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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Reflections and how to improve

Its been a few slow weeks for me with vacation, which is usually when I find time for reflections and lessons learned. My thoughts below are a continuation of this post 6 months ago: Portfolio changes larger reshuffle Part 1. I started out this blog and investment portfolio in March 2016. My portfolio at the time had a heavy tilt towards Hong Kong listed companies and holdings with exposure towards China. The big theme I had been researching for the past year, before starting the blog, was Electric Vehicles and this theme had a large presence in the portfolio as well. That was my starting point almost 2.5 years ago, since then I realized a lot of things on how I should build my portfolio and only three of the starting holdings are still around.

A picture says more than thousand words, so I will try a new format here showing the buy and sell timings of some of my holdings. The performance for all stocks is restated into USD, since my portfolio is in USD. As a reference the GlobalStockPicking portfolio performance is also shown, rebased to start at the same value as the stock price. The data series looks slightly choppy since the GSP portfolio returns are only calculated on weekly basis.

Step 1 – Rotate away from China

My main focus for quite a while has been to find new investment cases and at the same time becoming a better stock picker. The stock picking was needed, to find new type of investments when I decided to start reshaping my portfolio. As important is the portfolio management, side, what should I be looking for, and what kind of companies do I want to have in my portfolio? The starting point of that reshaping was to say, what I did not want to have too much of. In step 1 by decrease my portfolio country tilt, away from China (Rotate away from China). This was done in somewhat of a haste, since my bearish market view meant that I thought a stock market downturn was imminent. My views were based on that I thought the Chinese economy was (and still is) severely overheated, with all the stupid investments that goes along with such a overheating. In this haste to transform my portfolio, I tried to replace the Chinese holdings with less cyclical and defensive companies (like Huhtamäki and ISS). I have to confess here, these investments were made without going the full mile in due diligence. Of course I had done some sort of due diligence, but not really drilling into detailed valuations. More recently I understood that I bought some of these holdings at fairly stretched valuations. I just sold my Huhtamäki holding and I would say the next holding I’m closest to selling right now is ISS. Other non-cyclical defensive investments, like Swedish Match, has performed extremely well in the last year.

Lessons learned from this: Don’t overthink Macro, it still OK for me to make a Macro bet that something big is going to happen in the future. But starting to rush into new investments due to a Macro call of rotating away from China, is not OK anymore. It is very rare that there is such a rush to act, take the time to fully analyze what I’m buying before jumping in. I also have a tendency of finding some new investment and get very excited. It gets even worse when the stock is trending upwards and it feels like I’m missing out, classic FOMO. Investing in this way is not acceptable for me anymore, I have to do a proper deeper due diligence before anything goes into the portfolio. Although I have not formulated that here on the blog yet, this is something that has become a hard requirement in the last six months.

Huhta_20180629

SwedishMatch_20180629

China rotation – missed opportunities

My bearish China view obviously did not materialize at the time, rather Chinense stock markets continued to outperform for quite a while. Most of the holdings I sold, outperformed massively and only one, CRRC performed fairly poor. More recently though, Chinese stocks have turned bearish, with Trump trade wars having the most sever implications for China.

BYD_20180629 CRRC_20180629 PingAn_20180629 ShanghaiFosun_20180629 YY_20180629

Another lesson learned here is to scale out of winning holdings, rather than cutting the whole position. Sure the stock could be more closely to fully valued, but momentum should not be neglected. Both in terms of stock price momentum, but usually the stock price increase is on the back of better fundamentals, where there is usually also some momentum, bringing the valuation downwards all else equal if you just hold on for a while. The way I sold out of YY (Further China reduce Sell YY), on a China Gov clampdown scare, rather than valuation, and how the stock afterwards continued to soar, that is hurtful to look back at.

Part 2 – Easier companies to understand with a longer term view

I stated a quite long term ago, a desire to have less portfolio turnover and take a longer term view on my holdings. The next step of the portfolio transformation was something I realized I had to do, to come closer to such a investment style. That was to remove holdings that is hard for me to fully understand. Meaning companies that I spent quite a lot of time understanding, but the nature of the business just makes it very difficult to fully penetrate. I had a discussion with value and opportunity blogger on this. His comment was that its no point in fooling oneself that you will ever fully understand any business. I agree with him, but the point for me is to understand the company to such a level, that even if a lot of factors around the company changes, I at least have a reasonable chance to grasp what does the changes mean. Hopefully I will also be able to understand if a stock price fall is warranted, or if its just market sentiment shifting. My experience is that when a stock just keeps rising, it doesn’t really matter how well you know the company, it feels great owning it anyway. The stock price increase just confirms how right you were buying it. Its when an investment falls significantly that your investment thesis is really tested, then at least I need that confidence that you understand the company well. I felt there were some holdings I would never reach that understanding of, at least not without a very serious continuous research effort. Companies that had to leave for these reasons were Criteo and Catena Media, one being one of my larger laggers and the other one of the largest gains.

Catena_20180629 Criteo_20180629

Part 3 – Long term yes, but to what cost?

The main reason why I want to be long term in my investments, is that I firmly and strongly believe that one of the last untapped pockets of easily available alpha out there, is to have a longer term investment horizon than the market in general. Given that we want to be long term investors, how do we merge that with an analysis of the current valuation of the company? Should I buy great companies that currently looks very expensive, because they will do great long term? I think there is more alpha in finding great companies, that also currently have some margin to safety. That means you both are looking at good returns just from the business growing, but also a one off multiple expansion, as the market also realizes that this is a great company. In the very very long term, that multiple expansion probably does not matter as much for total return, but when I say I’m long term, I do not mean 30 years, I mean that I have an investment horizon of 5-7 years. Finding such companies is the ideal case, usually it’s only possible to find these among small caps, which then usually comes with other problems. So it doesn’t mean I never buy companies that are trading at high multiples, it all comes down to what opportunities are available in the market as well. Inditex, Diageo and NetEase are all examples where I paid up an fairly high multiple, clearly there is little multiple expansion to hope for, rather I just think they are great businesses which will continue to do very well, again, long-term.

Part 4 – Stock picking efficiently

Stock picking/research is what I enjoy the most, but it is also a time consuming process. Before I present a new investment case for you, I have looked briefly at many different companies, done a lighter due diligence on 5-10 cases and one of these hopefully is interesting enough to add as a new holding in the portfolio, which is then presented to you. I do not spend my time doing full write-ups of companies I do not invest in, just because time is precious, and I don’t have enough of it, to “waste” my time doing nice write-ups of something that I’m not investing in. The only exception was Teva, and that was a stock I thought I would invest in, but during my deeper dive, I changed my mind. Another lesson learned, is that I need to become more time efficient in my stock screening/searching. Currently my screening process is very much random, reading about one company leads me to another company and so on. Another way has been a general investment idea around for example electric vehicles, this leads me to read up on 10-20 companies in and around that sector. In the past I have done certain screenings, for example I screened for all brewery companies world wide, which led me to investing in Olvi. I have also done some screens on Australian and New Zealand listed companies, where I still currently have a few stocks on my observation list. Since my investment universe is global I think I should utilize this more in the future and use screens/filters as a more efficient way of generating ideas and companies I would never otherwise find.

Summary

  • Having limited time and resources to find investment cases marries well with being a long term investor. Long term investing gives the opportunity to extract alpha where few others are looking. For me only certain types of companies can become truly long term investments. For example the company should be fairly easy to understand.
  • I should focus my search and research on long term type of investments and also try to come up with a screening processes which makes it quicker to find such companies.
  • No more rushing into new investments and never make hasty portfolio changes due to changing Macro, better to be late and do correct portfolio changes than rushing into new holdings.
  • When a company re-rates in the market and starts to look expensive, do not sell the full holding, rather scale back the position, my track record shows I’m often not just early to sell, but way too early. Something of a let your winners run, cut your losers short strategy, but with less emphasizes on cutting losers.

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The effect of oil – selling Huhtamäki

I think most people have noticed oil price increasing significantly over the last 12 months. I started to expand on this topic in my latest post about Dream International. I realized going through all those years of annual reports that the price of oil had a impact of the raw material cost for all the teddy-bears made. In the past years the collapse of oil has boosted profits for a large number of companies, on the raw material and energy side. But the part that probably is not discussed enough is the transportation cost and especially in countries where oil is not heavily taxed.

Transportation – USA

A friend of mine recently did an analysis of companies exposed to the increasing transportation costs in the US. After a longer discussion with my friend I was a bit baffled that I haven’t been able to see this more clearly myself. The labor costs increase and extreme labor shortage among truck-drivers in the US has been well covered. The second part of the equation is of course also the increasing oil price. But how this together changes the picture in terms of transportation, is something I at least have not reflected enough upon.

truck_rates_USA

In many cases its hard for companies to fully transfer the increased transportation cost to the end buyer, especially in the short term. There is also a forward market for both trucking rates and oil, which means that competitors might have hedged their costs further out. More importantly different companies most likely have hedged it differently, or not at all. So the company which has no or shorter tenor of its hedging will face increasing cost, with little to no possibility to transfer that cost on-wards.

Read also the following: Bloomberg – Rising cost on supply chainUSA Today: Trucker shortage

All this brings me back to my analysis I recently made on Huhtamäki.

Huhtamäki

In my recent analysis of Huhtamäki. I understood that valuation wise we needed to see a margin improvement. It seems feasible to believe that such improvement is possible, looking at competitors margin levels. But maybe its the other way around, everyone’s margins are actually coming down? Part of Huhtamäki’s products are flexibles, plastic based products, meaning dependent on price of oil. The other part is high volume paper based products like paper cups etc. A products which most likely is highly sensible to increased transportation costs. How Huhtamäki in the current environment with US being its largest market, could raise margins, is going to require some pretty magical management execution. So after contemplating this a bit more, I need to revise the probabilities for my bear/base/bull cases. The conclusion then is that this is a clear sell, in the short to medium term. Therefore as of today I sell my full holding in Huhtamäki.

Other companies affected

As noted in the linked articles a lot of companies are affected by this. In my own portfolio I see several companies that could see headwinds due to this: Dairy Farm (Asian retail), Olvi (Selling beer in northern Europe), Inditex (Clothes retailer, shipping much of its clothes by air), Essity (selling paper based products worldwide). Essity probably being the next company I need to take a closer look at, for example competitor Kimberly Clark has been in a downtrend for a year now. We have recently seen US retail giants like Kraft Heinz drop tremendously, there are many reasons for that drop, but partly it could also be related to transportation costs. One should not change the whole portfolio, just because oil price has increased, but it might affect share performance in the short/medium term significantly for many companies.

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Xtep sell full holding

As I was hinting in my previous post, I was looking for a decent exit level in Xtep holdings, today was the day. The company is still cheap and I think it is operating in a segment (running shoes geared towards Chinese) with clear tailwinds. Why I’m selling is for more subtle reasons. I think I will personally really struggle to fully understand this company, its customer base and the products they are selling. I have no idea if the customers like their products or how much they like and trust the brand. I  tried to discuss the brand with people living in Shanghai, but nobody used the brand or barely had heard about it. They were all buying Adidas, Nike or perhaps Anta shoes. All the Xtep stores were also located far away from central areas. This is when I understood that this brand is just selling to a much poorer category of Chinese then I come in contact with. Since I have no contact with this customer base I deem it very hard for me to build any feel for the company beyond the numbers. I could possibly still keep this kind of company long term in my portfolio, for the general tailwinds of this segment and a belief in superior management. I think the deciding factor has been that I have not seen any signs of this superior management, rather this is one of the reasons why the stock is still selling so cheap.

I bought 14300 shares Feb 1st 2017 at 3.28 HKD, after a bumpy ride I thought the stock had lagged its competitors significantly and added Aug 22nd another 7150 shares at 3.16 HKD just before the semi-annual was released. The report was a disappointing and the stock traded down to a low of 2.6 HKD in the coming months. But this time I did not do the same mistake as with Zhengtong Auto (were I stop-lossed at the bottom). This time I held on and the turn-around thankfully came. Including dividends I made a return of about 36% on this holding as I sold the full holding today. As a reference my overall portfolio returned about 25% since the initial investment in February. With my increased cash position I will for the coming months rather consider what of my current holdings I will add to, rather than trying to find new investment cases. My portfolio is diversified enough already and it feels good for the first time to not have any stress of adding new and/or better holdings to the portfolio.

The last few weeks my portfolio performance has been very strong, in part thanks to Xtep, but also other HK listed holdings like Nagacorp and Fu Shou Yuan has performed very well. Last Friday the portfolio was just half a percent shy of all time highs, which feels as a pretty solid result considering the stock market correction we just saw.

The Huhtamäki analysis is now overdue due to high workload and a few other things that popped up, my apologies but it will take another few weeks before it is done.

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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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2017 Performance, Criteo sell, Inditex buy

2017 Performance +28.8%

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

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

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

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

The start of 2018

Graph_20180209

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

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

Clean out – Criteo out

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

Inditex – Add 3% weight

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

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

 

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Portfolio Changes – 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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Another Portfolio change

Defensive is my new offensive

So I continue my quest of reducing China exposure and finding good defensive plays. My portfolio changes are the following as of market closings today (Tuesday):

  • Buy 6% of my NAV into Gilead Sciences
  • Add 50% to my current holding in Xtep International
  • Sell 40% of my current holding in BYD
  • Sell my full holding in CRRC

All in all this slightly reduces my very large cash position. Some quick comments on the changes:

Gilead Sciences

As I have mentioned in several posts, I have been circling the Pharma sector for quite some time now. Since it is, at best, a murky area to try to estimate the value of a big companies research pipeline, I have struggled to come to an investment decision. It’s easier with companies where current cash-flow motives more of the value. I tend to end up a bit too much on Seeking alpha, trying to find people who do understand the intricate details of this industry and especially the pipeline. Someone that I do trust though on the topic is Martin Shkreli, who freely shares on his thoughts in his Youtube streams. He is a fan of Gilead lately (when the valuation has come down). That gave me some comfort to keep looking at the stock. After seeing this (WertArt Capital on Gilead) very in-depth review of Gilead, I realized I might be a bit late to the party. But nevertheless, I want exposure to the sector which I feel have come down valuation wise and is defensive. Giliead is the best I have been able to come up with after a long search. I feel confident enough to take a position at what I believe is still a decent entry point, with some confirmation that the down-trend is broken.

XTEP International

The case is simple, if this company is not a fraud, it is undervalued. All other Chinese shoe companies have continued to perform fairly well and outperformed XTEP. This might be the ugly duckling, but I don’t believe it is THAT ugly. We will also get a very quick answer on my bet, since the earning report is released tomorrow, I’m hoping for a +10% pop upwards in the stock-price.

BYD

The countries outside of China keep disappointing me in how much they dare to commit to electric buses, it’s already proven to work fine in China. This is where BYD is very strong and have a top product. On top of that I still don’t see BYD releasing a car anything near to Tesla Model 3 or Chevy Bolt, so my thesis from over a year ago, that I’m unsure of BYD’s success in the car market, stays the same. I haven’t given up on BYD, but I could see this one visit the high 30’s again and choose to reduce my position.

CRRC

This was my Belt and Road play, perhaps somewhat sloppily implemented. I decided to not invest in the theme before I understand it much better than I do right now. It has a holding I don’t have a strong view on and selling it reduces my China exposure, so out it goes.

My next post..

..will be about Teva. I have been very occupied lately and I still need some time to dive into the details. So stay tuned for Part 2 and let’s see if it becomes a new investment or not.

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Portfolio changes

I made a mistake..

when I bought XXL 1.5 month ago. The Norwegian sporting goods retailer is expensive without continued growth that I knew. But how solid is the ground in their home markets? After both visiting one of their stores and not having the same positive feeling as before (maybe too much Peter Lynch here) and reading an article from one of their competitors about the very tough environment I started to turn more skeptical.A podcast that I followed woke me up to the fact that I have probably overpaid. I realized today I have probably underestimated the risks in the company. Luckily I’m in USD terms able to come out at a very slight loss. So I reversed my decision today and selling the full position as of today’s close.

Something that I did right..

was buying Skandiabanken when I started this blog. Not my fastest, but a very steady and my largest gain (+120%). During this time the stock has gone from trading at a slight discount to the large banks, to today trading at a good premium. Just as it should be in my opinion, with it’s superior growth rate. But this bank is almost entirely reliant on the Norwegian housing market, which has been in a slide for some time now. Nothing major, and probably it is fine but for the first time I see some clouds on the horizon. Judging from how hot the Swedish property market is and I know the Norwegian one is in a similar state, there is some worry. Any kind of further outside shock which creates higher unemployment could trigger something very nasty. Now it’s up to the company to keep executing and stealing market share from the big boys. I think they can do it, but any failure will set the stock price back now. So I will reduce this holding just before their earnings release, take some handsome profit and keep a smaller position as a long term case. I sell 60% of my holding as of today’s close.

A new defensive..

..in my portfolio. Already as a kid studying finance, I found out that I could increase my Sharp ratio by adding Swedish Match to my portfolio. It didn’t have the highest returns, but it had this wonderful characteristic of being negatively correlated to the rest of the market. That did wonders in terms of risk adjusted returns. Swedish Match does not anymore have a negtive Beta, but it is very defensive and very well run company. There is some huge political risk if for example the European Union would manage to ban snus in Sweden, but I see it as highly unlikely. I start with a small position of 4% and I intend to look at more tobacco companies going forward. I would also be very interested to hear your thoughts on the E-cigarette/Vaping industry, if you believe in that, what would be the best way to gain an exposure?

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