When investing in a company I do my best to understand the products the company is selling. I want to understand the environment the company is operating in, competitors, brand value, together putting the company into a context. I try to understand the management of the company and where they want to take the business. I then try to look long-term if the industry has headwinds or tailwinds and how much sales is affected by the general market cycle. All this and more goes into my valuation of the company. But even when I try to cover all bases, the stock market keeps throwing curve balls left and right, I had my fair share and there will certainly be more in the future. The other day it felt like I was dealt another curve ball.
The management of Edgewell Personal care, went out bought a shaving company start-up called Harry’s for 1.37bn USD. Edgewell with an Operating Income of some 300m USD, net debt of 1.1bn USD and Market Cap (pre announcement) of some 2bn USD, thought it is in a good position buying a start-up for 1.37bn USD. Worse than that, they pay 1.085bn USD in cash and very little in stock. This brings debt levels to seriously tough territory, at a time when I at least believe we are close to the peak of the cycle. I thought I bought a low risk defensive company, it suddenly transformed into a equity position sitting on a huge debt rocket.
Harry’s is one of the competitors (Dollar Shave Club being the other) that I mentioned i my analysis of Edgewell when I invested. They are taking market-share from Edgewell, Gilette and BIC over the last years, particularly in USA. Harry’s top-line revenue is expected to be about 325m USD in 2019 (growing at 30% historically).
They do own their factories and it has been an impressive growth case, so of course it isn’t a worthless investment, it’s just a combination of overpaying and overstretching Edgewell’s balance sheet. I’m so disappointing in Edgewell throwing in the towel to create this themselves organically. By acquiring Harry’s it’s like admitting to not being able to compete with these guys. That speaks volumes to me about the management of Edgewell. At today’s close, I sell my full holding in Edgewell. Obviously I wish I never invested in the first place, given that I now take a -16% loss on the holding, but I never saw this coming. Investments really can surprise you in so many ways..
Other thoughts about my holdings and the market
Markets have come off a few percent from their highs and my portfolio has under-performed quite a lot the last few weeks. Some of that poor performance obviously is related to Edgewell, but there have been other holdings performing poorly too. Trade war is a big worry, especially for my portfolio that feels fairly exposed to this. I’m not very positive on us seeing a deal anytime soon, there is too much pride in China for that. At the same time I changed my mind about the so often cited coming China crash. I still think it will come, just not this year. My bets are on a pretty ugly 2020 in China, with serious deterioration in their economy in the later part of next year. These things are impossible to predict, but from everything I read and hear, it seems like we have already passed the peak. It will just take a while for slow moving things like the property market to start to wobble and finally fall.
My more defensive companies like Philip Morris, BATS, Swedish Match, Diageo, Dairy Farm, Gilead, Inditex and Essity has not really done that much lately. They have more or less performed in line with the market or slightly better. Below I instead focus on the more high risk holdings:
One of my largest holdings, the quite illiquid company Tonly Electronics has traded down. This is quite warranted given the Trade War that to some extend will affect the company. I’m still hopeful that the company will be able to improve margins during this year, which really is the key thing to be watching in the next report for the first half year. The fairly good dividend yield, which was paid out yesterday, at about 5% yield is also reassuring. Tonly was an opportunistic investment where I see a very deep value case, but not necessarily something I want to hold for another 5 years, as long as some of that value is unlocked at some point.
A holding that has been a long term holding, but where I numerous times discussed if it really should be. Nagacorp came through with how they plan to finance the third stage of their expansion in Cambodia. After reviewing the terms, I actually think they are quite fair this time. So I decided to increase my position size here and for now throw away my doubts and really firmly put this in my long term holding bucket. I increase my position size to a 7% holding, nearly doubling the position size, more or less back to where it was before I started to reducing my holding. Somewhat ironically the average selling price of my shares is exactly where the shares are trading at now, 8.96 HKD per share. But the situation was different then, I very much doubted that the majority owner would come through with a decent deal for everyone. Now that he did, it changes a lot for me. I many times stated I would be happy to have a very large holding here if I just could trust management. The trust gauge is not really at 100% yet, but it’s much higher than before and this money printing machine feels like a stable holding at 7% weight.
One of my original holdings since I started the blog. As explored the Electric Vehicle theme back 2015-2016 most signs pointed to that the real S-curve effect would start around 2020. I remember telling colleagues back in 2015, isn’t it cool that in just 5 years all big car companies most likely will be launching full EV line-ups. That more or less have come true, maybe with a 1 year delay until we really see them in every car dealership. Even if I got the EV theme correct, the company Coslight has not turned out as I planned when I invested more than 3 years ago. Now when EV sales numbers really are starting to climb, I don’t think its the right time to sell this company. I’m down significantly, on not really any news. The company still also has its game software development which is a profitable cash generating business. There is a lot debt here as well, which has been my main oversight when investing. So I might get wiped out from the debt, but somewhat stubbornly perhaps, I want to see this through.
Finally my speculative holding Irisity has lately been on a bit of a roller coaster ride. But fundamentally on the company, I’m even more bullish than before. First quarter sales on Monthly Recurring Revenue was fairly solid showing continued strong growth (from low levels). The latest news about HikVision also being banned, just like Huawei, plays perfectly in the hands of companies like Irisity. The largest competitors in this space for sure are the Chinese, with companies like Sensetime having huge software development teams on video-surveillance. If western companies avoid or even are banned from using Chinese tech in this area, a lot of the competition in the market is removed. I’m considering to increase my holding further, but will stay put for now and hope I can increase and a better entry level.
That is all for now. I’m trying to find time to publish a real deep analysis of some new ideas I have had for some time now. But you will have to wait a little bit longer for that. Comments as always are appreciated!
The portfolio reached a new all time high on Friday last week. It’s not very long ago I wrote a post where I shared my thoughts around the market. I thought then that we had started a cyclical downturn and the bear market had started. Suddenly the market feels stronger than ever again. My gut is telling me to sell everything and run nowadays (my gut is always early). Well I will just continue to pick stocks and do my best to outperform, whatever the markets generally decides to do. That being said, with the sell of Cheetah Mobile and now UR-Energy, I am lifting cash levels again, making the portfolio more defensive, at least for a short while.
My portfolio as of Friday last week:
So why am I selling my full holding as of close today? I didn’t even come around to write a post about this, as I probably earlier promised to do. First of all, this was a speculative holding, just as Cheetah Mobile. Second, the spot Uranium price really is stubborn. Even though so many fundamentals says its bound to go up long term, it continues to stay at rock bottom levels. A holding like UR-Energy then becomes like a far out of the money call option, which is bleeding time value as I’m waiting. Now I believe the stock has moved up only for the petition they have sent in, that USA should secure some yellow cake production from North America, and not rely on places like Kazakhstan for the supply of uranium to it’s power-plants (and perhaps nuclear weapons). So, maybe this will go through – I honestly have no idea. If that happens, there is probably much more upside here, but I have no clue to guess the chance that this petition is accepted. Also that was kind of a kicker in my investment case, not what I built my speculation on. My investment case was built on, that the world would wake up to nuclear and how much we really need it. To meet climate goals and as base power source when moving more to wind and solar. But no, it does not seem to happen at the speed/pace I was hoping for. Lastly I have some new upcoming investment cases that I will present in due course, I need the cash for this/these investments. I’m happy to take some money of the table here, netting a 10% gain on this speculative position.
JD.com was a tough investment case, continuing to fall sharply after I bought into the company at 25.7 USD per share. This was an investment in my Opportunistic bucket, after allegations against the CEO and majority owner Richard Liu. I thought the stock looked extremely cheap and had a unique position with the logistics network of warehouses and quick deliveries. Far better than what Alibaba could muster. This has proven not entirely true, this article sheds some light on the situation: JD vs Alibaba in the last mile: what’s happening behind the Great Wall.
Bottoming around 20 USD per share, JD.com now has rebounded trading around 29 USD per share. A nice bounce and also a gain for the portfolio, which during the same period is more or less flat. What I spent the last few months to consider is if JD.com is a worthy long term holding in my portfolio. I have come to the conclusion that it’s not. First of all the whole allegation against Richard does leave a bit of bad taste in the mouth. Maybe more importantly, Richard Liu seems to have fallen somewhat from grace in Chinese circles. In a country built on relationships and government contacts, this should not be weighted lightly. Secondly, just some personal reflections I got from people that know this company more from the inside. JD.com apparently is not at all as culturally open as many other tech companies, Richard himself does not come from a upper class background where he studied abroad at a young age. This seems to be reflected also within the company from what I hear. In many other tech companies it is common with droves of Chinese who lived/worked/studied abroad and recently returned to the “motherland”. I think this is an issue long term for an innovative company. Thirdly this space is so extremely competitive, that although a current low valuation, this does not make it into my long term portfolio as it currently stands. Therefore the opportunistic case kind of has played out, perhaps I could ride the positive momentum a bit longer, but I think I found a more interesting case. Therefore today I sell my full holding in JD.com to instead buy a position in..
From one controversial investment to another. Today is the last day Swedbank trades including a dividend of 14.2 SEK per share, with a current price of 142 SEK, that gives exactly a payout of 10%. I have followed this case very closely, it actually rather started when the Danske Bank money laundering scandal came out. Swedish television has after that followed up with a number of programs, exposing Swedbank. Partly it is a risk of BIG fines, but partly this has also been poor communication from Swedbank management. Today the CEO of Swedbank, Brigitte was kicked out and the CFO becomes the acting CEO until they find someone to take the permanent role. The whole thing is pretty much a shit show, right now its very hard to say where the share price will bottom. I think we are at attractive levels now. The money laundering that has been done in Swedbank, is not nearly in the same scale as Danske Bank. Danske dropped some -45% in total during their scandal, Swedbank is now down some -31% percent, but the bank stocks had already traded down a bit on back of the Danske scandal, so I would say Swedbank is down some -36% to compare it with Danske’s drop. This is in my view too much for one of the most profitable banks in the world. So this becomes my new Opportunistic holding, taking the cash from the JD.com sell and buying into Swedbank as of today’s close for the same amount. The SEK is also traded pretty weakly, so one can hope that that could also give a bit of boost in returns, if it’s strengthens.
This is a follow up post of my recent portfolio changes. Below is my current portfolio, now fully invested, no cash. As always you find this picture on my portfolio tab. Another small push of about 0.5% is needed for the portfolio to take a new all time high.
Below follow my thinking on the portfolio changes I made:
I have been looking for a long time for some defensive consumer staples companies, with strong brands and a reasonable valuation. Many of the companies with strong brands are based in the US and the recent sell-off has created some opportunities in this space. As of close today I take a 4% position in Edgewell Personal Care (EPC).
Edgewell Investment Thesis
The investment thesis is two fold:
Attractive valuation for a very defensive portfolio of strong consumer staples brands. The company is taking efforts to reduce overhead cost and reinvest in the brands. From conference calls I sense a urgency from management to turn this around. But from a valuation standpoint a larger turnaround is not needed, even with no growth, the company is fairly valued at current prices.
The Gillette commercial will in my view strengthen sales of razors and blades for all competitors. Edgewell will most likely be the competitor that benefits the most, given geographical sales and how Edgewell’s brands are competing head to head with Gillette in physical stores.
I also reduce my Dairy Farm holding in half. Below is a shorter summary of my thinking around this two investments:
For 2018, the Global Stock Picking portfolio is down -2.5%, that compares to MSCI World Total Return (i.e. including dividends) down -8.2% on the year. My return is also including dividends but no trading fees deducted. In the counterbalance to fees, I do not calculate any return on cash, which has averaged around 9% of my portfolio. Given my fairly heavy China tilt I have in the past compared myself with Hang Seng, down -10.5% on total return basis. During the first 9 months of the year I struggled to keep equal steps with MSCI World, given the benchmarks high weight to the U.S. When U.S. markets sold off sharply towards year end I increased my alpha quite significantly against the benchmark. As you can see in the graph below, I was flat performance wise from mid-October to year end. This meant that my cumulative alpha reached it’s highest level towards year end. Total return is 47% since inception vs 22.8% for MSCI World. Although a negative year is not very encouraging, I’m still happy with the results, given how exposed I have been to China, which has had a terrible year.
Significant Portfolio changes over the year
Funeral investments – Dignity and Fu Shou Yuan
I entered into my demographics investment case beginning of 2018. It did not play out as planned, I changed my mind and sold both holdings in late November.
Brewery and liquor companies – Olvi, Diageo and Kopparbergs
Olvi and Diageo I still hold, I see them as defensive good companies, 2018 performance wise has been unspectacular. Probably Diageo is a bit too big company to deliver outstanding returns, it would be better to find something smaller, like Olvi, which I like a lot. My best investment was the one I sold, Kopparbergs, good return and the stock has totally collapsed after I sold. I think this was a case of my being a bit lucky with the timing, but also being ahead of the market understanding the cider business fairly well. Behind the scenes I have done a lot of research on other cider companies and how the big breweries are ramping up their cider offerings. I also done a lot of on the ground research, always checking stocks in stores around the world and in pubs of course. All of this made my change my mind on Kopparbergs prospects, selling has so far paid of very well.
Larger portfolio reshuffle – Selling Tokmanni, Microsoft, Catena Media and Criteo
This selling was partly due to my change in investment style. One reason was that these companies are hard to understand and grasp, therefore hard for me to have an edge against the market. Hard to grasp also means high maintenance to keep on top of what is happening. Performance wise selling these holdings was neither good or bad, on average they are about flat since i sold. So overall they were not bad stock picks, given that flat performance is also out-performing the market.
Special Situations – Radisson Hotel and Amer Sports
Radisson was my HNA related turn-around idea, which played out like clockwork. Somewhat luckily I bought at absolute bottom (24.1 SEK) and the stock repriced upwards before the bid for the company came. I choose to sell out before the actual bid at 35.8 SEK, whereas in hindsight, like one my readers has pointed out, it would have been better to keep holding it. Currently trading at 42.4 SEK.
Amer Sports was just that I had pretty good understanding of the Chinese company Anta, which had indicated a bid for Amer Sports at 40 EUR per share. The market did not really believe this, I saw it as something that made total sense for Anta. I got my shares for 34.1 EUR and sold at 38.37 EUR 1.5 month later, currently trading at 38.75 EUR.
HK listed small caps – Tonly Electronics, Dream International and Modern Dental Group
I have invested long enough now on the Hong Kong exchange to have confidence enough to invest in the smaller companies listed in Hong Kong. It’s pretty dangerous waters, mis-pricing can last for very long periods of time and many of the companies are not run with shareholders best in mind. Anyhow I found three companies which I believe had few of these dangerous characteristics, low valuations and fairly bright future prospects. To summarize, so far so good, all companies have out-performed the market, although under very low volumes. All these stocks are easily manipulated up/down 10% on a single day. When I bought Tonly and Dream Hong Kong was one of few exchanges that had sold off, and these stocks were in my view uniquely cheap. Now when valuations are coming down everywhere, they seem less and less unique for each day that goes by. It might come a point when these are still good investments, but there are safer options that are valued as low as these. Still I think there is some way to go before we are there.
Speculative/Opportunistic holdings enter the portfolio – UR-Energy, Scorpio Tankers, Irisity and JD.com
The timing (mid Sep) of me buying more speculative, loss making companies was not really fantastic. Just when the markets really started to tank. Given that it’s no surprise that these stocks have not performed very well, all of them being a significant drag on performance. Currently I have most hope to Irisity which is making some acquisitions, trying to consolidate Swedish knowledge on video/camera detection software. Given the market climate I might make some changes and lower the weight towards these type of companies, it might get very brutal in a bear market.
JD.com is also an interesting case, the rape charges were thankfully dropped. On the other hand China feels much more wobbly now than 6 months ago. I’m a few dollars under water on this position, a bit hesitant if I should keep it, due to this being 100% China exposure. As argued earlier, with stocks repricing, there might also be better opportunistic investments than looking for a bounce in JD.com.
Thoughts about 2019
I believe we have entered a bear market. Opposite to a bull market when the market grinds higher and has sudden drops downwards, I think one can start to see that markets rather grind downwards and have large jumps upwards. That is for me the strongest sign of a typical bear market. 2008 was a bit special, since that was more of a collapse. I don’t believe in collapse this time, rather a longer grinding bear market, like in 2000-2003. It’s not going to be very fun performance wise in the next few years if I’m right. It’s also going to be frustrating finding a good investment case, just to see it trade down another 20%, becoming even cheaper. On the upside, it will be like a kid in the candy store, with a lot of great investments and fantastic prices. Probably all of this will not play out in 2019, but continue into 2020 (if I’m right). As always these things are impossible to call and I will just try to hold my long portfolio through it all.
I recently read a book with the title: China’s Great Wall of Debt – Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle. The author definitely has a negative bias on China but it struck a cord with me. I had not read the book when I wrote this post: Rotate away from China. He of course summarizes it much more nicely in his book, but he brings up a lot of points, which is just in line with my own observations. Reading the book it kind of re-emphasized that something pretty bad is lurking in China and when it turns, it’s going to be ugly. On the flip-side China still has many weapons to fight a downturn. Just the other day PBOC announced a Reserve Ratio cut for the banks which will release a lot of liquidity into the Chinese market. I think the big bad ugly China crash is still some years away, probably dependent on how much of a downturn we now will see in the rest of the world.
After a very tough October, my portfolio has recovered somewhat and is in total down -1.6% on the year. That compares to MSCI World which is down -4.4% on the year. Both have achieved these returns, with the exact same volatility, 15.1% for the year (calculated on weekly returns). My correlation is 79.5% to MSCI World, which is rather high, but also somewhat expected. When markets fall correlation tends to increase between all equities (the correlation during 2017 was 64%). After being down to 0% cash, when I introduced my new three bucket investment approach, I’m now back above 10% cash after divestments in my funeral related companies and Amer Sports, which I will comment further on below.
Amer Sports – The Chinese are buying
When I launched my big portfolio change: GlobalStockPicking 2.0 – Major Portfolio Changes, it just happened that information came out about a non-binding interest from HK listed Anta to make a bid for Finish listed Amer Sports at 40 EUR per share. Having looked into Anta when I invested in XTEP, the other sport shoe producer I thought this really made sense. Mainly because Winter Olympics in China is coming up. So I used my new Opportunistic investment bucket to take a 4% position in Amer Sports at 34.1 EUR per share.
I wrote at the time: “My own expectation is that this should be priced at 85%*40 + 15%*29 = 38.35 EUR”. I think the market has caught up with my analysis now, given that the stock closed at 38.37 on Friday. I still think this will go through, but there are some small tail risks, that for example USA will block the deal. Usually these things also take quite a long time, needing Chinese approvals. So I’m happy to leave the last 1.5 euro on the table and close my position here. This netted my a 10% gain in USD (some currency headwinds) in a market which was down -9% for the period, very happy with that. As always when an investment goes well, you just wished your bet was a bit larger.
This is the second time I got a more short term bet right, where there was Chinese related corporate action around a Nordic company. The first time was the Rezidor/Radisson case (Adding Rezidor Hotel Group – HNA related idea) which also ended with a buyout from another Chinese company.
Swedish Match – Adding 30% to my holding
The producer of Snus and moist snuff which through countless of studies have proven to be much less destructive to your health than smoking. The stock has been on a wild ride lately, first the markets have been very positive on the possibilities for growth of Zyn in USA. Lately the focus seems to be elsewhere, for example that Swedish Match will not be allowed to sell it’s products in the rest of Europe. I think they have a terrific product as good as all the e-cigarette alternatives. The company is very well run and highly cash-generative. This is one of those companies I plan to hold forever, now was a good opportunity to add to my holding. I add about 30% to my holding as of close Friday, bringing this holding to 6.1% of my portfolio.
Defensive feels good in these times
For the frequent reader, you know that I have been skeptical of markets for quite some time. I have expressed this in many ways, but the main theme has been finding defensive long term holdings. Early on in the sell-off my defensive approach did not really work out, because the only thing that held up MSCI World, was the U.S. market and tech stocks in particular. Being underweight both was therefore short term not good for relative returns. Lately it started to work better though when tech “finally” stopped defying gravity. Defensive feels very good right now, but that doesn’t mean I want to miss out on the stocks with higher return potential, or very undervalued cases. I will hold true to my defensive style as long as the valuation difference to growth/value doesn’t become too large. Now I’m actually more excited about stock picking than I have been for quite some time. Today I find much more interesting investment cases than I did a year ago, one example of that being Tonly Electronics – Another Hong Kong value investing case. There are many more I have on my Watchlist and even some not yet mentioned there. The point of my dental series has been an attempt to find 1-2 companies to invest in, which are defensive health care companies I can understand. To summarize my defensive holdings:
Olvi (5.7%) – Finland/Baltic – Produces beer and other alcoholic and soft-drinks, selling mainly in Finland and the Baltic countries.
Gilead Science (5.2%) – Global – Biotech company with market leading products against HIV and hepatitis.
Essity (5.2%) – Global- New Holding Essity – Wood base hygiene products, like tissue paper, diapers, feminine care etc.
Diageo (4.1%) – Global – One of the worlds largest distillers with brands like: Johnnie Walker, Smirnoff, Gordon’s Gin, Captain Morgan and numerous others. Also Guinness is a large portion of revenue as well as its 34% stake in Moet Hennessy drinks division of LVMH.
Inditex (2.8%) – Global – The world famous clothing retailer Zara, so far keeps defying the e-commerce slaughter by producing outstanding clothes at a fantastically low price point.
Total = 53.8% of my portfolio is held in defensive companies or cash.
The above companies are a mix of daily needs, like food, clothes and hygiene and vices, like alcohol and gambling. All of the above holdings I’m confident to hold long-term, especially in a bear market. That doesn’t mean though that none of them will ever leave the portfolio. I try to think long term and get to know my companies well, something I didn’t appreciate enough in the past. Part of being long term is to not rush into the new investments, I will take my time and get to know new companies properly before investing. But if I find a new investment that feels much stronger than what I currently hold, the old will go out.
Currently thinking about
Lately I spent a lot of time trying the understand the Chinese tech scene better. There are a couple excellent podcasters out there who educate anyone willing to listen, on everything related to China tech. One thing that is very clear, is how extremely hot this sector is and how fierce the competition is. It seems to be on a totally other level than outside China. On top of that we have the Chinese government interfering in a lot of different niches. The competition and the intervention has again made me more negative in general. So the three of my holdings I’m currently thinking most about all have strong China and tech ties:
NetEase – Great company, with quality games and co-ops with western gaming companies. Given how much U.S. listed Chinese companies have been punished lately I think investors still really like this company, trading at a trailing P/E of 37 and estimated P/E of 24, is not dirt cheap. Obviously partly this is due to the halt in new game launches in China and everyone is expecting this to be temporary. Still, the government is showing who is boss and they won’t allow especially young people to be gaming addicts. Just as the funeral case, this hampers the upside for NetEase. Although I would argue that it probably very long term is healthy for the company to have more balanced customers and not school drop-out gaming addicts. The other aspect is the competition, which seems to be brutal. In Sweden a number of listed gaming companies have plummeted lately, it’s not that easy to keep delivering one of the few hit games everyone is playing. I have a hard time deciding of this a long term keeper or not, maybe the competition will eat up NetEase future? My Original Post on NetEase: NetEase – Chinese Gaming
JD.com – Here we have a company that is again fighting in fierce competition in the e-commerce space. The moat though and reasons for investing in this company is the fantastic delivery/logistics network they have built up. This is the hidden value in the company and the reason I invested. Some nasty details has been coming out about what the CEO has done in rape allegation case. It doesn’t feel very good to be shareholder alongside someone accused for something like this, but the company as such, I think is valued very low currently. If we disregard from personal feeling around the allegations (which is hard to do), this is in my mind a value investment at these levels.
Coslight – I haven’t written much about this company for a long time, it has been a big disappoint lately. This was an early investment for me on the theme of EVs and back-up power stations. The company has developed poorly due to needs for large investments which has been impossible with the already high debt levels (a misjudgment on my side). The solution became to sell of parts of the factory producing batteries for laptops. I think that was the best they could do out of a bad situation, but I’m not sure if they will be able to succeed to play with the big boys like Panasonic, LG, Samsung and CATL. Already back in 2016 it was clear to me I needed to wait until 2020, before EVs would start to sell in larger scale, now we are almost there. This should perhaps move into the Speculative bucket, but I held it for a long time and I will let this Electric Vehicle hype actually play out before I decide further on Coslight. The same reasoning goes for LG Chem, but there I don’t have doubt about their success, they are and will continue to be one of the market leaders. My original post of Coslight: Coslight Outstanding results
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:
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.
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:
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.
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.
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.
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”
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.
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:
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:
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.
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 Letter, EGREGIOUSLY CHEAP blog.
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.
“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.
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!
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.
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.
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.
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.
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.