My watch outperformed my portfolio in 2021

Happy New Year!

There is no beating around the bush on this one, 2021 unfortunately was a lost year for the GSP portfolio. I bought a watch in mid 2021, it has already appreciated with roughly 10%, easily beating my 2021 performance of 3% return. That a watch can out-perform my portfolio is a pretty humbling experience but also nicely summarizes how upside down the world has been in later parts of 2020 and 2021. I have very mixed feelings about my 3% return for the year. I’m proud of how I covered stocks nobody else looked at, for example Modern Dental which is up +286% this year and I took profits when it was up 600% on the year. It’s pretty head-scratching then to have achieved such home runs and only be up 3% overall. The explanation is of course that broad parts of my (China/Hong Kong related) portfolio has just been hammered. So I will spend at least a bit of time harping about how incredible the spread is between Hong Kong and USA listed stocks in 2021. As you can see in the graph below, MSCI World excluding USA is on a total different trajectory. Since I barely invest in US listed companies I look like a terrible investor not because of stock picking, but because I have not been allocating to US stocks – rough! I do have exposure to other countries like Sweden/Finland/Poland, but even they failed me this year except one bright spot – Irisity. There I can’t blame having bad Beta exposure, I just didn’t pick the right stocks.

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Given the low correlation (43%) to MSCI World is it still fair to use this as my benchmark? For 2020 that correlation was 87%.

Portfolio Holdings

Return for my holdings during 2021

Total return for the same holdings:

 

Portfolio changes

Some highlight below in terms of good & bad decisions for the portfolio in 2021

The mistakes

AK Medical

I had initially bought the stock at 4.7 HKD in 2019 and quickly sold out around the 9 HKD level as the stock surged. The company continued to post great results and with multiple expansion on top of that it peaked at 26 HKD. The stock after that started a major down move due to fears of the changes in Chinas central purchasing of medical equipment and devices. I tried to look into the topic and as I understood it it would mostly be the distributors taking the hit and not AK Medical. I still believed in the long term story of aging population with higher disposable income, there will be a huge need for knee and hip operations in the coming 10 years in China. On top of that China is getting more nationalistic, surely they want the market leading local player to have a pole position here? I started the year by taking a position again in AK Medical at 14,7 HKD and a few months later doubled my position at 9.7 HKD. How the central purchasing actually pans out is still unknown, but for now it seems the market has agreed upon that it will be brutal. The stock ended the year at 6.6 HKD, -46% from my average purchase price. I’m slightly shell shocked by this move down, the market is basically saying that nobody will make serious money on hip and knee replacements in China, although China is one of the worlds largest markets. I can’t really believe that will be the case but the market doesn’t really agree with me. In my view AK Medical has good enough products to even shift focus to selling their devices abroad, which they already do in smaller scale. I will stubbornly keep this holding for now but not add until I see some proof of where this is heading. Market has already priced in a disaster, so I will only sell on proof of disaster.

Valneva

It was a pretty lucky stroke to research vaccine producers in 2019, 3 months before Covid started. Given that I did so, one might say I should have bought Moderna, which I never did. I am very happy though that I did buy Valneva and what a ride it was. I first purchased the stock at the very end of 2019 at 2.57 EUR, I then sold in Feb 2020 at 3.4 EUR (this was all still non-covid related). In May 2020 they announced their partnership with Pfizer for Lyme diseases, I also had a small hope that they could somehow get involved in Covid vaccine production. So I took a position again, unfortunately smaller than my original position at 3.98 EUR. I rode this and sold this at an average of some 14 EUR in February 2021. Given how Covid has developed, this was like the other vaccine makers something to hold on to, its now trading at 19 EUR per share (very volatile in the past days). It felt good when I sold but it would have been a good portfolio hedge to keep.

Alibaba

Another disaster decision was trying to buy the dip in Alibaba. I mean its not really even my style to invest in large caps, I have concluded many times I have no edge in these large cap stocks. So I feel double the fool when I dip my toe into one of these mega-caps and manage to catch the largest wealth destructor ever in a single year. I bought shares in May at 214 USD and increased my position in late September at 147 USD. Stock ended the year at 119 USD.

The right moves

Modern Dental Group

My shining star investment in 2021 which I already mentioned, was ironically on the Hong Kong exchange. In this weak market find a winner makes it so much more extreme. I sold most of my Modern Dental in the bottom of the Covid crash 2020 at 1.14 HKD. The reason was because I realized that dental clinics would be shut down and indeed they were. I kept a small position because I still believed in the company long term. As soon as the positive profit alert came showing that the business had rebounded I re-entered with all shares that I sold at 1.84 HKD. That turned out to be fantastic timing as the stock just sky-rocketed basically from that day onwards. I took some profits at 5.2 HKD as the stock grew into one of my largest positions and then cut again at 9.4 HKD as it again grew to one of my largest positions. Around these levels I felt the stock had gotten ahead of itself just momentum speculators pushing it past fair value. Today it’s trading at 5.54 HKD and business seems to continue to perform very well. I do think I found a potential gem to hold in the portfolio for the long term here. The stock is just barely up from its IPO price in 2015, revenues have doubled and profits more than tripled since then. It is still not an expensive stock and just today I actually added a little bit.

Essex Biotech

This was a serious laggard in the market early this year and I wrote a blog post in February 2021: Essex Biotech – Why I am bullish. I increased my position at 3.95 HKD. The stock then went on to almost double from there on back of good results and a strong Hong Kong stock market. For portfolio balancing reasons I took a small profit in July at 7 HKD. This turned out to be fantastic timing as the stock has been pulled down heavily by the weak Hong Kong sentiment, ending the year at 4.95 HKD. Fundamentally the company still seems to be on the right track and I’m looking forward to if the company can finally get a breakthrough with the wet-AMD (eye disease) trials they are funding through listed company Henlius.

JOYY

What a mess this stock has been, its almost painful to write about. Baidu wanted to buy JOYYs Mainland business, a short report was released that targeted the mainland business. Left was a fairly attractive international Videochat business called Bigo Live. Baidu seemed happy to go through the with the deal, shooting down the short case for the stock. I believed them and added to my position since the cash from Baidu + other cash was as much as the market cap of the company. This was at 119 USD per share, my previous shares were bought at 64 USD. I capitulated when the deal finally seemed to be falling through when stock was at 55 USD, its now trading at 45 USD. So short term it was the right decision to sell but to be honest it still feels bad to have sold at these levels. Finally why I actually did sell was because I did track the Bigo Live app a lot myself (meaning I used it) and I could see that the popularity with the app was dying, basically negative momentum when they should have had positive momentum. Since I sold and it continued down I put this in good decisions (for now).

Other worthy mentions

Pax Global

This didn’t really feel like a mistake on my side, but a very very freaky event. In the middle of the Hong Kong stock market weakness, when PAX was one of few holdings to still trade close to all time highs, the nightmare news were released. FBI was raiding PAX warehouse in the USA on alleged security concerns with their payment terminals. The customer which alerted FBI had also decided to stop using PAX devices, stock was down some -45% in one day and this was before the drop my largest position – what a nightmare. Now the dust hasn’t fully settled on this but some of PAXs largest purchasers have come out and defended PAX saying they don’t see anything wrong with the devices. One could argue that is in their interest since they probably don’t want to recall millions of payment devices. Adding to this PAX still operates in USA, FBI or any other agency has not banned them from the US market, so it does not seem they so far has found anything. Lastly PAX has hired a large famous US security firm to independently check their devices (Unit 42 by Palo Alto Networks). The results from this was: “Unit 42 reported that the network traffic reviewed was consistent with the intended features of the associated services of PAX terminals. Unit 42 also concluded that there were no unexplained network traffic in the course of its comprehensive and thorough inspection.“. I don’t think PAX actually can do much more, some confidence in the company has been lost for sure both from investors but more importantly the distributors and purchasers of their devices. How much will these large buyers in Brazil/India and elsewhere shift to other brands to avoid PAX due to this? Well that’s basically what the market has taken a view on here. The market is basically pricing zero to very low growth, meaning that a major shift to competitors will happen over the coming years, I think that is exaggerated and there must be good reasons why they choose PAX in the first place (pricing vs competition, Android capabilities, PAX app store etc). I’m betting that this will slightly affect growth but PAX will still be growing at +10% or more per year. I slightly added to my position today.

Nagacorp

Another big loser for 2021, but here it’s in my view actually warranted. Given how China continues to be closed down and the funding risk of completing the Naga3 construction it’s pretty fair Nagacorp has traded down as it has. Given this view, this is where I found some of my funds (except the small cash buffer I had) to fund my purchases in Modern Dental and PAX. I haven’t sold all of my Nagacorp, but I reduced this to a smaller position today. I think the company could bounce back majorly in 2023 but Asia is still far behind on moving on from Covid.

 

That’s a wrap for my 2021 review. In my next post I will dive a little bit deeper into why my watch outperformed my stock portfolio in 2021. Because it has really been a year where all assets went up (except my stock portfolio and a few poor other bag holders who invested in Hong Kong) 🙂

 

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When things go wrong

Back in May-June after my last blog post my life and portfolio was in bloom, I had my best outperformance since the blog started and I was back good physical shape. That did unfortunately not last and things went quite wrong from there on. I had struggled with my health for the past year and early this summer it got worse than ever when a injured myself quite badly. I’m much better now but going through something like this really drain you. Currently going through the slow process of trying to build up strength again. Due to these unfortunate health issues I haven’t had the mental capacity to post anything or research as much as I used to. But now after exactly 4 months of inactivity I’m back blogging. I got a bit of a writers block starting off this post, I try to just come as you are. Nevermind my health issues, let’s put focus back on what happened this summer and especially China.

Having a strongly China tilted portfolio has really been bad beta exposure these past months, the spread between developed markets and Hong Kong is really remarkable. Just like health issues which sooner or later emerge, I knew the day would come when China would have to clean up its imbalances and go through a readjustment/bust. I read plenty of books on the topic and spent considerable time trying to understand the dynamics of for example the Chinese housing market. Being somewhat mentally prepared and thinking through the downside helps, but it still hurts when it happens. My portfolio has taken it on the chin lately, but perhaps not as bad as one would expect. I had such a tremendous run in some of my holdings previously, that gave me plenty of cushion. Also I have had minimal exposure to all the sectors that have been worst hit. As of last Friday my portfolio is now in-line with MSCI World (20% vs 18%) and massively ahead of Hang Seng (-8%) YTD.

Portfolio changes/comments

Modern Dental Group

Although I haven’t posted I have stayed somewhat active in the market. I had to, for example Modern Dental continued to double yet again from where I started to reduce my position. I was very happy to unload another portion of shares at 9.4 HKD, keeping half of my initial position for the long term. This stock alone saved a lot of my bacon in terms of performance this year.

Greatview Aseptic / Vinda

I have been gradually increasing my position size in Greatview Aseptic, which I think is underappreciated and undervalued here. Yes the semi-annual was a bit weak in terms of revenue falling down to the bottom line, but revenue grew nicely YoY. Given the increased raw materials prices and the extremely stretched transportation market it was no surprise to me that profit wise it would be a somewhat softer half year. This is still a growth company (growing revenue some 9% YoY in the past 4 years) with a 8-9% dividend yield, priced as a zero growth company. Doesn’t make any sense, so I will continue to back up the truck and load up more. I added shares at 3.74 and 3.45 HKD, which apparently was too early as its now trading below 3 HKD.

In the same manner Vinda has come down in valuation, I added some shares at 23 HKD, again not the best timing but quite happy to add shares at this level. Both of these companies have similar characteristics: totally unsexy business, factories producing daily necessities, founder led and both taking market share in a market with a tailwind. This means the can post high single digit growth rates, which is nothing to scoff at in the long run.

Pax Global / Essex Biotech

Did some profit taking in both to fund the additions in above mentioned stocks, here I sold at good levels, 9.76 and 7 HKD per share. The selling has not really anything to do with not believing in these companies (they are even after selling my largest positions), just that I want to balance the portfolio and re-allocate to for example Greatview which I see as having better return potential from this point.

Dream International

When I added this company to my portfolio I wrote this post, with the question mark a dream Investment? I wouldn’t say it turned into a nightmare, but not far from it. I bought at 4.11 HKD and sold out 3 years later at 2.88 HKD, throw in a couple of dividends of some total 40 cents or so and its still a handsome loss, during a period my portfolio almost doubled. Incredibly enough most of the loss comes from the EV/EBITDA multiple contracting from 5 to 4, cheap got even cheaper. It’s ridiculous to sell but also ridiculous to allocate capital to something where shareholder value never seems to unlock. It would be painful to see the company announcing a special div or something like that now and the stock doubles, which would be reasonable. Such is life in value investing land, some stocks are just to deep value traps and this one I throw in the towel on. I could write tons more about this company, but choose to cut it short since its no longer in the portfolio.

Irisity

I have been flip flopping a bit in Irisity. I reduced my position in July thinking the odds for a continued rally seemed weak. Then they announced a merger with an Israeli company in the same sector, basically removing a one of the largest competitors (not that any of these players are large) and maybe more importantly gained a decent sales force. I think building some scale into this company is really needed and I saw this move as worthwhile to put on a position again, which I did a few SEK higher than where I sold 58 vs 61 SEK per share.

Nagacorp

Oh boy this has become a tricky one. The share price has taken a proper tumble dropping more than 50% from ATH. The market seems to focus more on the short term pain of Covid and Casino closure than the possible long term gains. Here you can see the sentiment difference between for example the US cruise liners like Royal Caribbean which has fully recovered from its Covid drop, although cruise sales worldwide has not fully returned. In this cases the market was quick to take the long term view but in Nagacorp’s case the market is either short sighted or changed its view significantly on future income potential. My interpretation of what the market thinks, its a bit of both. Short term scared that it could still take years for Cambodia and Asian markets to resume travel, combined with what has been happening in China with new rules for Casino Junkets, which makes it likely VIP business will not come back as before. This double uncertainty has just killed the stock. On top of that there is also some overhang fears of how the funding of Naga3.

I decided to add to Nagacorp (again too early) in July at 6.98 HKD per share. My reasoning being that Cambodia is a friend of China, which can be seen by high vaccination rates they got compared to the rest of south east Asia. My guess is that Cambodia will be one of the first countries which will open some type of travel towards China. But say I’m wrong and travel does not resume say in another 2 years, then the situation is tricky. Naga3 will be delayed and probably cost more to finalize, the down period will then be so long that I think share dilution etc will be a fact. Nagacorp will turn into a disaster investment with permanent loss vs current limbo situation. In my view all of South East Asia can not afford to be closed for another 2 years, yes it would crush Naga as an investment case but it would crush the economies of these countries more. Still I’m humble to the possibility of being wrong and I don’t want to size my bet too big, I’m not going to add further (7% position) until I see signs of actual improvement. In regards to VIP business, yet to see where this lands, I have a small hope that junkets will be more controlled in Macau but will find ways to continue to operate in Cambodia, but my base case is that VIP does only come back to 60-70% of previous levels, which is still good. In other words in my view risk reward looks good, but outcomes could be extreme both on up and downside.

New holding – GPW SA

A third Polish holding enters the Portfolio, the Warsaw stock exchange itself, a separate post will come soon!

China

A few words on China specifically as well, given all the things that happened perhaps I should dedicate a separate post to it. Since I started this blog I always had mixed feelings about my tilt towards HK listed companies and China exposure. First time I got bearish on the blog was 2017: Rotate away from China. Already back then I spelled out my worries of China property and sold out of my holding Ping An. Ping An has lately been one of the largest indirect losers of this Evergrande mess. Trade War feels like a really old topic by now, but its very much alive and kicking. The whole de-globalisation feels like a long term new theme one could do investment after

It’s clear to my by now that China has decided to decrease the wealth gap created in the past 20 years. There has been some obvious losers, like education companies but a lot of companies have been hammered for various reasons. In my view even the Evergrande mess is part of this same theme (at least partly). What is less talked about is that there are also some winners in equalization. Just like in the US with stimulus checks which created a huge buying freenzy. If the poor in China got less poor thanks to wealth redistribution, perhaps the customer base of Vinda’s Tempo tissues grows from a few hundred million to half a billion? If a dedicate another posts to thoughts on China I would like to explore this are more. As always happy to hear you input, who do you think are the winners if China wealth gets more equally distributed?

 

It’s very good to be back posting, hope you got the tribute hints, man 30 years already!

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Portfolio changes over the past months

With ~5 years of announcing every buy/sell transaction on the blog, I have now for a while shifted to only post changes under “Trade History”. Sacrificing some transparency but with the aim to focus blog posts on more interesting things than every trade done. I imagine this will be my new format, where I look back on the past months and comment on what I feel is most relevant to mention. This is the batch of trades I will discuss.

Let’s start from the bottom

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Summary of 2020

Intro

Much can be said about this year, I choose to focus on how extreme the dispersion been this year. A very small subset of the markets has been doing tremendously well in 2020. Bitcoin has tripled and Tesla and other ESG trendy “hot stocks” soared hundreds of percent on back of the massive stimulus we seen. 2020 has been a treacherous year for us long term more value oriented investors. With the exception of 1999, it has probably never been harder to stay true to your investment philosophy. The liquidity flywheel has been turning extremely quick in a smaller segment of the total market at the same time we all know how poorly the real economy is doing. I’m pretty active Twitter user and never have I seen such euphoria among investors that had a portfolio of loss making, high growth tech stocks with as many SaaS etc in the company description as possible. I was still very young in 1999 and history never repeat itself, but I’m pretty sure it rhymes. And the rhymes I have been hearing lately are not positive for the returns for the coming years.

2020 has also been a terrible year from the perspective of have and have nots. And I’m sitting as a clear winner here from that perspective, with a stable high paid job and and assets that just keep appreciating at a high speed. At the same time a lot of the people who don’t have the luxury of big savings even lost their jobs this year.

The crisis months

What defined most investment returns in 2020 was how one navigated the period of February to April this year. Given that I live in Asia I had a front row seat to what was happening in Wuhan. In my post from Feb 9th I wrote the following:

I would like to start of by saying, that I think we are facing an extremely serious virus spread. It’s the sneaky feature of the virus that it can spread before people feel sick, which really makes this so very dangerous. Thanks to very powerful actions taken in China and elsewhere, we might just dodge a major major global health crisis.

When I started to write on this post a few days ago I felt my fellow investors in the US and Europe had not understood what is going on in China. But just over the past few days I think investors are getting input from company management and decent news reporting on what is actually going on. I felt all worked up, how could equity markets continue up when 1.4 billion people had decided to sit at home, not work and basically tend to basic needs!?

We humans are pretty easy to scare and what influences most of all, is the behavior of the people around us. People can be calm and rational about the likelihood of catching the virus, but change mindset very quickly when put with a new group of people that act more panicked about the virus spread. It’s very quick back to basics in situations like this, Maslow’s pyramid comes to mind. Nobody is any longer thinking about which Hermes bag or new car to buy, when you are fighting at the local supermarket for the last rolls of toilet paper. Maybe it sounds like a joke, but this has been the actual situation in Singapore and Hong Kong over the last few days. 

I think I was fairly spot on in my analysis in early February and really early to voice my views/concerns as well. After that point of being correct early I got a lot of things wrong. First of all I was very bearish and thought this bull market had in general ran its course. I thought we where staring at a crisis that would trigger a more long term economical decline. This meant I did not think of upside potential and buying potential winners from the crisis. I focused all my energy on downside protection and rotating out of anything with high leverage and/or severely affected by the virus. When all the stimulus packages started to kick in, again I was more thinking downside protection, that the USD would be devalued long term, so I took some positions in gold. The right move of course, now that we now the results would have been going in heavy on what was a Covid winner. For example I wrote my analysis on Valneva late 2019 so I was well aware of Moderna, go back to my post and you will see I compare Valneva to Moderna. A company probably nobody heard about in late 2019. In general the strength of the stock market boom from the lows really surprised me and still does.

The year of Poland

2020 was also the year that the Polish stocks in a more significant way entered my portfolio. It’s always a bit scary when one starts to trade a new market, where a lot of information is not available in English. My earlier investing years was very Europe and US focused and later when I moved to Asia I focused much of my investments on mastering investing on the Hong Kong exchange. I know feel I have a good grip of the western markets + HK/China. The become a truly global stock picker, I have over the past 2-3 years tried to widen my scope to other more undiscovered markets. I firstly focused on Italy but struggled to find real gems to invest in there (the market is still clearly on my radar). I then shifted my focus to Poland, a more emerging market than what I previously invested in. The companies have very tiny market caps and one has to accept poor liquidity to buy anything except the 5-10 larger companies on the list. The one big market I have left to look at would be Japan. I know there are tons of interesting companies there and I have from time to time been close to pull the trigger, but so far not.

Exceptional return in an exceptional year

I’m both extremely pleased and somewhat surprised over my return in 2020. With twice the return of MSCI World and at a lower standard deviation (measured on weekly data), it’s my best year since the blog started from an outperformance perspective. When I say that I’m surprised it’s because how strong the US tech segment been, which has a large weight in MSCI World. I have had very little to no such exposure (perhaps you can count LiveChat and JOYY in that segment). If you look at the below table of where most of that performance was created, it’s almost all from holdings that I added during 2020 (holding period less than 1 year). Many of my 2020 losers are my long term holdings such as Nagacorp and Dairy Farm, so activity has definitely paid off this year.

Thank you all for following my blog all these years, if you do enjoy it, please subscribe go get all my posts in your mailbox.

 

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Portfolio walkthrough – short comments

It’s high time to review my holdings and if anything changed in their investment thesis. This will be a monster post, for me it’s a great way to review all my holdings and make sure I stay up to date. For you, if you hold or are interested in one of these stocks you will get a quick “what’s the latest” with some sprinkles of why this is a great company (or not anymore). As a bonus there is a short elevator pitch of my two new holdings.

I stopped posting updates for every portfolio change (instead found under Trade History tab), so I have some changes to comment on: MIX Telematics left the portfolio and Lvji entered and exited without comment from my side. MIX Telematics was a case of having too high exposure to the oil industry in the US, I don’t see that coming back at all in the same way as in the past. This was something I did not understand when I invested, properly hidden oil exposure and a mistake on my side. Lvji was a tech play on travel guides for Chinese, but soon after taking a position some twitter friends alerted me of doubtful accounting. I looked at it myself and couldn’t really feel comfortable, better safe than sorry I then sold at almost the same price I bought.

Now on to comments on all my current holdings from top to bottom in the table below.

Press “read more” and enjoy!

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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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