GlobalStockPicking 2.0 – Major Portfolio Changes

Before I start this post, I just have to comment on the last months terrible portfolio performance. After being comfortably ahead of the MSCI World benchmark, I’m now behind by almost 5% on the year. The portfolio is down nearly -8% in 1.5 month. Some of it, is company specific stuff, like the gaming halt in China (NetEase). Some of it is just general Emerging Markets and China sell-off, versus how strong USA (which I’m heavily underweight) is in comparison. A picture says more than a 1000 words:

MSCI World_USA outperf

Now over to something more fun than my under-performance, which I’m not too worried about, its bound to happen, especially when you have such large regional tilts.

GlobalStockPicking 2.0

In a recent post I laid out my new and hopefully improved portfolio construction/allocation. I summarize my new portfolio construction in the following three buckets:

GSP_3buckets_20180917

Long Term

The idea is to keep the main focus on the long-term portfolio. This bucket contains about 15 stocks and carries the majority weight (65-90%) of my total portfolio . Given a 5+ year holding period, this implies that I should not change more than 3 holdings in a year. I did not put that as a strict requirement, because sometimes more action is needed. But the Target Holding Period defined above is really there to imply that this should be a low turn-over portfolio of great long term holdings.

Opportunistic

I have been following stocks and the market so long now, that I see stocks that are miss-priced for one or another reason. When I see the risk/reward as favorable, I now have the flexibility to take part on a more short term basis. The analysis on my side here could be anything from very deep to more shallow.

Speculative

I’m not sure if this the gambling genes in me that likes this so much, but I just love speculative stocks. I added this investment bucket for two reasons:

1. I spend quite a lot of time researching and reading about these kind of stocks. I think I sometimes actually have an information advantage (that is yet to be proven).

2. Because its fun. Investing is mostly serious business, but it should also be fun and exciting.

Portfolio Changes – Selling 3 holdings

It will take some time to have a portfolio that is fully in line with the above buckets. I think for example the Opportunistic cases I present today are not the strongest ideas ever. Nevertheless I think they are good enough to enter my new and shiny three bucket investing strategy. Below I will go through what has to leave the portfolio. At a later stage there still might be 1-2 long term holdings that needs to be evaluated if I’m really comfortable holding long-term.

Kopparbergs – Sell Full Holding – 5% investment return

Since I bought into Kopparbergs I spent quite a lot of time, Peter Lynch style, looking at cider products in stores around the world. Walking around daily life, like in a supermarket is just full of investment opportunities don’t you think? In fact this is in general something I draw quite a lot of inspiration from. The more important step in that process is both figuring out what you think of the product compare to its competition and more importantly, how other people feel about it. In the case of Kopparbergs, I think that competition has stepped up significantly and consumers are now having choices similar to Kopparbergs. Kopparbergs more or less created a new cider segment, with very sweet cider. From what I see in stores, although less sweet, for example Carlsbergs Sommersby cider is extremely popular. My case was that Kopparbergs cider had a good chance of being a hit in the US, I now changed my mind about that and see it as less likely. Kopparbergs product offering is not strong enough to really stand out in this competition. Another important factor is that selling these products is as much about distribution and network as in having an awesome product. For all the above reasons I decided that the likelihood of Kopparberg continuing a strong growth journey in cider sales, is low.

Original Kopparbergs investment case

ISS – Sell Full Holding – 15% investment loss

A behemoth in property services, mainly related to cleaning with almost ½ million staff is an impressive entity. My investment thesis was a turn-around in free cash flow after paying down debt and after that a significant dividend increase. That didn’t really play out as planned and the stock market has also been as disappointed as I. Selling this holding is for totally different reasons though and that for me is too low growth opportunities. This is a steady (potentially) high dividend paying company. Although high dividend stocks have many nice characteristics, it’s not really what I look for in a long-term investments. There has to be both growth and dividends. Mature businesses which are just fighting with operational efficiencies is not what I believe will generate alpha long term. It might do so in a bear market, given the stability and quality of the company, but I’m not going to hold ISS as a timing play on a bear market.

I will have to expand what I look for later, in my Part 2 of the “Art of Screening”

Original ISS investment case

Radisson Hotel Group – Sell Full Holding – 39% investment return

I’m usually pretty tough on myself and my investments failures. That’s because I’m not here to brag, but to become a better investor. But now I will do a bit of bragging. Damn it feels good when you are spot on in an investment idea. I painted out a investment scenario whereby HNA would be forced to sell it’s position in Rezidor (now renamed to Radisson). On top of that I had listened to a 3.5 hour investor presentation on how the hotel group was going to structure it’s turn-around. So it was a double whammy turn-around + bid case. As it happened the market started to believe the turn-around, especially when it already started to show in the latest results. Then came the bid by a Chinese hotel company: HNA sells Radisson Holdings to Jin Jiang-led consortium.

Unfortunately this bid did not give as much of a stock price bump as I had hoped. There is still some un-clarity around how much Jin Jiang will need to offer the minority holders, but they might low ball investors and keep the stock listed. There still might be more upside here, but my investment case has played out and I’m happy stepping off here, overall a great investment which returned 39% in less than 6 months.

Original Radisson/Rezidor investment case

New Holdings – Adding 5 holdings

I will at end of trading today add 5 new holdings to the portfolio, and after selling the 3 above holdings, this is what my new 3 bucket portfolio will look like:

GSP_3buckets_Holdings_20180917

Short comments on new holdings

Obviously this will need to be expanded over multiple posts, but here is the quick and dirty on these 5 new holdings:

Amer Sports – Opportunistic – 4% position

Since my previous investment in Xtep, I have both researched and followed the Chinese sportswear and sport shoe producers in China. I invested in the one (Xtep) that was trading cheap on all kinds of metrics. If I had taken a more long-term approach, perhaps I should have considered the local champion Anta instead. Anta which is a 13bn USD MCAP company recently showed a tentative interest in bidding for Amer Sports, a Finnish holding company for a long list of attractive brands/assets. The tentative offer was at 40 EUR per share and the stock quickly after repriced from 29 EUR to 36 EUR, but has after that come down to 34 EUR. If one wants to play mathematics on that, one can say the market is pricing about a 50% probability of this bid actually going through.

My investment case is two fold:

  1. I liked Amer Sports already before this bid and had already done a quick due diligence on the stock. Even if the bid falls through, I’m not in panic mode holding this stock, it could convert to the long-term time bucket if I did a deeper due diligence and like what I see even more than I already do. There has already been other speculations that Amer might spin-off parts of its business to unlock value.
  2. The market is way too skeptical on the bidder in this case. I take this as typical “China fear”. This investment, so makes sense for Anta. If and when it goes through I will be very compelled to add Anta to my long-term holding bucket, I think they would do great things with Amers portfolio of companies. We have Winter Olympics coming up in Beijing 2022 and Amer holds several “winter” assets. Anta has the network in China to actually being able to grow these brands in this tricky market, in the past Anta has bought the China rights to the at the time quite poor brand Fila in 2009. They have totally re-positioned the brand in China over these years, growing it into a real success, from 200 to over 1000 stores in the country. I put the probability of Anta being serious with this bid at 90-95% and I take the probability of a successful takeover somewhat lower (85%), since there is some overhang with for example USA wanting to meddle in this, given that many of the brands under Amer are tightly related to USA.

My own expectation is that this should be priced at 85%*40 + 15%*29 = 38.35 EUR, giving about 12.5% upside on current market price of 34.1 EUR.

JD.com – Opportunistic – 4% position

In this pretty brutal China sell-off I have been scratching my head if and when I should poke my hand in trying to catch any of these “falling knives”. I somewhat randomly felt that now would be a good time to catch one of the stocks I have been looking at for quite some time. JD.com is the case of a quickly growing e-commerce company with tremendous revenue growth. The company plows all of the cash back into investments in its own business and other businesses. For example it’s a co-investor in Yonghui Superstores, which my largest holding Dairy Farm owns 19.99% of. For a primer on JD.com I kindly refer to Travis Wiedower who presents the case in his investor letter: JD.com in LetterEGREGIOUSLY CHEAP blog.

What has taken this fall into another gear, is what happened recently to the CEO of the company: Richard Liu of JD.com Was Arrested on a Rape Allegation, Police Say

A pretty disastrous allegation having hanging over you, I will refrain from speculating in the probabilities of this being true. The main point here is that at this stage the company is bigger than Richard. Yes, Richard built this company and yes this will have a negative effect on JD’s perception among the Chinese. What did Richard do in the US when he got arrested? He was actually studying at Carlson School of Management to complete the American residency of a US-China business administration doctorate programme. Having time for these types of studies shows that other people are running the company by now. There is some issues with the governance structure if Richard would be imprisoned, but we very far from that right now, he is not even charged yet. Richard has built a fantastic business in China, in many ways better than Alibaba’s model. My best guess is that these allegations will die out and JD.com will on a 1-2 year time horizon trade significantly higher. When/if this allegation overhang is removed, this might move into my long term time bucket.

Irisity – Speculative – 2% position

The company listed in 2013 under the name Mindmancer. The idea was to provide smart camera surveillance systems to construction sites, schools and such. The whole package of software imagine recognition, cameras and installation was provided by Mindmancer. They had some success and have installed this in numerous places over these last ~5 years. The problem was that the business model didn’t scale and it was hard to keep the company profitable. There was also management issues, where one of the founders, a very young an enthusiastic guy was the CEO. He probably had the heart in the right place, but was to inexperienced to run and grow this company. The largest shareholders which is connected to the University in Sweden where the company started, decided to appoint a new CEO, change the name of the company to Irisity and do a rights issue (24 MSEK at 7.8 SEK per share) to strengthen the balance sheet. After that the new CEOs strategy has been to go for scalable sales model, just selling the software they develop. The software is proven in all the live conditions where it has been installed already. They are going for so called Software as a Service (SaaS) model. Somewhat surprisingly this quite quickly has got a lot of interest from market participants, both G4S and several of the worlds largest camera producers.

A somewhat sloppy google translate of one of their press releases recently (Irisity press releases):

“Irisity AB (publ) signs license agreement with Hangzhou Hikvision Digital Technology Co. Ltd.

Hikvision is the world’s largest supplier of innovative video surveillance products and solutions. With 20,000 employees, including nearly 10,000 in R & D, the development of intelligent cameras leads. Hikvision is listed on the Shenzhen Stock Exchange with a valuation of USD 46 billion. The company shows a strong YoY 32% growth, with sales of USD 6.6 billion (2017). In collaboration with Hikvision, Irisity now evaluates embedded integration of IRIS ™ AI software in Hikvision’s camera platform.

–        Hikvision is a wish party to Irisity, we already have our AI with several of their IP cameras, but are also looking forward to creating a Linux embedded solution right in the camera. This is the future, since very few cameras will be delivered without built-in AI! Comments Victor Hagelbäck, CTO on Irisity.”

What is not mentioned in the press release is that Hikvision produces almost 100 million cameras per year, so the potential is gigantic if these companies really like the Irisity software.

So to summarize, the company has a proven product in the Nordic markets. They are currently trying to convince huge players, that its software algorithms are good enough. In a best case they would want to pay Irisity to embedd them in their products. Right now this license agreement is not worth any money, its just shows that Irisity has got to actually showcase their products and on some level for example Hikvision (several other big companies are doing the same) is evaluating their product. I find Irisity (valued at about 35m USD) at a very attractive risk reward right now, even if the probability is very low to see large orders. This is truly speculative, one of these lottery tickets, but with much better odds than playing the lottery.

Scorpio Tankers – Speculative – 2% position

This is a fairly simple case, market analysts seems to think that Day Rates should normalize. They have not done so, so far. Equity markets have given up and stock is tanking (ha ha). Taking the long term view on day rates, its seems plausible that they would increase from these levels. I’m a firm believer in mean reversion. Scorpio has a attractive fleet of new vessels, as long as day rates recovers somewhat, they are highly cash generative. Let’s see if that happens or not.

Scorpio_day_rates

UR-Energy – Speculative – 2% Position

Canadian listed Uranium miner, that I actually owned already back in 2006-2007. At the time, it was the only junior Uranium prospecting company, that actually came out on the other side of the bull and following bear Uranium market. They are now a small scale Uranium producer, with a large portion of their production hedged at higher levels. I will have to write another time about Uranium, but its a very special market and a strong case can be made for long term increases of as its called yellow cake. I’m choosing UR-Energy as my Uranium proxy, because they have excellent management, a very crucial detail in the mining industry, which is full of crooks and cheaters.

Please comment what you think of my new holdings and I will try to follow up with more details in later posts!

 

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Portfolio holdings – half year review

Year to date the portfolio is up +3.5%, compared to MSCI World at +0.8%, both including dividends (so called total return). My portfolio has in the past generated it returns with significantly higher volatility than MSCI World. You can almost see it in the graph below how stable the upward trend was in MSCI World. Interestingly enough now this year, when markets have turned more volatile, my portfolio volatility is slightly lower than MSCI World, at 15.2% vs 15.8%. Downside volatility is what counts and I think this is one proof that I managed well to create a defensive portfolio, which has been one of my aims, many other aims were discussed in my previous post earlier today.

Total return of GSP portfolio vs Benchmark

Graph_20180629

Total return of holdings since investment

Holdings_20180629

Notable winners/losers during 2018

Some comments on the largest gainers and detractors during this year.

+ Swedish Match

The Swedish tobacco company has performed very strongly compared to its sector colleagues. Then again Swedish Match is a very different company selling smokeless tobacco products. For the interested reader this is a good primer on snus: New York Times on Snus. Except good results, one reasons for the strong share price performance is spelled ZYN. Which is a tobacco free nicotine pouch, which recently has become a big hit in the US. Swedish Match has recognized this and is spending 60 MUSD+ in increasing capacity over the coming to years of ZYN. Valuation short term is a bit stretched, if I had a larger position from the beginning, now would be the time to scale down the position somewhat, unfortunately I started of with a very small position. I’m willing to continue to hold 5% of my portfolio in this excellent company.

+ Fu Shou Yuan

One of my two funeral company investments, they truly went in opposite directions. In a very poor market environment this stock has been on a tear since I invested. The price momentum strength in this stock is almost a bit scary considering how weak the Chinese markets been lately. At these multiples/levels I have to say I’m close to scaling off a bit of this position. That will depend on if I find somewhere better to allocate my money. Here I also want to mention my fellow blogger who wrote an excellent analysis on the company: C for Compounding on Fu Shou Yuan.

+ Dream International

Another new investment that also just kept on its upward momentum. Since I did my analysis on the company I have understood a bit better what kind of plastic toys is driving this fast growth. The understanding came from a deeper analysis of newly US listed Funko. Basically a lot of the Funko’s toys called Pop! are collectible items. Just search for it on Youtube and you will find a lot of people like this guy: Funko Pop collector. The funniest one I found was a contract written up between husband and wife: Funko Pop contract – Limiting spending. This makes the picture a bit more clear how Funko in just a few years has become such a big player in the plastic toys industry. I see this as one of my strongest investment cases, therefor it also carries a large weight in the portfolio.

– Dignity

My second funeral stock has not done nearly as well the first one. I decided to double up in this stock after the fall of 50% in one day. That seemed like a very good move for some time. Actually I was close to making up the whole loss about a month ago, then the stock was hit again. This time it was due to UK’s CMA (Competition and Markets Authority) who launched a review of the countries funeral sector, to make sure “people are not getting a bad deal”. It seems after this most investors have given up hope on the stock. I haven’t really given up yet, since the reason for the rebound after me doubling up was that actual results came out much better than anticipated. We are still looking at a totally non-cyclical company, with a estimated P/E of about 11-12 and a dividend yield of 2.4%. As mention in previous posts, the worry is the debt load in case profit margins fall significantly further. I’m stubbornly keeping this one.

– LG Chem

After being one the portfolios true outperforms and a holding I had for a long time, LG Chem has given back much of that out-performance over the last few months. The stock is fairly volatile and living its own life, but the downturn is likely due to the oil price. This volatility from the Chemicals division is something I will have to live with, since I didn’t invest in more pure play like Samsung SDI. The reason why I’m owning the company is not due to the Chemicals division, but because the company is truly in the forefront of EV battery production. Now we are 1-2 years out for the start of really widespread EV sales from all the big car companies. My plan is to ride this whole wave and hopefully hold this company for another 10 years.

– Coslight

Similarly my idea with Coslight was that it could become a Chinese large player in the EV battery space. I’m less sure now than I was 3 years ago that actually will be the case. Not because Coslight is not going to try, but because the company does not really have the financial muscles to build up huge modern EV production plants. Like for example the newly listed CATL can do, or BYD for that matter. Coslight has proven itself as one of the largest producers of laptop batteries, so they have the know-how to make batteries cost efficiently, but I’m starting to feel less sure if that is enough. They sold of a portion of one of their factories to reduce debt and free up capital to invest further into EVs. Overall it was a good move for us that wanted the company to move towards EV battery production, but the market has not really received this news well. A tricky holding I followed for a long time, before I had a lot of conviction. I think the reasons why I’m not giving up on this company, is that they have truly hidden value within the firm. Strangely enough (due to the majority holders son) the other leg of the company is video/mobile games producer. The best case would be if they decided to list the games entity separately. The games developer might be valued at perhaps a third of whole Coslight’s value, given the multiples on games developers these days.

Summary

As you can see from my discussions above, some holdings I’m happy with, others more worrying. Given this, I still need to keep up the hunt for at least 2-3 new investments. I will also consider if I should increase the weights in some of my current holdings, to not keep cash levels too high. In general that has been a problem in the past and really big performance detractor, since I calculate 0% return on cash.

CashLevel_20180629

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Reflections on top 5 holdings

Graph_20180223

Holdings_20180223

In the graph of portfolio performance dividends are included, but in “Return (in USD)” of current holdings dividends are not included.

Holding comments

As you can see above, my portfolio has become more diversified than ever before (18 holdings). I would say the reason for that is the high valuations we currently see in stock markets. I used to at least find cheap stocks in the Chinese markets, but not so much anymore. In frustration over finding anything that feels like a home-run investment, I have gone defensive, both in the style of my holdings and also diversifying into a broader portfolio. With this kind of portfolio I do not expect to outperform as much as I have done in the past. Below I will give comments and thoughts on the larger holdings in the portfolio. Before I start I would like to mention Catena Media. I bought into the company when the stock price was falling rapidly from it’s highs. Soon after I bought the CEO was fired and the majority owner took over as CEO. It was a tough decision to hold on to the stock, as people speculated that the quarterly report would show some major issues (perhaps why CEO was fired). But no such thing happened, rather afterwards confidence grew in the company again. When I sold the full position in Catena it was actually the largest holding in my portfolio and a strong contributor to me managing keep pace with the benchmark. Now let’s focus on the five largest holdings in my portfolio:

LG Chem

Previous posts (LC Chem posts)

I have not commented that much about LG Chem, although it has moved up to be my largest holding. The investment traces back to my investment theme 2 years ago when I started the blog. The six months before the blog was launched I had spent a lot of time to research the whole value chain of Electric Vehicles (EVs). I ended up concluding that it will be very hard to forecast a winner among the many  car makers. As a side note I did and do still have a belief that Chinese automakers will step up and take a large part of the global vehicle sales pie. I looked at three segments of the value chain, mining companies, battery producers and semiconductor companies. Semiconductor companies I dismissed, since at the time I saw it as more linked to smart/self-driving vehicles. It then came down to mining or battery companies. When I looked into the supply situation of Lithium, from what I could gather there was actually plenty of supply, the bottleneck was rather Cobalt, but here there were no decent investment options. Batteries also had the tailwind of Energy storage systems, that could potential ramp up demand substantially on the back of more Solar energy usage. So batteries became what I focused on.  LG chem was and continues to be a world leader in battery production, with the most advanced batteries in terms of performance vs price.

EVleaders

The problem with LG Chem, was like most of the investment cases around the EV value chain, it was not a pure play. Most of LG Chem’s revenue comes from chemicals sales which is totally unrelated to EVs.  I tried to analyze the chemicals business best I could, but it is a complex field. I understood that I did not buy into something at peak valuations, but rather chemicals where trading at somewhat depressed levels, my analysis did not really go deeper than that. I reasoned that expanding battery production, to meet the enormous future demand, would require a sizable company with muscles to expand.  So without knowing that much about the chemicals business, I saw it as a good backbone to build the battery production capacity on. And that is more or less what LG Chem has been doing. Capex and R&D expense is planned to increase substantially in the coming years, on the back of strong cash-flows in the last quarters.

Looking at the future, worries lies in if there will be any substantial margins left for the battery producers. As Chinese new giants like CATL steps up to the plate, it would not be the first time a  thriving profitable industry, becomes like the solar industry where huge volumes are produced, but no money is made. What keeps me somewhat comforted is that there are safety and quality aspects to these batteries produced, which means that a battery product is not just only about cheapest possible price per kWh of battery power. There are also more long-term quality and safety aspects to a battery product.

Even after the strong share performance, the company is trading at an undemanding trailing P/E of 15 and a estimated forward P/E of 13, which is in the middle of the range of it’s long-term P/E band. I would argue there is still room on the upside, even short-term. Since we are closing in on the S-curve area of EV adoption, where LG Chem is bound to see strong Revenue growth. A few years ago, it was estimated we would see substantial EV sales come through around 2020. But it’s more likely that most cars will be Plug-In hybrids around 2020 and pure EVs really taking of on a massive scale, is still probably a few more years into the future. But say 2025, I’m certain 75%+ of all new cars sold will be either a hybrid or a full EV car. If LG Chem manage to keep in the forefront of battery production, it is a company I’m very willing to hold for the coming 10 years.

Dairy Farm

I recently wrote a long analysis on this company, you find it here: Dairy Farm Asian Food Giant

Dairy Farm being a conglomerate within a even larger conglomerate. One could argue that instead of buying into Dairy Farm I should take a position in the whole Jardine Group. But I do like being exposed to food in the Asian region. Food is of course important to everyone around the globe, but Asians are in my view even bigger foodies than westerns. As the region grows richer, which its more or less bound to do, if Dairy Farm plays its cards right, it should be able to long term leverage that trend. Of course it is a highly competitive market, but with the Jardine Group behind it, Dairy Farm has all the advantages you could have for this region. I see this as a very long term holding, which I would only re-evaluate if I saw that something major had changed in the direction of the company.

XTEP International

I invested in two steps into XTEP, you find my thinking at the time here: XTEP Posts

The more I learn about Hong Kong listed companies and market participants, I realize mis-pricing are more common, or at least market participants have another time horizon and sentiment shifts in their investments. When the sentiment finally changes, it’s a bit like the famous ketchup bottle, positive momentum builds quick and reprices the stock to a new level in a very short time. For a stock picker that is of course a good thing, if you can get in before the sentiment changes. But you also need to be very sure about what you are investing in, since your patience and thesis will be tested. XTEP has had a a similar story of under-performance and then a catch-up. The clear winner though has been the largest company Anta, which since I invested has continued to outperform its peers.

XTEP_Relativeperf

When I invested about a year ago, XTEP was the ugly duckling, trading at a much lower P/E than its peers. One of the reasons as I have understood more clearly is that XTEP competitors are aiming more for the branded high priced segment, competing with Nike etc. XTEP has had it’s niche more towards the cheap/affordable running shoes. Much of the growth trend (so far) in health and sport awareness among Chinese has been in the more affluent population which obviously will go either for western brands or top Chinese brands. I tried with this investment think second level, that since healthy living and exercising already is a strong trend in China among rich people, that maybe it would also affect the middle class population to consume more sports shoes. The jury is probably still out if XTEP will succeed in this.

Looking to the future, I think the sports apparel segment is a good segment to be invested in. The tailwind from Chinese consumers on these type of products should continue. If XTEP is a good enough company in terms of execution and brand building, that I’m less sure of. Basically because I’m not in touch with its customer base, or consume their products myself. So the case for me to generate alpha in terms of stock picking, is lower here, where I only go by what I can see in the data. For these reasons I will probably never be fully comfortable with this as a very long term investment and my strategy lately has been to ride this positive momentum that finally arrived and look for a good exit level in this holding.

Gilead Science

My initial thoughts when I invested: Gilead investment

I was reflecting on that I spent a lot of my research time on looking at Health Care/Pharma companies of different kinds, everything from more niche small cap companies producing probiotics or vaccines, too large companies like Teva. It’s a bit ironic then that currently I only hold one single Pharma company, and that is a company I spent less time researching myself and more followed the results of others that I respect for their knowledge. WertArt’s excellent analysis helped my jump the boat and invest. Since I invested Gilead has made some larger acquisitions, again I’m not competent enough to understand if this was positive or not. I can only see that the Gilead management has had a fairly good track-record in its larger purchases.

The question to ask myself really is, since I seem to have no to a weak edge in being able to understand and analyse big Pharma companies, should I even invest in them? I’m not a benchmark agnostic investor and the Health care segment has 12% weight in MSCI World. With such a large weight in the benchmark I would rather say that I want to hold at least one Health Care company. For now I’m happy holding Gilead as a good pick in the segment, but I will do my best to find smaller companies in this sector, which are easier to grasp.

Huhtamäki

Initial reasoning for buying into Huhtamäki: Rotate away from China – New holdings

In a very fragmented market Huhtamäki has managed to take a strong position in the food packing market by doing a large number of smaller acquisitions. Food packing I believe has a long-term strong tailwind. In terms of risk I see a trend where large companies decided to be more eco-friendly. Seeing the documentary “A Plastic Ocean” makes you very sad of. We treat our environment in a horrible way in terms of plastic packaging. Maybe in parts of the world, there will be trend towards more paper/wood based packaging products. Huhtamäki today does both, so even this I don’t think is a major risk long-term, although short term it could create some losses if the plastic production facilities would become underutilized.

In the case of Huhtamäki a full analysis of the company is long overdue, it’s something I kept pushing forward as I feel I understand the company fairly well. The truth probably is somewhere in between since I have not sat down and looked at detailed figures of the company, reading many of the previous annual reports etc, as I usually do when I fully analyze a company. Instead of doing a half-hearted attempt here now, I will instead try to deliver a full analysis of the company in the next few weeks.

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Portfolio Changes – larger reshuffle – Part 1

Thoughts on investment philosophy

I have recently had quite a lot of time to contemplate my investment style and philosophy. I think I reached some conclusions. After all that is what this blog is about for me, learning from and seeing my mistakes more clearly and then adjusting accordingly.

Before I started this blog I have during periods followed the market and specific stocks very closely. I have used technicals and fundamentals to swing-trading holdings (3-12 month horizon) with fairly decent results. Meaning that I see the stock as fairly/undervalued with a chart that looks good for a move up. I then later sell when the stock is more close to fully valued. To some degree I have implemented such a strategy also for my blog (for example Avanza, Ericsson, YY, Shanghai Fosun etc). But this is very different from believing in a company truly long-term, even if the stock gets ahead of itself valuation wise. Given that I do have a full time job and this is a hobby, the time I can spend on updating myself on holdings vary widely. From another perspective baby-sitting such swing trade positions takes away valuable time from researching new interesting companies and sectors/niches.

All in all the conclusion for my future investment strategy is stop looking at these companies that trade cheaply currently and then start to swing them in/out of the portfolio as they get cheap/expensive. If all stocks in the world would be drifting sideways forever with some volatility this might be a successful strategy, but that’s not a very likely scenario. Instead I will focus on what makes more sense, finding great companies. Preferably currently cheap, but anyhow companies that in 5 years time in my view has a high probability of trading significantly higher. I should also at all times be comfortable turning to stop following my holdings and be happy to own them for the coming 5 years. Currently I do not hold such a portfolio and I intend to spend the coming months to do just that. This means that I am tilting my portfolio more towards Quality, which in general is expensive now. But I intend to find my own type of Quality, not necessarily Nestle and the likes (nothing wrong with Nestle though)

In terms of Portfolio management I will still allow myself to trim holdings that grow very large or add in holdings that have under-performed but I still believe in. And of course I will still make mistakes and mis-judge companies, meaning they will not sit in the portfolio for 5+ years, but till be sold when my view has changed. But preferably the investments should be such so I won’t be easily swayed in my judgement of the future prospects of the company. For example an oil company with great management and execution might be dead in the water if oil production cost is around US$60/barrel and oil drop to US$40, so before I have a very clear and sure long-term view on the oil price, it would be a silly investment to add to this portfolio. I take this as an example because currently outside the blog holdings I do have a swing-trade position in a what I think is a very decent oil company (Tethys Oil).

Reshuffle of Portfolio – Part 1

Not only have i contemplated my strategy, but another reason why I have written so little lately is that I have been very busy re-searching a larger number of companies. Most of these investment ideas will materialize in new holdings over the coming months. It probably won’t be perfect, since I change so much at the same time. Minor adjustment might come later. But all in all it’s holdings more in line with a more long-term investment strategy. The holdings are in general also more defensive than what I currently hold. This I also very much what I seek in such a late stage bull-market. I’m not sure if I should call it new Themes, but I chose to allocate significant capital to two industries below, 1. Funeral Services and 2. Alcohol and Beverage related companies. In due course I will try to expand on my thoughts behind these investments.

Dignity – Add at 5% weight

Funeral service business in the UK. I had my eyes on for some years now and lately a very good buying opportunity arose. I heard about it for the first time from a long only manager and have since understood what a wonderful business segment funeral service is. Firstly from a margin perspective. but also how fragmented the business is and the possibilities for a cash flow generating company to buy these small companies at attractive multiples.

Fu Shou Yuan – Add at 4% weight

Basically the same story as Dignity above, funeral services, this time in China. This stock I’m perhaps not buying at the right moment short term, as it has traded up and is actually very expensive at the moment, but from a long term perspective I’m very comfortable holding this.

Diageo – Add at 4% weight

Has a portfolio of high quality liquor brands. Also has a minority holding in Moet Hennessy which I find interesting. Overall the thesis here is that they will continue to leverage their strong brands and their tremendous track-record of shareholder returns. For example the portfolio of whiskey brands probably is 50% of all top quality brands available.

Olvi – Add at 4% weight

I have searched for quite some time for a way invest in line with my positive view on the three small Baltic countries, I think this might be one good way. I also have fairly bullish view on Finland, finally coming out of some economically challenging years. This is a family owned (through voting strong shares) beer and beverage company with exposure to the above mentioned countries. They have also shown a tremendous track-record of execution. Overall, smaller listed beer and beverages companies start to be as common as unicorns. I will expand on this later, but not many are listed anymore. As uncommon they are, its seems to be a fantastic business to be in. Since almost all companies shows great returns (until they are bought out) with very strong cash flows. Previously I held Royal Unibrew for mostly the same reasons (I should have kept it), but overall I find Olvi more attractive, with a stronger track-record.

Tokmanni – Sell Full Holding

This was also a play on Finlands recovery and that the company felt cheap with a good dividend. But they continue to under-deliver and the last straw was the mess with the new CEO not being allowed to start due to a non-compete clause. Felt very unprofessional. Also nothing I’m very confident to hold in 5+ years, with what currently goes on in Retail. I’m happy coming out of this one with a small profit.

Microsoft – Sell Full Holding

A great company of course, but current Tech-hype is just too much for me. If/when Tech companies re-price downwards I will definitely be looking at adding 1-2 Tech holdings again. I’m happy for the returns I got and unfortunately I cut my position in half way too early, the part I kept returned almost 80%.

Catena Media – Sell Full Holding

This became the latest of my “swing trades”, with over 40% return in less than 4 months one of the better ones as well. I was a bit torn about this holding, since I do see some good long-term prospects. The online gaming business will grow, and these sites really need channels which supply them with customers. But it’s a way to unstable business case for me to comfortably hold for many years. It is definitely in the “baby-sitting” category, where I felt a need to keep myself updated on a frequent basis. So with a bit of a heavy heart I sell this holding. This could for sure keep performing very well for a long time, but I categorize it in the “too difficult” pile.

 

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Portfolio Review Q3

The third quarter of the year has passed and the bull market is still roaring pretty strong. My guess a few years ago would have been that we should have seen a larger setback by now. On this particular point I feel pretty humbled by being wrong for so long. Performance wise I do not feel as humble. I have done quite a number of things wrong during this year, mainly selling stocks too early. But in general I did more things right than wrong and that’s what counts. Let’s go through the performance and some high- and lowlights.

Performance

Graph_20171006

Year to date the Global Stock Picking portfolio is up +24.5%, that compares favorably to MSCI World (Total Return) which is up +17.4%, but lagging Hang Seng (Total Return) which is up an incredible +29.3%. Looking at risk adjusted returns, I’m not faring that well though. Although I have run a large cash position (which lowers volatility) the volatility YTD is at 10.5%, compared to MSCI World at 5.5% and Hang Seng at 11%. So risk adjusted I come out with the worst Sharpe ratio of 2.33 vs 2.66 for Hang Seng and 3.17 for MSCI World. I guess that also says something about the state of things in the markets when a Global Index portfolio is returning a Sharpe >3.

I probably sound like a broken record soon, but this to me is a very late stage bull market and one should plan accordingly. I did make an attempt to discuss the topic recently (Where to hide – a factor approach).

Compare with Hang Seng?

That I have added Hang Seng as a comparison might be somewhat misleading, since my intention is to run a Global portfolio. The reason why I added Hang Seng was due to my heavy China tilt when I started the blog. I would argue that is not a constant tilt that I will have over time. It was an allocation call I made at the time. It is a call I’m obviously happy about, since it has given me free Beta out-performance against MSCI World, which is my true benchmark.

Lately I worry about the Chinese economy and the valuations has got more stretched also for Chinese stocks. As you know from previous posts I actively rotated away from China. Currently my portfolio has 16.5% of its cash invested in companies with most of its earnings from China (Coslight, XTEP and NetEase). I will keep the Hang Seng comparison for sometime, but I might remove it at some point.

Highlights

Buying Gilead became a very well timed investment. The market really liked the new product line their are buying themselves into through their acquisition of Kite Pharma. I honestly don’t have the knowledge to know if this will actually be so fruitful as the market seems to think. My impression is that (the market thinks) Gilead has a strong acquisition track record.

Nagacorp which we discussed extensively in the comments and I choose to double up on has come back to something closer to fair value. The company continues to execute well on attracting more VIP players and the Naga2 complex is about to open in full scale. Next Chinese New Year will be very very interesting, I’m optimistic about further share appreciation. As long as the majority holder does not decide to do something stupid (again).

LG Chem which is my long long term holding for the EV-theme (being a leader in battery technology) has performed very well lately (although not as well as the pure-play Samsung SDI). Unfortunately the battery part of LG Chem is still fairly small. I expect it to grow substantially over the coming 5 years.

Lowlights

I made a bet that XTEP, the Chinese shoe company was lagging it’s competitors who have all had great runs in the stock market and would do some catch-up after it’s semi-annual was released. It turned out being the opposite and I doubled up before the stock collapsed. I feel a bit beaten up, picking the only Chinese shoe company that is down performance wise. Still haven’t given up though, although less about my position than before.

In my move to rotate away from China (Time to rotate away from China) I have sold a number of holdings lately. Two which I sold after very strong returns were YY and BYD. It has been a bit hard to see the shares continue to surge another 30-40% after I sold, but such is life. As I wrote at the time for YY, I got scared of the Chinese Gov clampdown on streaming services, but these things often go away and so it did. And the upside I saw very shortly after came true.

Catena Media which I just bought into also had a negative event right after I bought. The CEO was fired with immediate effect. This gives me some worry that something might surface in the Q3 report. I have considering to reduce my initially fairly ballsy position. The only positive keeping me from doing it is the interim CEO which I have very high hopes about.

I bought two bricks and mortar stocks, XXL and Tokmanni, I reversed my decision with a smaller loss for XXL and kept Tokmanni. So far I should have done the opposite, since XXL has rebounded nicely whereas Tokmanni is treading water.

Current Portfolio

Holdings_20171006

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The USD effect & Portfolio comments

The USD effect

I want to start with a graph of EURUSD, because it has such profound effects on the market when it starts moving.

EURUSD_20170807

With the risk of being called something of a Chartist, to me this is a significant move. We are breaking out of a 2 year side-way trend. This could be the beginning of the normalization of major currencies, where we see EURUSD moving back to it’s previous range 1.20-1.50 which lasted for about 10 years. What is a normal range though? It all depends on what time perspective you take. If we look at 30 years of data, we are today already very close to the average exchange rate. The 360 month moving average is at 1.21 and the 500 month moving average is where we are now, at 1.18. If EURUSD moved to for example 1.4 over the coming year, that would definitely have profound effect in the stock markets and on all ours portfolio returns.

EURUSD_20170807_30y

Exporters vs domestic

The kind of currency move we see now, leaves its mark on a Global portfolio and it’s returns. The effect is largest for domestic companies. For example if we take my largest holding Skandiabanken, which is a Nordic online retail bank, generating majority of it’s revenue from Norwegian Krona (NOK). Since all it’s costs and revenue is in NOK, its a purely domestic company. So when USDNOK moves, the portfolio experiences the full currency move, whereas the fundamentals for the company stays the same. Since investing in Skandiabanken I have realized an extra 6% return from the NOK strengthening, pure luck!

In comparison my holding in LG Chem, is traded in Korean Won (KRW). But the company exports all over the world meaning a lot of it’s revenue is priced in USD. So if KRW strengthen against USD, the company will earn less in KRW terms and the stock should fall. At the same time the KRW stock price is worth more in USD terms, so the effect negate each other.

This means that companies that mostly sell domestically adds an extra component of FX-risk into the portfolio. To make it even more complicated, the domestic company might have it’s cost in USD and chose to either hedge it or leave the currency risk open. If you as an investor compare yourself to a benchmark, your definition of taking risk in this sense, is if you have another mixture of exporters vs domestic companies, per market, compared to the benchmark. This will make you over and underweight a number of currencies. It all sounds very complex, but since weightings of for example MSCI World is so heavily tilted to the larger markets and large companies, in effect, you mainly have under/over exposures to a few major currencies (USD, EUR and JPY). The tricky part is that you won’t really notice this effect, before one of the major currencies really start moving, like now.

Conclusion?

So what’s the point of this analysis? My point is that major benchmarks is made up of large companies with revenues worldwide, so the majority of your portfolio from a Global benchmark will be USD exposure. But if you as a stockpicker, find smaller domestic companies, which have their revenues and costs in a local currency (either naturally domestic or hedged to a domestic currency). You will have an implicit bet on that currency versus the USD.

The reason why I bring it up, is because two of my holdings that have performed the best, is such holding, Skandiabanken and Ramirent. It’s nothing I lie sleepless at night about, just something to keep in the back of your head before you fill your portfolio with such holdings.

Portfolio Update

A quick look at the portfolio performance and composition shows continued strong performance, both for my holdings and the benchmarks. Especially Hang Seng is on a tear lately, somewhat frustrating when I already have come quite far in rotating away in my Chinese holdings (and the ones I have left have not really moved). For example my two previous large positions in Ping An Insurance and YY has in the month after I sold surged 15% and 33% respectively. Whereas the stocks I bought in Europe have trades more or less sideways (Tokmanni being the exception), I have also been somewhat saved by the weakening USD in these holdings. Cash level is still high, as always I’m spending a lot of timing searching the markets for something investable. And as always lately struggling to find anything worth buying. In my Portfolio page I have made my Watchlist a bit longer (in reality it is much longer than this) but maybe those stocks can give you some investment ideas.

Graph_20170805

Holdings_20170805

Going forward

I will take one final slash sometime this year, to further reduce my China exposure (it will not go to zero as long as I find very interesting investment cases there). And according to my previous post about “where to hide”, I will try to move my portfolio one more step defensive (less cyclical) than it currently is.

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1 Year Anniversary!

Some thoughts on the past year

As we all (older people) know, its scary how fast the years pass by. So here we are, and a year has already passed since I took the leap to launch the blog and my official portfolio. I launched my portfolio in the recovery from the strong sell-off in early 2016. The next six months would be very easy to a be long only investor, with world markets drumming upwards and quickly shaking off the Brexit event. After that it has been more of a mixed bag for world markets, naturally with a lot of focus on Donald Trump.

From the get-go writing this blog I knew it would be a challenge to keep up the pace. I didn’t want this to be something that flared up for six months and then died down. My main goal the whole time has been to keep this page running for one simple reason, to build a credible track-record of my investments. I want to keep building this track-record over a long enough period, to be able to evaluate if I would be suitable to invest money professionally, for myself and perhaps for others. I expect this to be a very long process, perhaps around 10 years.

From time to time it is hard to motivate myself to sit and research companies or just in general read, to come up with ideas or understand something new. It is a fun process, but only when you do not feel stressed by other things. This has been a struggle from time to time, especially during end of last year. It is after all a hobby and I have many other good things in my life, a full time job for example.

The type of content I produce has also shifted somewhat. In the beginning it was more of what I already know and could teach you readers, later it has been focused on what I do not know, which I write to develop myself. I think this makes more sense for me, although I know of many popular blogs that write a ton of material to educate their readers. I could do that, but since my purpose is to build my portfolio track-record as successfully as possible, that will be the focus.

Finally, a clarification. You might wonder why I never post a company analysis where I conclude the company is not worth buying? The reason is that I live and operate in a region where people actually are banned from the industry or sued for making “false” claims which brings down the stock price of companies. I do my research based of public information, the best I can and have time for. But I do not want to have any risk of ending up in this situation. Of course I do analyse a lot of companies that do not end up in my portfolio. Unfortunately you will not see me posting on those (in any great detail at least) in the future either. The other reason for this is that it saves me time, that I do not have to write a long post about a company that I already discarded as an investment. The obvious downside is that I haven’t recorded my thoughts clearly and the stock could be worth revisiting at a later stage.

Mistakes to learn from

We especially learn from our mistakes, I think we all know that. So let’s have a look at what has gone wrong for me during this year.

Current Portfolio

Holdings_20170324

Looking at the current portfolio there is not much that has gone terrible wrong. The shoe company Xtep International came in with a weak report, mostly related to the Kids shoe business. Here one can say that since I’m not a user of their products and I never visited one of their stores (I tried but they were too far away from Shanghai city center), I obviously don’t know the brand well. I have only looked at company figures and online how popular their products seem to be. Buying consumer brand companies without knowing the products might add unnecessary risky, which is obvious for other. I try to hold on to the companies that does well, so to say “let the winners run and cut losers short”, this leads me to the next topic.

Previous holdings

To find my larger mistakes we should instead venture to what I already held but decided to sell.

Old_holdings_20170324

Before we start talking about specific stocks one can notice that I had fairly significant portfolio turnover. Out of my starting 13 stocks, 8 have been sold (although 1, SAFT, was bought by Total). This is in my opinion too high and something I need to correct, there is no point in such a stable market to be switching the portfolio so quickly. A portfolio turnover around 50% per year, would perhaps be OK, but preferably I would want to come down towards 30-40% in a normal market. One can also notice NetEase as a big positive outlier, which was one of my larger holdings with a tremendous run.

I sell to cut my losses

In general I have a tendency of selling companies to cut my losses. Looking at the 4 stocks I sold at a loss, it seems to have been a bad decision on all occasions. All of them has positive performance afterwards. Here we find my two biggest mistakes, Highpower International and Zhengtong Auto. Highpower I was very well aware that the stock might bounce after I sell. It’s after all a stock with thin liqudity and very volatile stock price. So it’s not so painful, although still bitter to see the stock rally after I sell.

Much worse is the case of Zhengtong Auto. This stock I sold for no other reason than that I concluded it is something I have not understood in the company (since it keeps falling). The stock looked very cheap, but the market kept trading the stock lower and lower. In my real money portfolio this is a stock I held for a number of years before setting up the GlobalStockPicking portfolio. So I have suffered for a long time already with this stock-price decline. I have tremendous respect for the market and sometimes I will be terrible wrong, that’s just the way it is with investing. But I have to confess it became physiological this time. There was not really any very strong signs that my investment thesis was all wrong. Yes the market was pressured for a period with lower than average margins, but even considering that the stock was fairly cheap. I came to a point of fatigue and sorts of gave up on the stock. The picture below illustrates my timing:

Zhengtong Auto Trade

Selling winning stocks

In terms of taking profits and selling winners, the result is more mixed, in several cases I have managed to sell a stock at a peak. I have to confess I am somewhat of a chart-follower. I watched charts for so many years I tend to (believe) have some feeling of when a stock is weak or is going to correct soon. It’s not all about charts either, it’s also me believing in mean reversion in more or less everything related to financial markets. Two of the cases where it has been wrong to sell winners, are lower risk companies, SAS Preference and Yuexiu Transport, which both have very high dividend yields and kind of slowly compound upwards.

But my general strategy is to let my winners run. So it what cases do I then sell a company that had a nice run and in what cases do I just ride out for the long run? That is a good question that I’m struggling with myself. I probably need to more clearly define what stocks I no matter what own for the very long term, then I’m at least not allowed to sell the full holding, just because the performance is very good in a short time.

 

Portfolio Evaluation

Graph_20170324

1y_stats

Looking at normal portfolio stats my returns looks impressive. My risk figures are somewhere in-between MSCI World and the Hang Seng index. But my return figures are much better, indicating a fairly significant amount of alpha has been created. Return wise, the correlation indicates that I seem to be closer to Hang Seng than MSCI World, which is maybe a bit strange considering that I call my blog Global Stock Picking. A part of this portfolio tilt I motivate by that I find valuations on stocks with China exposure to be among the lowest I have been able to find. Another reason is that I’m closer to the region and therefor have a tendency of reading more general news that give my ideas for stocks to follow-up on.

Return distribution

With my portfolio being concentrated to around 15 holdings, looking just at standard deviation, might not tell the whole picture of the risks in the portfolio.

weekly_return_distr

As we can see from the weekly return histograms above we can see that MSCI World and Hang Seng has a weekly return profile similar to a normal distribution. We also understand why MSCI World has 9% vol and Hang Seng has 15%. The weekly return distribution for my portfolio looks.. ..different. It’s rather inverted from a normal distribution. During this year I have managed to skew the distribution towards the positive side. In another market environment and making some wrong calls one could imagine that a portfolio with this return characteristic could turn somewhat ugly. But partly this is the price you pay with a concentrated portfolio.

Current Sector exposure

sector_breakdown

active_sector_weights

 

Here I must say I’m quite satisfied, being a single person running a portfolio, it is not easy to have expertise to invest in all sectors. With only around 15 holdings in the portfolio one could not really expect a better spread among sectors. Professional fund managers often minimize sector bets to less than 10-15% active weights, but they usually have much broader portfolios with at least 40-50 holdings for Global Portfolio. I will try to continue to keep my portfolio as sector diversified as  now.

Revenue exposure breakdown

revenue_expos

 

As we already have seen in the correlation with Hang Seng, here is the Achilles heel of the portfolio.Way too much of my companies revenue is dependent on China. 25% is pure China exposure and another 26% are companies with large China exposure, but are also selling worldwide (this is mainly my battery companies). Property prices in China are crazy and all Chinese that can afford it are speculating widely with borrowed money. As soon as the market starts to wobble the government steps in, so it might be allowed to continue for many more years, but as some point a reckoning day must come. And that day, even though I found companies with great prospects, short term I will surely suffer greatly return-wise. Here I must find a reasonable balance and right now one might argue that my global stock portfolio is not really balanced.

Conclusions

You don’t get my kind of returns in a year without taking risks (deviating from bench) and being somewhat lucky. How much it was clever risk taking and how much luck, that will always be impossible to judge. The risks I have taken are related to a few sectors and exposure on China. Within these two exposure groups I have managed to pick stocks that outperformed. The main contributors in these two groups are NetEase (Chinese gaming), Coslight Technology (battery producer) and Shanghai Fosun Pharmaceutical (Pharma holding company). On top of that I managed to pick up some Nordic bank exposure (Skandiabanken) just when banks stocks started to rally. I picked one of the strongest performers of all, as well in the country where the currency (NOK) since then has strengthened against USD. I would attribute a higher percentage of skill in identifying NetEase and Coslight and more luck in the case of Shanghai Fosun and Skandiabanken, since my analysis on the two latter was much more shallow.

Looking forward

  • I will work actively on reducing my China dependency in the portfolio.
  • I will try to reduce my portfolio turnover, preferably max 6 new stocks in the portfolio over a 12 month period.
  • I should really think twice before I sell a stock just because the performance has been bad. My hit-rate on these trades is awful.
  • I should probably keep selling or maybe even better, reducing the size in stocks that had a very strong run, my hit-rate on these trades is very high. But having said that the most important is the long term and I should mark down what stocks I’m not allowed to sell on short term speculation, risking losing out owning the stock for the long term.

 

Thank you for reading and I’m very happy with your contributions in the comments section!


 

 

 

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End of Year update – All holdings

Does my portfolio need a brush up?

The year is coming to an end and I think it’s time for some year end cleaning. What I mean is that I perhaps have not spend enough time following my portfolio holdings and more focusing on finding new good investment cases. My current holdings need an evaluation if the company is progressing as planned and still worth to hold. Some investments have developed better than I could ever have hoped and others have not performed well at all. One way of looking at any portfolio would be – start every day with a blank paper and choose how to allocate your cash. If your current portfolio is different, you should change your current portfolio. I do not practice this, as it would be way too time consuming, I rather practice a philosophy of letting my initial judgement play out, although it might take (much) more time than I anticipated. This also kind of ties in with let your winners run etc, although here I’m sometimes (too) quick to take profits. One risk with just holding on to your initial idea is that when you are wrong and time just pulls your stocks deeper and deeper into the red, you reach a point when it is time to admit that you have been wrong in your investment thesis. And you at some point realize that you should have been quicker to adjust/update your view. Admitting to this can be a painful process, at least for me. Below is an attempt to critically judge all my current holdings (prepare for a long post).

Portfolio Overview

holdings_20161226

My holdings – one by one

Spending a few minutes on each holding, and also taking the opportunity to decide: Add/Reduce, Keep or Sell.

Skandiabanken – Keep

I bought this Norwegian Bank stock after reading some Swedish sell side research and there was a few points I really liked, the company had the most satisfied customers in Norway. They are building their bank on a purely digital platform and they are small and nimble. Digital in combination with high customer satisfaction gave me the confidence that this bank is already where the larger banks want to be and what I believe is the future of banking. Since then the stock has performed tremendously well, basically starting after Altor went in as a new large shareholder. It’s not a screaming buy anymore, but rather valued in line with large Norwegian banks like DNB. But being such a small bank it should be doable for Skandiabanken to steal market share from the large banks and keep up the growth. Therefor I’m still bullish, since it already is my largest position I can’t really do more than Keep.

Coslight Technologies – Keep

This stock has been falling helplessly without any company specific news. I feel fairly confident this is just Mr Market playing with us shareholders and not reflecting any true change in the company. I therefore decided recently to add to my position and bring it up to a high conviction position again. Coslight is one of car producer BAIC’s main battery providers and they have a long co-operation, I have not been able to confirm if it is Coslight’s batteries that goes into BAIC’s EVs but I would not find it too unlikely if that was the case. Recently BAIC’s latest EV EU260 has been selling really well (Ev-Sales Blog) and this could (if they are selling to BAIC EVs) increase sales for Coslight significantly during the second half of 2016 and going forward in 2017. With Coslight moving to more normalized sales margins in lithium ion battery sales I expect this stock trading up about 100% from it’s current level. It is currently the stock I see most potential in of all my holdings, but the risk is high and the liquidity and coverage thin, so there is more room for me to misjudge the situation. For example it is a delicate balance if there will be oversupply in the battery production space. That the next annual report continues to show strong margins/figures is crucial.

Ping An Insurance – Keep

It’s hard to find the right companies to ride the growth from the Chinese consumer.  The price pressure (think Taobao) eats away a lot of the bottom line, even if your top-line grows. But an area which the Chinese just have to move into as they get richer is insurance, and the margins are still very healthy here. Ping An is not a pure insurance company since a fair chunk of its earnings comes from Ping An Bank. But they are in a good position as one of the market leaders, they put a lot of money into online and innovative mobile sales etc. The company is trading very cheap and is for me a good way to capture Chinese growth, I don’t expect any crazy returns but stable growth.

Shanghai Fosun Pharmaceutical – Reduce

I timed the purchase in this stock extremely well, it had a good run and has after that been treading water. Again I have my views of China long-term, which definitely entails having Chinese pay more for healthcare, medication etc in the future. As this is a holding company of many types of hospital/health/medicine exposures it’s not all too easy to analyze exactly how well each sub category will perform. Given that I don’t have the full visibility and the under-valuation i previously saw now has corrected somewhat I choose to reduce my holding from 7.5% to 5%. This is after all not a high conviction position for me.

Ramirent – Keep

This company I bought part as a price momentum play and part as being a late cyclical, which is what I believe is where we are in both the Nordic construction and equity cycle. It is very obvious that the stock just wants to go up, even though the company keeps delivering disappointing results time and time again. Hard to hold on to this kind of company when the fundamentals looks “so so”, but I still believe we will see a substantial move upwards, perhaps when the fundamentals finally do turn around.

Rottneros – Keep

I have written a lot about this company quite recently, after my analysis the Q3 EPS came in a bit lower than expected and the stock took a bit of a nose dive, bad timing on my side. But I believe my investment case holds true so far, meaning as long as the SEK is so weak against the USD and Europe NBSK Pulp prices keep steady, this company should be a cash cow. This cash is used to increase production output even further. Obvious risk in this stock if the pulp price starts to fall.

LG Chem – Keep

I can’t really get my head around the valuation of this company. In my view the Chemicals part seems to be doing fine. On the battery side, the Bolt has been launched with raving reviews, this car is going to sell really really well! And other EV producers are lining up to use LG’s batteries. On top of that even Samsung, who have their own listed battery company Samsung SDI (which fucked up the Note 7) now is considering using LG’s batteries instead. But performance wise the stock just keep getting hammered and even though Samsung SDI had such a scandal, stock performance wise LG is under-performing Samsung SDI since the scandal started to unravel – this is just beyond me. A very easy keep for me and I’m biding my time with this one.

CRRC – Reduce

This holding might take a very long time to play out. But it’s a play on the Chinese governments One Belt One Road plans. The stock is fairly priced at the moment in my view, share price increases will come if the sales starts to increase. If new interested investments would come up, I have to admit that this one might leave the portfolio, as I don’t really see any immediate triggers. Currently I just choose to reduce.

BYD – Add

The stock has been trending down for a while now. Looking at the 5 year price chart one can observe that without much fundamentally changing in this company, the market has not been able to price this stock very effectively. The stock price has shown wild swings between HK$20 and HK$60, although with somewhat of a drift upwards. With risk of becoming a chartist one can say that for the trend to hold, the stock need to reverse its downward trend around HK$35 and we are currently at HK$40. But bullocks with concentrating so much on the chart, the case is intact. China is insanely polluted, the government has clearly decided that China is going to be world leading in EV production. BYD is a clear leader in the electric bus space. BYD is the only Chinese company they has the scale to produce batteries totaling more than 8 GWh and thereby qualify to the new subsidy rules the Chinese government has proposed. One question mark that I had since the start is how well they can position themselves in the personal vehicle space. Their SUV Tang did initially very well, but has already started to drop in the rankings, this is my only worry at the moment. I believe the stock has been harshly punished lately and I decide this is a good level to add to the stock.

Ctrip – Keep

A play on Chinese travelling, this holding has not yet shown any returns, just a sideways roller coaster. Top-line has been growing nicely, but the profit margins are a bit wobbly. This one of my holdings I have not done such a deep due diligence on (yet). This is definitely in the cards for 2017, after that it will be easier to take a decision.

Ericsson – Keep

It was psychologically hard to keep buying into this when the stock just kept falling. But the stock found a bottom and I’m now in positive territory. My play that Cisco is coming with a bid obviously not materialized, I’m waiting for that, or that the stock recovers further (around 65 SEK) before I sell.

Sony – Add

I tried to get hold of a VR set for the Playstation as a Christmas gift, that was impossible, such long waiting times. Also I’m impressed with Sony’s digital cameras, which is something of best in class. I think Sony is in a good spot, active in many areas with continued good consumer consumption, given that I sell a number of holdings, I bring this up to a full position.

Microsoft – Reduce

I still believe Microsoft will make a lot of money on cloud computing, that was my main investment case. But now the US stock market has disconnected too far from other markets, stocks in the US is just expensive right now, I decide to reduce just because of that, even though I like Microsoft long term.

Zhengtong Auto – Sell

Here is just have to admit that I have been wrong, this was one of few Value companies in my portfolio, but it’s killing me, disappointment after disapointment. I have been wrong on the investment case and therefor I chose to sell the full holding.

Highpower International – Keep

A very tricky holding, they are super small cap, the stock is not very liquid and information on the company is hard to come by. The best way is basically listening to quarterly result calls and the following Q&A sessions. They seem to hold their own in the battery production market and also have backing from a joint venture. This is a highly speculative holding, but I still decide to keep it, because it is so cheap, I might exit if the stock spikes up, which it does from time to time.

Avanza Bank – Keep

This stock has traded up nicely, but since its trading in SEK, the currency weakness is taking back most of the stock gains. The case is still the same, stealing market share from the big Swedish banks by broadening their offering (perhaps introduce mortgage loans in larger scale). Their deposit base will also become more valuable when/if Sweden comes back to positive interest rates.

Autoliv – Sell

This stock has made a swift move upwards, probably much driven by the weak SEK, I have re-evaluated this company somewhat, I don’t know if they will actually be such a winner on the future “smart car”. There are so many technology companies moving into this field, so it is becoming a much more crowded space. I decided to sell after this nice run-up.

Summit Ascent Holding – Keep

This Russian casino company (it just realized how crazy it sounds to invest in Russian casinos) became a sink bomb in the portfolio. It is anyway Hong Hong listed, run by Chinese and tries to facilitate rich Chinese in the northern region that fly in to play (instead of going to Macau). In the last semi-annual the last few months results hinted at a big increase in turnover and I would normally be willing to double up now after the stock has fallen further. But now we have the problem of China tightening capital controls even further, it might not be that easy to gamble for big amounts in Russia at the moment. I will still keep this as a small speculative holding, it will be very interesting to see the next annual report.

Portfolio Movements Summary

The stats of my portfolio moves are the following:

Shanghai Fosun down from 7.4% to 4%

CRRC down from 5.6% to 4%

BYD up from 5.6% to 7%

Sony up from 4.5% to 7%

Microsoft down from 4.4% to 3%

Zhengtong Auto Sell full holding (4.1%)

Autoliv Sell full holding (3.2%)

The score takes me from 0% cash back to 9.8% cash. Time to find one or two new investments!

 

 

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Performance Review – since inception

Still a stock pickers market

In the future I will move to quarterly performance reviews, so this is the last irregular update. The portfolio has done extremely well and I must say this much out-performance does not come without a certain amount of luck. I feel we are reaching the end of this long bull-market and we are probably moving into a more challenging investment climate over the coming years. Even so I still think there is enough dispersion in the market that it gives some comfort in attempting to pick stocks. The strength of the USD is concerning I think. I don’t see how the US stock market can be at it’s peak and the USD keep strengthening as well, at the same time other equity markets are far from peak levels. Something got to give.

Performance

graph_20161009

The graph above shows The “GSP Portfolio” performance including all trading and dividends since the blog inception (no trading fees deducted).

Current Holdings

holdings_20161009

Previously held stocks

old_holdings_20161009

Notable Movers

+ Coslight Technologies

After tremendous results in it’s semi-annual report, the stock soared. I have been analyzing all the battery companies that are listed and I have been able to invest in. Out of all of those I placed my bets into two stocks, that were pure-play battery companies. One has with a lot of volatility, mostly gone sideways, but Coslight had the sales turnaround I was expecting, driven by China’s significant insentives for electric vehicles, both buses and cars. Nice to be right for once, after spending tremendous amount of research on the topic over a 1 year period. Now there is talks about a potential over-supply situation among the Chinese battery-makers, I’m somewhat worried about that, but more short-term than long-term. I see signs everywhere that the growth of Plug-in hybrids and all electric cars is just in its infancy. If this company keeps playing their cards right, this stock could go another 100% within the next 2 years. Previous write-up on Coslight.

+ Shanghai Fosun Pharma

This was an example where a lot of things together made me take the investment decision in this holding company. The chart looked like the stock was set for a leg up, I wanted a healthcare stock in my portfolio and the valuation started to look more and more compelling (SinoPharm holding >50% of Fosun Pharmas Market Value). Right after I bought the stock started surging, a quick 25% gained. Lucky yes, but at the same time it was strangely out of sync with SinoPharm. Now the stock is more fairly valued, although still not expensive. Since I have understood from Chinese friends that Shanghai Fosun’s management have a bit of a reputation, I might need to have some margin of safety in this one. I have another “Pharma” holding on my radar, if it looks more compelling I might switch this for something else. Fosun Pharma write-up

+ NetEase

This fantastic company is over-delivering for every report they release. But I can’t keep holding the stock at these valuations, so I sold all, at an average gain of over +50%. I’m hoping there will be a rebound, because this is probably still a great stock to hold over the long-term. NetEase full analysis

– MQ

Well, I thought I got this stock on the cheap, and I still think I did. But it got even cheaper. I’m surprised by how weak retail sales are in Sweden, given how well the economy is doing. This was a play on the Swedish consumer, and although I wasn’t dead wrong, I was not right either. Seems it’s sales through internet channels that are hurting retail all around the world and perhaps also in Sweden? Well I chose to move on since I don’t believe in the Swedish consumption over the coming 5-6 years anymore., even if it pains me to sell something that is still cheap.

– LG Chem

Again I thought I got in on a technically good level, where the graph looked like a move up was in the cards. And it was, but it became very short-lived, a month later the stock peaked and then took a serious turn downwards, now sitting -10% from my purchase price. But the stock falling doesn’t generally bother me much, I’m in for the long-run for their battery production (although it’s not a pure-play). But there was a reason for the stock falling, which was plans from LG to merge LG Chem with LG Life Science. I don’t know anything about LG Life Science, but what I do know is that I bought this for it’s future in battery making, not to own a conglomerate with a small part in battery-making (like Panasonic) – frustrating! So, right now it is wait and see, I’m not ready sell, especially when the stock is trading fairly cheap. On a more positive note the Chevy Bolt is coming out with great positive reviews from everywhere, just like the Tesla model S before the Tesla share surged with 300%. The Bolt is very much a LG product, with battery produced by Chem and the electronics inside is produced by LG Electronics. Looking at competitors it’s clear that LG is one step ahead of its competitors in battery technology (price per kWh). Short LG write-up

I leave you with this test drive of the Chevy:

 

 

 

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My first pharma holding and Portfolio Update

Yes, it’s time to deeplet these high cash levels, I have suffered some serious performance drag having 15% cash in an uptrending market. First it was LG Chem announced the other day. As of today’s close I’m allocating a 6% position in my first Pharmaceutical company – and no, it’s not Valeant (although it seems to have bottomed out by now).

Shanghai Fosun Pharmaceutical (2196 HK)

Yet again I dig into the Chinese market, this time through the fairly famous Fosun Group, which I previously been a shareholder in.  Shanghai Fosun Pharmaceutical (from now on Fosun Pharma) is a H-share listed in Hong Kong, meaning it’s also listed in mainland China (as is some of my other holdings – BYD, Ping An)

Fosun Pharma:

  1. Develop drugs (metabolism, anti-infection, cardiovascular, oncology etc).
  2. Provide Healthcare services, they have been fairly aggressively buying up hospitals.
  3. In Co-operation with it’s big shareholding and partner Sinopharm they co-operate in drug distribution in China.
  4. Produce Medical Devices.

I’m taking this position for a number of reasons:

  1. In general I think the Pharmaceutical companies need a re-visit, after being the market darling stocks, they have taken a beating lately and I have been looking for a good candidate to invest in.
  2. Fosun Pharma listed in HK is fairly cheap, trading at trailing P/E 15 and looking like 2016 figures will come out around P/E 13-14.
  3. The stock looks oversold and the China listed stock has started to move upwards lately, the spread between China and HK listed stock is as stretched valuations as they historically ever been. See picture below for spread in orange.
  4. Fosun Pharma is a big shareholder (11%) in the pharmacy distributions company SinoPharm, this stock has been soaring lately. This holding accounts for over 50% of the price for Fosun Pharma’s stock price, meaning you get the rest of it’s business very cheap.
  5. I need a Pharma holding in my Portfolio.

Fosun_Spread

This is the first time the China listed stock has been moving so significantly, without any spike in either the stock or the Chinese stock market.

Portfolio Update

I also include a Portfolio update (not including Fosun Pharma yet).

Holdings_20160815

A lot of beats

Skandiabanken came out with fantastic results that beat estimates, after Altor came in as a new big investor, the stock has been soaring. As always when you bet correctly you wish you did not allocate more in an earlier stage, but with this significant gain the current weight in the portfolio has become a high conviction position.

NetEase continues to deliver, awaiting a report in a few days, if the stock keeps soaring I will probably cut the weight in this one short term. It’s a struggle to stay long-term in companies where the gains you were hoping for over the coming 1-2 years materialize in 3-4 months. Definitely the type of luxury problems I would like to keep having.

Microsoft also came with a beat, the market seems to start to value it’s Cloud business (my reason for investing), not sure about the hefty price tag for buying LinkedIn though..

Sony beat estimates with a strong report, I read some comment like “Nintendo should look at Sony, a Japanese game maker that actually makes money”.

One big disappointment was Ramirent’s report and the market struck down the stock -13% over two days. The momentum seems to keep holding though, which was one of the one the reasons I bought this stock (no I’m not a value investor).

Overall in the strong market many holdings has started to recover (Zhengtong, Ctrip, CRRC and MQ). The only company that is strangely weak is Avanza Bank, I might need to re-evaluate this one, as I always listen to what the market is trying to tell me. Stocks going side-ways in a up-trending market will not do well the day the market breaks down. I have also discussed this company with some friends who are knowledgeable about Swedish Banking, they think Avanza will have a tough time finding ways to making money out of their customers. More to follow..

 

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