Portfolio re-balancing & some thoughts

Some thoughts…

I have been thinking and discussing a lot over the past few months, what is actually going on in the world? I think most investors have been taken by surprise by size of the disconnect between the stock market and the underlying economy. I try to stay clear of taking too much notice of this, just stick to my stock picking process, but it’s damn hard not to. In my view central banks after the financial crisis distorted the Fixed Income markets and to some extend with that also the property market in many places around the world. I think equity markets were fairly free from such distortions previously, but it’s becoming more and more clear to me that is no longer the case. We are reaching bubble territory in some sub-segments of the stock market, probably to a large extend due to central bank and political interventions.

Mr Market seems to believe a few things right now:

1. Interest rates will stay close to zero for the coming 10-20 years. This gives large incentives to own growth stocks, instead of value stocks. Growth stocks have their profits further out in the future and are therefore gaining more on a lowered interest rate.

2. “New economy” tech stocks that can show large growth today, will continue to grow in the same fashion for a very long time.

3. These new economy stocks will so to say eat the old world and nobody will be able to out-compete them or destroy their margins, rather the opposite, with scale they grow even stronger. There are many examples, better cars (Tesla), new ways of shopping (Amazon), new ways of watching TV (Netflix), new ways of providing software services (A huge number of SaaS companies). These are the champions of the market right now and every company that has a look and feel anything like these champions are bid up in a similar fashion.

4. Lastly, momentum feeds momentum, when liquidity is ample (again thanks to CBs), people tend to pile into what is already rallying. I see clear tendencies that when a stock starts to move and establishes an uptrend, it moves a lot.

So this is where we are, maybe the market is rights, maybe not. This has anyhow created a divide in the market, with a sub-set of the market rallying like there was no tomorrow. One can also describe this as the growth/value spread being at extreme levels compared to history etc.

My portfolio is not immune

Obviously my portfolio is not immune to the above points, my holdings like LiveChat, Swedish Match, Vinda, JOYY and a few other I already sold have rallied like there is no tomorrow since the rebound started. This is great news and has helped me have a fantastic performance this year, the portfolio now up some 16% on the year. But it has also pulled the valuation of a few of these companies slightly out of wack. So what do I do? Well I want to invest for the long term, but I also have to stay true to my approach of allocating my money where I see the most value. Not just momentum riding something that quite frankly short term starts to look expensive. So just like in previous stocks I sold I run the risk of selling too early. But this time I’m not selling my full holdings I just trim them a bit and re-allocate some capital to stocks that haven’t followed up in this stock market crazy, but still are solid companies, valued very conservatively.

Portfolio before re-balance

This is my portfolio as of last Friday, all re-balancing happens on today’s close:

LiveChat Software – Reduce to 8% position

My analysis from 1 year ago: Link

The company is doing a lot of things right. The company recently spent quite a fair sum of money to acquire the livechat.com web-address which I think is important (previously they had livechatinc.com). They have also spent money on creating a new Logo and revamping the look and feel of their brand. The launched a brave mission statement of how they want to develop the company going forward. Read it yourself: Living Constitution

“I don’t want to build a company that only has 100,000 clients and billions in revenue. I want us to go down in history as the company that revolutionized internet communication. We need an ambitious goal and the courage to achieve it.”

Everything I read about the company speaks of leaders that have vision and are still hungry to be even better. As you can see the stock is on a phenomenal run and it’s turning into one of the better stocks picks I made since the blog started, especially considering the short holding period. I’m happy to keep holding this long term, but valuation is for sure much more stretched now, therefore, to keep my investing discipline I reduce the size here.

Nagacorp – Increase to 10% position

Another company that I thought a lot about lately. The casino has been closed for months and recently reopened. Cambodia does not have that many covid-19 cases but there are troublesome restrictions to travel there. They will for sure be hurting until this virus is over. Early bull case would be travel bubble towards China (not unlikely). But they are in a good cash position anyhow, I don’t have the slightest worry that Naga will end up in cash-flow trouble. I will save a longer write-up here for later, but at these valuation levels this is a very nice holding to have as my high conviction position. Maybe it will be even cheaper during the autumn, but I’m happy buying at these levels.

TGS Nopec – Reduce to 2% position

A put this is a long term holding when I bought it, but to be honest this was a bit of oil punt. I still believe the oil price will recover long term and this is a high quality company in the sector. The only issue is that I haven’t done a deep due diligence on this company. The position is a bit too large, given that. That’s my only reason for reducing the position. Either I will do a deeper DD and decide to take up the position size again, or it will sooner or later leave the portfolio.

PAX Global – Increase to 6% position

This is a holding that has been growing on me. The valuation is suspiciously low, meaning one starts to think in terms of fraud. I have been discussing both on Twitter and emailing with investor relations. I’m not as confident as I can be that it’s not a fraud. There is for sure a lot of competitors that can create a payment point of sales devices. But they seem to a fit a very nice niche of being cheaper than the best solutions and better than all the other cheap options. With card payments being on an extreme uptrend worldwide before Corona, this is actually a real Corona-theme play for the coming years. I just have to increase my position here and hope the market will agree with me at some point. Shout out to Gabriel Castro with twitter handle @gabcasla for good discussions!

Essex Biotech – Increase to 7% position

My analysis from April this year: Link

I will give you a sneak peak into my next theme, which is partly related to eye sight. With the analysis I have done of the “eye sector”, my conviction on this holding has also grown. Another fast growing company, doing a lot of things right, but the market has yet to revalue it. I increase and I’m ready for re-valuation!

Kirkland Lake Gold – Increase to 5% position

Markets are as stated slightly crazy right now, in my view there is a decent probability that we get a total rocket lift-off in gold price (remember the market love momentum trades right now and gold momentum looks fantastic). Money printing should create inflation, this is my hedge (also a company with track record of creating shareholder value).

Summary

All in all this reduced my cash balance from 12.4% to about 7.7%. Comments as always welcome!

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New holding PAX Global, Selling Tianneng, BBI Buyout finalized

Tianneng Power (819 HK) – Sell full holding (2.3% weight)

As you probably have understood if you read my previous post, the short thesis released was for Tianneng Power (819 HK). I did my best trying to take the material they had written seriously, but like I already implied in my previous post it did not feel like a quality report. The market has so far neither taken the report to heart and the stock is up significantly since the short report was released. I have followed this company since I started this blog, on the back of my EV theme and owning small cap competitor Coslight Technology. Before I invested I scratched my head a lot about the extremely low valuation, I too asked myself could it be a fraud of some sorts? One has to be skeptical why the market puts such a low multiple on the company. But from all research I was able to do, I did not believe it was a fraud. That said its clear its not a company which is run with shareholders best interest at heart (Chinese companies seldom are) at all times. The cash hoarding for example has been extreme. My conclusion for the low valuation at the time is the shift to Lithium Ion batteries, where Tianneng is not competitive. The short report brings this up and I think its a very valid point. My opportunistic investment case though is that the market has misunderstood the timing of how quickly Lithium Ion batteries will be price competitive and challenge Tianneng’s lead battery sales. That was basically my whole investment case – it will still take some years before that happens.

It is a fact that the company is a market leader in lead acid batteries where the big market driver has been for cheap electric scooters sold mostly in China and rest of South East Asia. I initiated a position in the stock at the beginning of the year, as an opportunistic trade, on extremely low valuation which would re-rate thanks to a IPO spin-off. I think this short report brought up some doubts I already had. The stock has now has re-rated (although it’s still not an expensive stock by a mile) and I’m willing to let it go. Reviewing how the holding fared unfortunately looks so so, thanks to poor timing in reducing my holding. The Corona market crash got me to sell at the same day the market bottomed – 23rd of March. I reduced this holding to add more into other holdings. Some of the holdings I added has done OK, but none of them has generated such a performance as if I would have held on to this holding. I bought 9000 shares for 5.93 HKD and sold off 6000 shares at 4.45 at market bottom and now I sell my remaining 3000 shares for 10.46 HKD + a dividend of 0.39 HKD per share. It nets me a 10% return on my initial investment but almost a 100% return on my remaining 3000 shares.

Read my post about Tianneng here: Tianneng Power posts

BBI Life Science – Buyout finalized – 5.4% return in 4 months

I was so exited about this company which I had researched and was ready to pull the trigger on, then the founding family released a LBO offer. I believe with Corona happening this could have been a multi-bagger if it was not bought out. Instead I bought into this just when the buy-out offer was announced and I netted a small 5.4% return, my first actual buy-out risk arb trade since the blog started. The stock market has since I put on the trade in January been on a proper rollercoaster ride, but MSCI World is actually down -7% in this time period, whereas this trade as stated netted 5.4%, so I’m very happy. This then also releases some significant amounts of cash for me – 6.1% to be more exact. Together with the Tianneng sales and some dividends that have dropped in over the past months I have in total almost 8% cash to deploy. And 4% of that is going to PAX Global.

PAX Global – New holding with 4% weight

This company is one of the world leaders is selling the equipment we come across every day when we pay something with our credit card. Back in the days I used to swipe my card, later I put my chip into a reader and now I tap my card on top of the machine. All these machines are produced by a few companies, where PAX is one of the large players.

This company first appeared to me, through a Hong Kong market screen I did a few years back. After doing quite a lot of research I was very close to pulling the trigger and investing in the company. In the end I found some issues with management, where an analyst was thrown out from the AGM for asking “uncomfortable” questions. Also the majority shareholder in PAX is another listed entity which seems to be even less well run than PAX. So even though fundamentals looked good, it felt like management had zero interest in unlocking the value of the company to shareholders, so I passed on it. With the help of some twitter friends I have from their information understood that maybe I shouldn’t have made this into a deal breaker. Anyhow, a few years has passed, the stock price has actually done nothing since then and is actually down a bit. Meanwhile the company has continued to deliver good solid results and Mr Market has not as often is the case on the Hong Kong exchange not rewarded the company at all. What also has changed is that management has to a degree changed it’s attitude towards the market. The hired an IR and are now holding investor calls – a good start! On top of that they raised dividends significantly (although the company is still hoarding cash). But what really got me to pull the trigger and invest was this fantastically well written investment thesis on PAX by Gabriel Castro and Neeraj Mohandas (who can be found on twitter). I have been allowed to link to their investment thesis and I again thank theme here for sharing such a deep analysis for free with all of us. I highly recommend you to read it: PAX Global Investment thesis

So with my own research, following this company for a few years and the excellent analysis linked above I feel confident to initiate a position with a 4% weight as of today. The holding goes into the opportunistic bucket to begin with, it will still take me some time to see that the management are continuing on the track of doing the right things before I move this over to something I want to own long term. Currently I think the company is in an industry with a strong tailwind (card payments) and the valuation is like in Tianneng’s case (before its revaluation) ridiculously low. So risk/reward is very skewed upwards and well worth taking a position here.

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