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).
All in all this reduced my cash balance from 12.4% to about 7.7%. Comments as always welcome!
14 thoughts to “Portfolio re-balancing & some thoughts”
On Pax Global, do look out for working capital issues – potentially increasing receivables days from distributorship model in overseas market, and increasing inventory days from longer shipping time to overseas markets and increasingly more components for smart/android products
Yes that seems like a quite likely short term scenario, given covid-19 and probably a lot of businesses even going bankrupt. The company has an excellent cash buffer to withstand that though..
Why is it short term? Aren’t they the nature of the business and sales models the company adopted, and hence is structural and medium or long term unless the company has a way to change its business model (of which it would have impact on other things)?
Maybe I misunderstood you. Short term there will probably be customers who have ordered POS equipment that goes bankrupt. When covid19 is over in steady state, yes this is business of selling physical goods around the world, this creates inventory management issues in general. PAX has for some time now sold products on the other side of the world, so I don’t think its necessarily something that would get worse going forward.
I’m not sure if PAX is going to do this, but rather with scale, one can consider using banks for more efficient cash flow management. There are different types of supply chain financing solutions that banks are happy to provide to minimize the working capital needed. In the end PAX business is no different than any other company that produces goods sold all over the world.
Regarding Pax Global (327.HK);
1/ Have you looked into majority shareholder Hi Sun Technology (China) Ltd. (818.HK)
which shares the same office building in Wanchai?
Also, Hi Sun’s major shareholders Kui Man Chun & Che Fung?
2/ Who are Pax Global’s main competitors for their payment terminals?
I think the office thing is normal, they list a Hk adress but the company is defacto having its real office in China. More interesting is the part of Pax competitor being owned by Hi Suns shareholders. What company is this competitor? Also not sure how you can define Pax main competitor given how many markets they operate in.. still interesting digging. Please elaborate
Two other companies that may fit well in a global stock-picking portfolio;
1/ Corbion NV; http://www.corbion.com/
2/ IMCD; https://www.imcdgroup.com/en/investors/key-figures
Both are Dutch companies that operate globally.
Corbion was brought to my attention while listening to a John Hempton interview last year.
It’s an example of a company that makes small but key components for products.
Therefore, they are less price-sensitive and allow for steady margins through business cycles.
IMCD was a more recent discovery after they became distributors for Corbion’s food additives in Australia & New Zealand.
IMCD i looked at in the past, good company and expensive. I will look at Corbion! Thank you!
Have you looked at Genting Singapore? Trading at a cheap valuation for a casino if you consider the all that cash on their balance sheet.
Hi Giorgi, it was a long time ago I looked at it, not something I follow. Thanks for the heads up, I will take a look!
I have taken a look now. You are right, the stock is pretty cheap, might be an interesting candidate. Given the large exposure to Universal Studios etc this becomes a bet on Singapore’s popularity as a tourist destination. I have been in Singapore quite a lot, it’s a fantastic place for a business trip, one of the absolute best in the world. But as a tourist destination it’s not fantastic in my opinion. What Singapore does well though is being a stop-over for flights, so I think a lot of people do short visits to Singapore. I would have to make up my mind around this and decide that Singapore will see good visitor growth, before I invested in Genting.
Another issue would be the terms that the casino is owned under. I haven’t read up on the details of Genting, but I know about this in general in Singapore. The government gives were short periods that the company owns property or in this case Casinos in general. At some point I think Genting needs to pay up or the Casino goes into state ownership. So the DCF of future cash flows is not endless..
You did only state the markets view, but not your own view, I believe. Did you intend to lower your cash quota? If so, wa sit based on the feeling that equities are the better alternative compared to cash for the next x years?
Well indirectly I did so by reducing my position in LiveChat, clearly the company has partly moved on being in the right space, SaaS company with good growth. I would say my Kirkland Gold investment is because just like you say, Im a bit scared of holding cash right now.