2017 Performance, Criteo sell, Inditex buy

2017 Performance +28.8%

With MSCI World being my main benchmark at 23.1% for the year, I’m pretty satisfied with +28.8%, although I did it with a higher volatility than the benchmark. Calculated on weekly returns MSCI World created it’s 23.1% return which an almost mindbogglingly low realized volatility of 5%, that’s a sharp ratio any hedge fund would be proud of. My portfolio came in at 10% standard deviation. When I started the blog I had a heavy tilt towards Chinese stocks, so I also made an evaluation against Hang Seng. As you know Hang Seng has outperformed greatly (+36%), and that contributed to my performance for sure. I’m still overweight (about 15% of the portfolio) China from a MSCI World perspective, but it’s not such a heavy tilt, so I will drop those comparisons henceforth.

I had a probably too active year in terms of holdings turnover, although most holding periods have been about a year or longer. My aim is trying to extend that average holding period closer towards 2-3 years. Only one stock that i bought in 2017, I again sold within the same year, that was Norwegian sports retailer XXL.

I decided during the year to shift away from China, we can say that I was too early. All of my Chinese holdings like Ping An Insurance, BYD, Shanghai Fosun Pharmaceutical and YY had all just started their run upwards, I sold off in all three cases in the earlier to middle part of their revaluations. I reinvested in mostly European stocks that have instead traded sideways. In other cases like Rottneros (Swedish pulp company) and Ericsson, I managed to get out in time, selling at peak and stock trading down significantly afterwards.

Although I would have had greater returns in 2017 by not changing my start of the year portfolio, I’m still fairly satisfied with what I’m holding today. I think I hold a defensive portfolio with companies with a reasonable chance of maintaining most of the earnings even in a cyclical downturn. Of course the multiple will still come down in many of my holdings, so I don’t have any fantasies of being immune to markets falling.  As you probably realized I’m not all too bullish on the stock markets for the coming 2-3 years, let’s see if the market volatility we seen in the last few days is the start of a larger trend. I do really think we should be worried when US 10Y Govies are closing in on 3% yield. As the catch phrase says in front on my Hong Kong skyline picture, there still probably is a bull markets somewhere, in some little sector or niche of the market, hopefully we can find that too.

The start of 2018

Graph_20180209

I did not really have a great start to year, the reason is spelled Dignity. The puns that can be thrown about being buried by the investment are actually pretty funny (I was for the first time mentioned on twitter thanks to this). I already dedicated a post to that and I have taken my stance, adding into this position, let’s see over the coming year how it plays out. More interestingly it was good to see how my portfolio behaved in the severe downturn we have experienced. I’m happy to see that the portfolio is holding up at least in line with MSCI World, thanks to my cash positions I have realized about a percentage point less losses than the index over the last 2 weeks.

Looking forward I will continue to rotate my portfolio into positions I’m comfortable holding over longer periods of time, with the goal of reaching average holding periods into the 2-3 year range.

Clean out – Criteo out

Some of my comments have made me aware that all might not be well in Criteo land, I decided to put this in the “too-hard” bucket as well, just as Catena Media. Although its probably a lousy timing to sell right now, stock is ripe for a bounce, I’m taking my stop/loss in this one, selling the full holding.

Inditex – Add 3% weight

So, we all know, bricks and mortar clothing retails i hard, really hard right now. Just ask H&M, the darling stock of Swedish investors is really struggling at the moment and they are not alone. So Inditex, or more widely known, Zara, which is still trading at high multiples, why am I buying this now? I simply love their business model. I think they have a very unique market model and position, if its anyone that is going to survive cheap trendy fashion retail, it’s Zara. And as other companies probably will need to close down stores, my belief is that Zara will come out of this even stronger.

I’m probably a bit too early into this stock, hence the 3% weight. The opportunities to buy this company really cheap has not really existed in the past either. It traded at P/E 15-20 around 2010-2012 and today it’s still at P/E 26 after a decent sell-off. As they say, buy quality and hopefully only cry once. But if the multiple keeps contracting I’m more than happy to keep adding into this position until it is one of my major holdings.

 

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Portfolio changes – Criteo In, Sony out

Adding Criteo 6% weight

For the second time I buy back into a stock I previously held. First time it was NetEase, this time it is Criteo (Criteo – Growth Case). To also revisit the reason I sold it was uncertainty on their revenue model and competitors crying wolf (Criteo – lawsuit scares me). Like all previous holdings of mine, I have kept this on my watch-list. With time I have understood their core model better. Although one has to mention that they keep innovating and coming up with new revenue sources that again are hard to understand.

But to summarize, the investment case is not very different from Catena Media, which is the affiliate for betting i have in my portfolio. Both companies are just trying to in the most clever way route customers to companies homepages and generate sales. The more I think about it this a very natural next step, we do not browse as much as we once did, we go to known pages through apps, but companies still want to reach us with their message. It’s a new and changing field and it might be that there is no room in the future for this players and Google/Apple takes it all. But that’s not my view, I think these players will mature and be a more accepted part of the business for anyone wanting to generate online sales. In the current circumstance for Criteo I feel the market has taken a way to negative view of the possibilities that Apple will limit their business model in the future. Meanwhile since I sold, the company has kept delivering very well and building up its cash-pile. I think the company is still misunderstood and negativity has again taken over and the stock is oversold. I find the stock attractively priced with a nice risk reward.

The biggest negative I can find is how they keep increasing the Equity awards compensation, although the stock price is not moving up. Clearly their metrics for Equity awards is not aligned with share holder returns.

Sell Sony – full holding

After a very decent run its time to part ways with Sony. I bought the stock believing the VR gear could become a big hit. It has done decently well but has not at all been any main reason why Sony has had solid results in general or good results in the games business. A bigger reason for the recent profit upgrade is the image sensor business, which goes into smartphones. An area I did not foresee at all would drive profits, sometimes you are just lucky too.

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Criteo – Lawsuit scares me – I’m out

Criteo the company I recently wrote an article about, has started a legal battle with the private competitor SteelHouse. So what is it all about? Well you can read it yourself in these two business insider articles: It started with Criteo and then SteelHouse came back with a counter.

The growth numbers Criteo have been pulling, are impressive indeed. But if it was one thing that was very hard for me to understand, it was the inner mechanics of how they generate their revenue. Since I don’t fully understand it, you might say I should not have invested in the first place. I guess I somehow was tempted of all that juice growth, in this case i never really considered any fraudulent behaviour.  And that might be my lesson, but here I am, not any longer comfortable with Criteo’s “black box” as SteelHouse calls it of revenue generation. One lessons I learned in the past is, if you are no longer sure of your thesis, then sell. You can always buy it back later. I sold my full holding as of today’s close.

Now I have way too much cash on my hand (17%), I need to find some new good investments.

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Criteo – Growth Case

It’s time to present another of my Portfolio holdings – Criteo.

Criteo was founded just over 10 years ago and has in that time grown into a billion Euro revenue company. Back in 2005-2006 Criteo developed a sophisticated machine learning platform that analyzed user behavior. The company applied this to movie reviews as well as e-commerce purchases. The problem was that they could not figure out how to make money on them.

So the founders started to look at other markets and saw that the adtech industry looked like a great fit. But then again, there was no shortage of adtech operators gunning for the opportunity. In other words, Criteo needed to find something compelling to set itself apart. Keep in mind that – at the time – the adtech market focused on charging for ads based on fuzzy metrics like ad views. But for the founders of Criteo, this seemed really odd. Why not build a system that only billed customers when there was actual performance that drives sales?

This was a big idea and disruptive.

Big growth

The inner works of how Criteo creates its ad technology is not easy to comprehend. But looking at their growth figures it is obvious that they do seem to have an edge in this field.  They employ a large number of PhD’s to build their systems. The more clever people they hire, the more their system seem to scale. I try to disregard from the complexity of how they build their systems and look at the facts. My investment thesis is fairly simple. This is an extremely high growth company with a long proven track-record of growth. Right now all their revenue is plowed back into the business, to grow it further. When the company reaches a more mature stage and the growth slows down, they will have the ability to increase margins significantly, and a lot of that juicy revenue will fall down to the bottom line.

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