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.
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!