Breaking 100% Return & Trading disclosure

I can today proudly and happily announce that I reached over 100% return since I started this blog in March 2016. To be exact a 104.9% return vs MSCI World at 60.1%. This has been done with a volatility (16.2%) lower than MSCI World (17.1%) and a 0.77 correlation, all measured on weekly returns since inception.

Even more pleased am I with the return characteristics. I outperformed when it mattered the most, both the sell off end-2018 and recent Covid-19 sell off.

Further if you consider:

  1. That my portfolio has been severely underweight USA, which is the top-performing market during this period.
  2. At many times half of my portfolio has been in “value” stocks, again stocks that severely under performed the market.
  3. Mega caps and tech have been driving much of the performance and I have at most been equal weight on tech and always underweight mega caps.

So I had the chips stacked against me from several perspectives. Anyhow I delivered out-performance and especially when it mattered the most! When I set out on this journey some 5 years ago, to prove if I could deliver alpha, I had no idea if I could do it. I think you need a good 10 year track record to truly tell that you are not just lucky, but this half way point is worth some celebration! Yay to me!

Trading disclosure change

Almost all other good blogs I follow do not fully disclose their holdings and portfolio changes. That was something that always annoyed me, why not just be transparent? From the start of this blog I decided to disclose each and every portfolio change through a post to you readers. From today there will be no posts on each portfolio change, instead these disclosures will be moved to a separate page. All the portfolio changes will from now on only be available on the Trade History page. Here you can find my latest portfolio changes and below that I provide full disclosure of all my trades since inception.

The reason for this is two-fold:

  1. Too much of my blog posts goes to updating about portfolio changes. My blog posts will instead focus more on my thoughts of companies, strategies, themes and most of all stock picks.
  2. It’s going to be more time efficient for me, instead of providing a full blog post for each portfolio change.

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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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Selling LG Chem – My last holding from my first investment theme

Over the years as I have become more confident in my investment style and invested less and less through themes. A theme can still be a good backdrop for the investment case, but I want to pick a specific company, not get exposure towards the overall theme. When I started the blog in 2016 I still bought companies to get exposure to a theme, without having very high conviction on the specific companies. In 2015 I identified the Electric Vehicle theme as an exciting change in the industry and I wanted to profit from being early investing into companies that would benefit from this shift. Today the great champion of EVs – Tesla, is trading close to 1000 USD. The best option for sure would have been to just invest in the most obvious choice back in 2016, but seldom has my investment path been such. I have always tried to find the overlooked and hidden companies. I’m not sure if LG Chem qualifies for being hidden, but many other of my investments in this space definitely were. Nevertheless LG Chem was the company I held onto the longest, almost 4 years. After a very strong re-rating recently I think its time for holding to finally leave my portfolio. There are of course many positives with the company, but here are the reasons I sell:

  1. The EV hype is currently very strong and not very healthy. I think Elon is a super cool guy, I even read the book about him back in 2017, but Tesla at 1000 USD per share is in my view ridiculous. Some of that hype must have rubbed off on LG Chem.
  2. Like many other markets, Airlines, Solar-panels etc, competition often eats away at margins. Looking at sell side research which aggregates the available battery cell supply, it looks like a fairly oversupplied market for quite some time. I’m afraid the EV market is important to the Chinese to champion that they will subsidize away healthy margins for battery cell producers, like LG Chem. China’s aim is to be a leader in production of Electric Car’s. I think for example Geely will be one of the players in this space.
  3. We now have fairly good visibility of EV models coming out for the big European carmakers. Back in 2015 it looked like 2020 would be the “big bang” year for EVs. There will probably never be a big bang event, but I would today put that date at 2022 perhaps. I think the positive market sentiment has been discounted quite heavily into the shareprice of LG Chem.
  4. LG Chem has taken on a lot of debt to finance their big battery cell production expansion, I’m wary of owning companies with high debt, especially given the Corona market we are in.
  5. LG Chem is still mostly a Chemicals company and it’s a beneficiary of the low oil price, I see this a cyclical upswing which wont last (although hard to time).

As of Friday I sell my full holding in LG Chem.

This is what my portfolio looked like just before selling, sorted after Holding period (in years):

I’m happy to announce my portfolio now has taken new all time highs, but maybe even more importantly significantly outperformed the market. My out-performance against MSCI World is a total of 39.2% over this 4+ years. This means my alpha compounded at about 8% per year, an incredible figure which I don’t expect to keep over time. After all I run a diversified portfolio of some 20 holdings. We are indeed living in strange times when the portfolio can perform so well, when in the real economy people are losing jobs and struggling.

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Portfolio changes: Valneva, Philip Morris, Veoneer, Vinda & Kirkland Lake Gold

Time for some portfolio changes again.  I have continued to contemplate what I’m comfortable with in my portfolio and have come to some conclusions:

Philip Morris & Kirkland Lake Gold – Swapping my defense

PM International was bought as a highly defensive holding in my portfolio, a way to get a higher return over time than sitting on cash when I was negative on the market. I have slightly re-evaluated how defensive PM is. Partly because of declining tobacco sales (which I did know about), but because Corona obviously shows the need for healthy lungs, which perhaps will speed up this process. The other part is the debt load that PM is sitting on. Instead I decided to move into the ultimate defensive – gold. My thesis is that all this money printing by FED, ECB and other central banks in combination with banks actually at the same time lending more, will over time devalue fiat currencies. Most likely we will see a short deflationary shock initially, but I think this will turn to inflation for a number of reasons. First the mentioned money printing, secondly because supply chains and just in time delivery is going to revised – at a cost, which also adds inflation. On top of that air cargo will probably be more expensive as well, at least for a few year. With interest rate near zero, the “cost” of holding gold becomes very low at the same time as fiat currency is devalued. I’m not putting on a tin foil hats here going all in on gold, but a small allocation to gold feels good in this case. Kirkland Lake Gold is as close to what I can find to a well run gold mining company in an industry full of crooks. They don’t have mines in countries with problems and have a track record of building a good business creating shareholder value even without gold price going up. So, I’m selling my full holding in Philip Morris as of today, basically around the same levels as I bought it. This gives me some 2.4% of my portfolio in cash. I allocate 3.5% of my portfolio to Kirkland Lake Gold as an Opportunistic holding. Opportunistic because this is more of a mid/short term hedge, than necessarily something I planned to hold 5+ years.

Veoneer – Sell

Another opportunistic holding was car safety company Veoneer. It’s been a hell of a ride these past month, but now I’m back to flat. They have written of parts of their business recently, showing me that things I thought had value seems to have almost none. This was speculative, I can’t say I have been right, neither wrong. But the stock was apparently not as undervalued as I thought when I bought it. The revaluation might come later, but the probability of Geely bidding for Veoneer I think has gone down as well. I choose to move on to other holdings as my conviction is not so high anymore, I sell my full Veoneer holding as of close today, which releases 1.6% cash.

Vinda – Reduce

This stock has had a fantastic performance year to date (up +58%). The stock surge is partly warranted, but partly just hype in Asia around the whole toilet paper thing. I decide to take some profit here and reduce my position from some 7.5% of the portfolio to 5%. There is nothing more sophisticated about it than that I think the valuation is somewhat stretched short term, I think it’s still a great long term holding.

Valneva – back in the portfolio!

Finally Valneva, the company I previously owned, made a quick buck on and then sold. Here is my write-up: Valneva Microcap Vaccine Producer. Later when I sold I wrote: “If I had a strong belief they would succeed with the launch of a Lyme disease vaccine, I would be happy to hold this company through the 5 year process they have in front of them. Instead I will sell my full holding as of today’s close.”. Basically what has changed is that they have landed a good agreement with Pfizer to develop the Lyme vaccine. Thanks to that I know feel the company is investable again, unfortunately I have to pay the price of having this information known. I sold at ~3.4 EUR per share and today I will have to pay ~4 EUR per share. But I feel this is reasonable given that the company might have a revenue share in a new block buster vaccine. Again to weave in the Coronavirus into this case (it feels like you should mention Corona in every stock pick you do nowadays), I think the anti-vaxxers will be less loud when the whole world has got use to taking another vaccine here in the next year or so. It will raise the awareness of how important vaccines can be, and Lyme to be honest is also such a case. This is an important point, because the previous Lyme vaccine was discontinued due to loud anti-vaxxers. I take in Valneva at a 3% position of the portfolio.

 

 

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Portfolio re-balancing and selling Diageo

The rationale for worries and opportunities in all my holdings are spelled out in my previous post. Today I will just briefly announce my portfolio decisions. One little obstacle in this extremely volatile market is that in the blog execute all trades on close, this might mean quite large deviations from the levels I would have been happy to enter or exit my positions on. Anyhow, that’s how its going to be, the blog NAV is just a proxy of performance.

Some quick thoughts around my investment philosophy in this market:

  • Classical defensive holdings not necessarily defensive in a Covid-19 situation. It’s somewhat of an all bets are off situation here. One would think that Diageo with liquor sales is a super defensive stable business, not so much in this situation. Philip Morris another holding is reporting that they have to close their factory in Spain. It doesn’t matter of how defensive cigarette sales are if you can’t produce cigarettes. This market is truly hard to navigate.
  • Don’t try to be a hero in this market – focus on surviving that will give you plenty of returns long term, permanent capital loss is what will really hurt returns. I will reduce/sell anything I see risk of permanent loss of capital or dilution to shareholders due to leveraged balance sheet.
  • My small cap strategy of investing in less discovered (overlooked) stocks makes sense in a normal market. In an highly distressed market, it might as well be a large cap which is wrongly priced. I will therefore consider all-cap companies going forward. When markets have normalized I plan to go back to my small/micro cap strategy.

Selling:

  • I will fully sell my holding in Diageo, the debt levels the company has is scary in a scenario where sales significantly drops, which is surely in the cards if this continue. It’s unfortunate when a holding you bought for it’s defensive characteristics fall even more than the general market, but here we are. I should have reacted earlier and it’s probably very late to sell, at least I will re-allocate the cash into other cheap companies.

Reducing:

  • Although company proved a turned around, due to debt load and total stop in business I will reduce my holding in Modern Dental Group to a 1.5% position.
  • Reduce position in Olvi to 4%, not due to company doing poorly but just that the business will be hurt, but the stock is not trading as cheaply as many other holdings with better prospects.
  • Reduce position in Tianneng Power to 1.5%, although the company is not doing badly, this was a speculative holding now I want to focus on building positions for the long term in strong companies.

 

All in all this raises about 11.5% of my portfolio in cash

Adding:

  • Greatview Aseptic is in my view a big winner on this, people will be buying packaged food as never before. The company is already super-defensive to begin with, being net cash and very non-cyclical business. I raise this fairly new holding to a high conviction position and take the position size from 6% up to 8%.
  • I choose to double down on my oil positions TGS is increased from 2.6% to a 4% position and Tethys Oil I will increase slightly from 2.3% to 3%. This is a real pain trade to do, since in this sentiment these stocks can probably quickly drop further. At the same time these type of extreme events is when you need to dare to go against the sentiment.
  • Dairy Farm is another company where I spelled out my thinking quite clearly for that this is way oversold and actually quite defensive. I will increase my position from 4.7% up to 7% here.

This takes some 6.4% of my cash, which leaves me with roughly net +5% cash (give or take depending on today’s close prices). These 5% + ~7% in BBI Life Science (if the takeover goes through) is left to be deployed at a later stage.

 

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Portfolio update – what a difference 3 weeks make -22% YTD

My portfolio has dropped -22% year to date and it’s been a struggle how to position myself in this type of market. This still compares fairly well to MSCI World which is down -30% YTD, both calculated in USD. Talking about USD, the currency moves we have seen lately has been out of this world. I have a few holdings in NOK and SEK, in the last three weeks USD strengthened 25% vs NOK and 8% vs SEK. This means that my portfolio calculated in NOK is actually UP year to date! Such moves are way to big to ignore and must be incorporated in the analysis of the company you are buying, especially if the companies income is in USD. And then we have the oil, here I feel a bit unlucky buying into my first oil investment since I started the blog just before this epic double whammy of Corona scare and Saudi/Russia oil price war. A bit more on that later. Oil is important, but the big one has of course been the spread of the virus and lock downs around the world. First of all, I think it has been a process for all of us investors to come to grips with this. What does this all mean for my holdings and the economy? I had a head-start given I had closely followed this situation in China before most investors barely looked at it. Even with a head-start it has not been easy. Question like should I re-balance my portfolio when one holding drops unreasonably much compared to another, pops up for me on a daily basis. It’s very easy to over trade in this type of market. I will do a new quick review of all my holdings from a corona perspective. Debt levels for example become more important (I have usually been careful with this). First a few more Corona thoughts..

Further virus thoughts

First I want to say, you are probably pretty tired of reading about virus opinions from unknown readers online. Like 99.9% of these opinions I’m not an expert on virology. That said, I spent an almost unreasonable amount of time following this, listening to experts, trying to form an opinion on what is happening, long before most of you did. Not because I’m more clever or anything, it just happens that I live in a region which was close to the epicenter of this. I mentioned this many times before over the years in my blog, normally I would ignore Macro and focus on stock picking. But some events are so large you should not ignore them, this is such an event. I previously posted about how serious I thought this virus was in China. I just assumed that other developed countries closely monitored the situation and would sound the alarm if cases started to spread elsewhere. I was wrong. It’s now clear that the virus must have spread for a long time in Italy before getting noticed. But I wasn’t entirely wrong, in my post Feb 9th I wrote: “I really don’t understand why we are 1% off all time high the S&P500 when we are staring this situation right in the eye.” That doesn’t mean though that my portfolio was hedged for this scenario. I have tried to stay in defensive stocks for quite some time now, but that was defensive in a general sense, not Covid-19 defensive. In the past three weeks the whole developed world has changed and with that stock markets has totally repriced the world economic outlook. Credit/default risk and significant rise in unemployment is a certainty. The question now is not if, but how bad it will get, before it gets better? Vaccines is everyone’s big hope and that would be wonderful, but unrealistic to have before late this year. If we are locked down until a vaccine comes around then, this will be as bad as the depression in the 1920’s in my opinion. My hope stands to a medicine which significantly reduces the symptoms and the deadliness (right now malaria medicine + zinc seems like the best candidate, with HIV medicines a good second). Such a medicine could potentially reduce symptoms and would enable the younger/healthier part of the population to dare to go back to work and a more normal life. I read that most countries are now giving their patients the malaria medicine (based on the results from China and Korea). Given that governments have to find a way to at least partially normalize this situation, I see such medicines as the base case scenario, where governments can within a month or so go out and proclaim that they have a positive effect. A more bullish scenario would be an even more effective medicine, making the disease harmless, which seems unlikely to me. Then there is the depression scenario, one has to at least have a plan to survive that as well. That scenario goes a bit outside of this blog though. It means buying physical gold (which I have done and potentially I will buy more), stock up on goods at home, and hope you are lucky still have a job with cash flow coming in. I will focus less on the depression scenario, such scenario is a bit to bleak and in my view, still unrealistic, at least at this point.

2nd Corona status check on my holdings

I need to redo my Corona virus status check from Feb 9th, since the one I did a month ago was discounting “only” a significant spread in China, not a world pandemic. So here we go again (press read more):

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A look in the rear-view mirror

This time around I thought I would take a different approach. Recently I walked through all my current holdings: Short comment on all holdings

Today as a year end evaluation I will do the opposite, go through all companies I held but sold. This will also give new readers who hasn’t read through my blog from the start a better understanding what has built my performance over the years. For every holding, if you want to kno more, check through the drop down menu (if you are in a web browser) and select the stock in question. The purpose of this exercise which took quite some time to compile is to evaluate if I’m turning over my portfolio, too much or too little. And even more importantly of all the investment ideas I put in my portfolio over these years, are they of high quality? Have they kept performing after I sold or am I buying too many poor performing businesses?

All stock performance data is converted into USD and total return (meaning dividends are reinvested) and benchmark against my GSP portfolio. Also take note that the Y-axis varies in scale, let’s get started!

Press “Read More” and be ready for a lot of graphs!

In stock code alphabetic order, all stocks I held but sold:

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Portfolio update and larger portfolio change

2019 has been the toughest year for the GlobalStockPicking portfolio in terms of under-performing against the MSCI World benchmark, YTD the return stand at 3% vs 15% for MSCI World. I did very well up until about April this year, when I posted about a new all time high for the portfolio. Such boasting was immediately punished with severe under-performance. Both US and European markets have performed well, whereas Asia is more in line with my portfolio. With quite a lot of Asia exposure the portfolio has fallen behind, but even taken that into account I have under-performed.

Obviously I’m disappointed, but more so I have been scratching my head. Is this how it should look like at a market peak, as irrational investors pile into Beyond Meat like investments and rational investors fall behind? Or am I on the wrong track and investing in poor value trap companies etc? Before going further into that topic, below is the return in a more digestible format:

Two portfolio “issues”

  1. First “issue”, I’m sitting on a few Hong Kong small cap investments which are pretty much dead in the water. The market sentiment in Hong Kong currently is not very good and although my companies (thinking foremost of Tonly Electronics, Modern Dental Group and Dream International) seem to have little exposure to trade tariffs (for Dream it’s actually a positive) or exposure to Hong Kong protests, the stocks are not moving. These three holdings at 17% of my portfolio seem to be pretty much in value trap land at the moment. Sure they might be cheap, but there is no interest in the market to price these stocks at higher multiples. So is this an issue then? Well yes and no, if it’s important to keep measuring yourself against a benchmark which keeps moving upwards, then it is an issue. If you are long-term and the underlying businesses are doing all right, it’s a non-issue, at some point the market will wake up and revalue the companies. Given that I want to be very long term, I have decided that this is not an issue for me. Obviously that might change when the semi-annuals soon are released for this companies.
  2. I’m having too many large cap companies in my portfolio where I have no reasonable edge against the market. Not having an edge on the market is something I thought a lot about lately and something I realized is critical for long term out-performance. I see two main cases (there might be others) where I think I could still have an edge in large caps:
    1. That I have a much longer investment horizon than the market (my investment in Diageo, Inditex,, Essity, Dairy Farm and LG Chem are based on this).
    2. Irrational selling flows in certain market segments, for example Hong Kong listed stocks right now, or stocks not fitting into the ESG portfolios which seems to go into everything right now (my investments in Swedish Match, BATS and Philip Morris are based on this).

Basically this gives me a few large cap holdings which have not really been bought with these “edges” in mind: NetEase, Gilead Science and partly NagaCorp. But NagaCorp being a Cambodian investment, listed in Hong Kong and after a big run-up trades around 6bn USD in MCAP. I would say it’s not really a main stream large cap investment just yet.

Portfolio Changes

Selling Gilead Science

Already back when I invested in Gilead I “confessed” that I had struggled to find a really great Pharma investment case. I relied heavily on other investors and their analysis when I invested in Gilead (Another Portfolio change Aug 2017). I think shows a bit how my investment style has changed since then. Today I would not do such an investment without doing my own due diligence a bit deeper first. Given the “no edge” argument, it’s time to let this one go and invest in something where I think I found an undervalued company, which the whole market is not aware of.

Selling British American Tobacco (BATS)

I might be right that ESG tilts in portfolios have put tobacco stocks on the no-go list of investments, but I can’t just base such a large portion of my portfolio just on this. I need to see that these companies long term are capable of delivering great returns in my portfolio. Swedish Match I think qualifies there, that’s why I increased my position there. Philip Morris might qualify long term, I do like the IQOS product and long term it’s success will be pretty crucial for delivering really strong shareholder returns. In BATS case, I’m pretty confident that this is a good defensive company which will deliver decent shareholder returns, if I was a corporate bond investor I would like BATS quite a lot. But I’m looking for slightly higher returns and I gambled a bit too much on this ESG angle having 3 tobacco companies in the portfolio, two is enough and BATS is the weakest link.

Selling Essity and switching into it’s subsidiary Vinda

This switch is something I haven’t mentioned, but looked at for a long time now. Vinda being a Chinese tissue paper products producer, majority owned by Essity and listed in Hong Kong. Basically the case is that given demographics, Vinda will see much stronger growth than the rest of Essity, which is also confirmed in historical results. So all else equal given higher growth Vinda should trade at a higher multiple, but it’s rather trading just in line with Essity. Why? Probably because Vinda being somewhat illiquid in comparison with a small float of some 25% on 2.2bn USD MCAP. But you get a Swedish governance run company, with full exposure to China’s growing middle-class and elderly population. This is truly something to put in the long term bucket.

Some pictures showing how Essity and Vinda traded since Essity got listed as a separate entity (spun out from SCA):

I was unfortunately asleep at the wheel during the summer when the spread was at it’s largest. The spread shrunk after great H1 results from Vinda, but has increased again on back of Hong Kong stocks under-performing in general (probably due to protests etc). So this gave me another opportunity to switch into Vinda.

Initiate new position in AK Medical Holdings

Another twitter inspired holding (LiveChat being the other), which I feel a bit ashamed of not having found myself (given how much time I spend looking for stocks on the HK exchange). Again my timing here is not the best given that the stock has rallied quite a lot recently. A full write-up will have to wait, but this is the holding I hinted at in my 3-D printing post. The company produces orthopedic implants, mainly for the hip and knees. The sell their products almost exclusively in China. Over the last few years the spent quite a lot of resources to use 3D-printing technology to create better custom made hip implants. Just as I wrote about in the 3D-printing post, the most successful examples of 3D-printing so far has been for the human body, where the need for customization is high. The companies sales of 3D-printed implant parts is still fairly small compared to total revenue, but it’s growing very nicely. It also shows the companies ambition to not just be the low cost option for implants compared to international players.

I think the company partly have traded so strong lately due to trade war speculation. If the trade war intensifies, probably international companies selling hip implants will face difficulties, which could favor a local player like AK Medical. My investment thesis is not based on this though, although of course it’s nice to have a trade war hedge in the portfolio.

This company is not trading at very cheap levels, so I will start with a fairly small position. You will have to wait a while longer for a full write-up.

Sizing and adding in Sbanken

I sell the full holdings in Gilead Science, BATS and Essity as of close Friday. This takes my cash level to about 14.1%. Of this I allocate a 5% to Vinda and a 3% position to AK Medical Holdings. Of the cash left I decided to increase my position in Sbanken again, which has traded down significantly on general Nordic bank stock weakness. I take my Sbanken position back to 5% of the portfolio, leaving a small cash buffer.

 

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Sell Edgewell, adding to Nagacorp and other thoughts

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

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

Deal details can be found here: Presentation

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

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

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

Other thoughts about my holdings and the market

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

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

Tonly Electronics

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

Nagacorp

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

Coslight Technology

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

Irisity

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


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

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