 65 countries. The company was founded in 2000 by Johan Löf as he was working on his PhD in radiation treatment. Johan is still the majority shareholder and CEO and has proudly stated that RaySearch has never lost a customer, that’s a pretty strong statement.
In the early days RaySearch delivered functionality to the leading treatment system vendor Philips. In 2003 RaySearch listed on the Stockholm exchange. RaySearch is developing highly complicated software in a very specialized field. The cancer treatment facilities are among the most complex areas in a hospital and requires both very advanced machines and software. Radiotherapy kills the cancer cells by various kind of high energy beams, like x-ray or protons. The core of RaySearch products and what Johan worked on already in his PhD is a more clever dosing of the dangerous radiotherapy. Basically “burn” away the cancer with higher precision, meaning minimizing damage to healthy tissue. After the early cooperation with Philips, RaySearch tied more and more partners to its development. Companies like IBA Dosimetry and Varian as well as certain large University hospitals worked together with RaySearch. Over the past two decades RaySearch grew from a small niche player with some smart algorithms into the only major stand-alone software company in this field. All this was done without any share dilution, RaySearch has funded all growth by being profitable from a very early stage. This R&D has coincidentally costed RaySearch just in line with the current Market Cap of the company (1.55bn SEK). Let’s look at the history and the products RaySearch developed in greater detail (press read more).
What does a bitcoin speculator, a Rolex collector, a Magic the gathering cards collector, a wine collector and a tech growth stock investor have in common? Not that much they might think, but in my view something happened in 2019 that got all of these people exposed to the same something.
My previous post headline claimed that my watch outperformed my stock portfolio in 2021. I thought we should dig a bit deeper into that. I think most people by now are aware that low interest rates and stimulus pumped up asset prices all over the world. Equities and bonds are at record valuations at the same time, is something we heard for quite some time now. Of course it doesn’t stop there, crypto has created tons of newly rich people. House prices have soared in most places of the world, everyone who own anything seems to have done very well for themselves. A question that at least skeptics like me keep asking is: If the world did not get much better in terms of inventions or production of goods, how is possible we all got so much wealthier? So what? Its good times and the economy is running hot, what’s new? Well not everything has run equally hot, some asset price increases have been just off the charts the past few years. That’s what I want to dig deeper into. Also in in my stock portfolio some holdings have taken off like rockets whereas others have actually decreased in value or been flattish. So we know FEDs balance sheet has shot up like crazy in the past years and we know about the super low interest rates – but what distinguishes these certain sets of assets that just sky rocket?
To cut to the chase, the short version in my view is that we created a bubble. A new kind of, everything is a bubble bubble, which is pretty unique for how bubbles goes in an historical context. Usually bubbles are concentrated in something, like tulips, tech stocks or so. I don’t literally mean that everything is in a bubble, there are plenty of things out there at reasonable valuations. I just mean its a really freaking wide-spread bubble this time cutting across assets classes and countries. Let’s go back to my watch, which outperformed my stock portfolio in 2021 (and probably in 2020 too). I thought a lot about this, not really from the context of watch prices per see, but how risky assets re-priced in the past years. I have tried to look for patterns and would like to share some of the bread crumb clues I looked at. My conclusion is that what has sky rocketed in value the past two years, they all play to the tune of the same factor. In the past they didn’t necessarily really have that much to do with each other, but in the past two years, suddenly they did.
Finding the common bubble factor
What does a bitcoin speculator, a Rolex collector, a Magic the gathering cards collector, a wine collector and a tech growth stock investor have in common? Not that much they might think, but in my view something happened in 2019 that got all of these people exposed to the same something. “Something” was driving the action in their respective holdings the past 2 years. I call in the everything is a bubble factor. Let’s take a look at how price action looked like in the past years:
So I got onto this topic when my portfolio had outperformed the market quite significantly. I noticed that there were particular holdings that had extremely strong short term performance on very little actual fundamental company change. Back then most people only talked about how value investing is long dead and so on. But it was only when I plotted this graph in mid-2020 that I understood that growth stocks had just gone into hyperdrive mode. Around the same time some twitter names started to boast extremely good portfolio performances, they had portfolios fully exposed to this factor and were now bragging about their returns. As the ever contrarian I am, I got worried I was also just surfing on this factor – and not really created any actual alpha. With hindsight I shouldn’t have worried but rather piled into this more deeply myself, because this spread just kept delivering and delivering until about three weeks ago.
Just to be clear what we are looking at above, because I find this – sick, hilarious and just bonkers all at the same time. Above is the Vanguard ETFs which replicates the CRSP US Large Cap Growth & Value Indices. Buying the Growth Index and Shorting the Value index gave you a nice 20% outperformance between 2017-2019, a very strong out-performance on index level in the same market. That was probably justified as companies like Apple, Microsoft etc did improve fundamentals quicker than for example JP Morgan, Berkshire and Pfizer (companies found in the value index). But then in 2019 all of a sudden in 2 years time the growth companies went up 100% more than the value companies. How is that possible to be even close to reasonable? In my book its not, markets ran way way ahead of themselves. Let’s look at some of the other “assets” to see if we can see a pattern between this Growth-Value spread and the rise of other assets:
Watches
With a bit of lag to the Growth-Value spread grey market prices of watches seems to take off in a very similar pattern. Look at the AP Royal oak which basically doubles in value in about 1 years time. These watches are now selling for multiples of what they cost in the store (if you are lucky enough to be allocated one). So should we be buying stocks or just hold physical portfolios full of Audemars Piguet watches? Historically these watches have been good store of value, basically rising with inflation, Rolex is famous for this over long periods of time and much of its special status is probably due to this good second hand value. But now we are talking about watch prices doubling in the span of 1-2 years, trading over 2x the retail price. Rolex produces roughly 800 000 watches per year, which are sold at retail (in some few cases the retailer might do some shenanigan’s to extract some of that grey market premium but most often not). These watches have supply constantly coming into the market but still the demand is so much larger than supply that these watches can catch such premiums. To me this is again just bonkers and typical bubble sign. So how about my watch? I did not in fact buy either a Rolex or a AP but my watch has had a similar trend as these. For the avid twitter stalker and watch enthusiast you can figure out what I got 🙂
Wines and Champagne
Again we see the second hand prices of rare wines just taking off (after flat lining for many years). It’s clear people suddenly got so much more disposable income and everything went into scarcity as people bid up prices rapidly. Although the scale here is not like other assets a double or triple just a “meek” 30% increase, its still pretty significant for somethings so large as the average prices of the whole worlds stock of fine wines.
Magic the gathering cards
One of my person favorites, collector cards from MTG. I still have my collection in my parents home, just like the price of the most famous card in the picture here, the Black Lotus, my collection has roughly tripled in value over the past 2 years. My parents who are very frugal do not really have anything expensive in their home. Somehow my mom anyway got a bit irritated when I messaged her and said that box of cards tucked in away in one of the wardrobes is probably the most valuable item they have in their home. Just wanted to give a small FYI reminder to be careful with them but that was apparently insensitive saying they didn’t have anything of higher value than my Magic cards – sorry mom!
Bitcoin
And finally “everyone’s” favorite asset class over the past years, for extra clarity I merged the graph with my Growth – Value spread:
The trend is so clear so no further arguments are really needed, this spread and bitcoin trade on the same factor – the bubble factor.
Why bubble?
So why do I say bubble factor? It’s because its impossible that things so very different like Rolexes, Magic cards, fine wines and bitcoin all have something so fundamentally in common that they should all reprice to multiples of what they traded on before at the same time. There must be an underlying frenzy/inflation or similar driving these gains. And although we have seen inflation it has not been anything near these levels of gains. Many of these assets like Rolex, Magic cards and fine wines, have 20+ years of price history showing very stable pricing, how is it possible that they all should reprice at the same time? It’s very clear to me that the combination of stimulus money and sitting at home locked down through Covid measures created this momentum frenzy into all kinds of assets. This fed on itself and prices on pure momentum/FOMO continued to move higher. As all bubbles unfortunately they always come to an end..
This is the Growth – Value spread over the past 3 months, I wonder how second hand watches will perform the coming year? 🙂
