Portfolio updates, new holding and other thoughts

After a fairly long period of lower activity both on the blog and holding wise, in these past weeks I have sprung to action to make some changes. Others like Swedish Match were force upon me, now to be fully bought out by Philip Morris. This is a quite a dramatic change to the portfolio and Swedish Match leaves both very big shoes to fill and a lot of cash to deploy. I also have a new holding to reveal, so let’s go through the changes. But first let’s start with some brief thoughts about the market and all craziness that happened during this year.

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Some random Macro thoughts

I want to start by less humble than I usually am. To all the “SaaS, profits in 2027, everything will go to the sky bros – I told you so! Everything really was a bubble – Everything is a bubble. This was not really unique insights, I think most people at some level understood that we were in a very unhealthy market, the question was rather when was it going to turn and some people got greedy on the growth gravy train. I tried to play defensive going into this year, buying cheap fairly defensive companies, but anyway managed to get mauled by the market. I kept my bet on China at a time when the whole world lost trust in the Chinese growth and what the CCP is up to going forward. That China has been hammered has not really been unfair, I’m as surprised as anyone that China is still sticking to Zero Covid. Although some unofficial signs these past weeks seems to point at that some type of shift is ongoing. To summarize, I knew markets in general were in a bubble, tried to play defensive but got caught in another type of risk and managed to get significantly mauled – ironic.

In my everything is a bubble post I argued that a factor that quite well described the “unhealthiness” and bubble sentiment of markets was how much growth outperformed value over the past years. Now as interest rates normalized there should in my view not be any such out-performance at all. At the time of writing the bubble post, growth had outperformed value with about 100% in the past 5 years, so where are we now? Still 40% out-performance since the same start date.

We are back at the point when the real craziness started in 2020 with mad stimulus. That we are retracing is a healthy sign in my view. If the high rates of inflation and interest rates stay longer than anticipated, there is nothing stopping this spread to turn negative, meaning value stocks out-performed growth. We have gone so far on this pendulum that value investors are a truly extinct species. Perhaps this only really turns around when growth investors are nearly extinct, nobody knows. In my view I still think you can do well in both camps, but it’s for sure easier to ride a tailwind, like was the case for growth until recently and how value has performed more recently.

A few more words on China, just like value investors have gone instinct, so have the China bulls. I partly identify in both camps, and I can say it’s been a very small group of twitters friends that have been crying together. The rest have gone very silent in the past 18 months. The Hang Seng index is down roughly -50% in the pasty 18 months, its been incredible rough, its been a true bear market. Luckily I have lived through 2008 and that has shaped me a lot to this day. Instead of ending up in despair I have seen this as excellent opportunity to accumulate shares in well run companies at tremendous prices. That said, I’m hesitant to further increase my China exposure in the portfolio, for example the Swedish Match cash I would like to find new European or US cases to deploy into. I don’t like to have all eggs in one basket.

So all in all my views are, US markets still have more downside as the growth/value spread also further normalizes. Europe and China are closer to bottom with more value in their benchmarks but I don’t expect any spectacular stock market rallies in the coming years, it will be hard fought to make 10-15% per year in the coming years (currently I’m -12% on the year).

Major holding changes

Swedish Match

I have already mentioned this and the biggest “trouble” is really finding something new I have such high conviction in as SWMA. The GSP portfolio is up 100% since inception 2016 and 20% of that total return comes from Swedish Match.

AK Medical

I really liked this story when I first invested – China aging and richer population needing hip and knee implants. The long time readers will remember I bought, got a quick double and sold. I then re-entered the stock as it was trending downwards. This became a typical knife catching investment. I totally underestimated how much China would reduce prices for medical implants. They totally killed the market margins through central purchasing and with that AK Medical. I was down terribly on this investment as the stock fell lower and lower. Clearly I was just wrong in this investment. What has made the stock bounce 100% from it’s bottom was that I think the market underestimated how large part of the total implant sales was awarded to AK Medical. Thanks to them being probably the best Chinese producer of these products, they won something like 20% of the entire market. So the company went from low volume high margin sales, to high volume low margin sales. I think this is unfortunate though, as obviously AK Medical can’t focus on quality and maybe becoming a global player over time. They now become a low cost producer. Perhaps this can turn out really well in the long-term with AK Medical winning a low cost segment also in other markets or getting even higher portion of the central purchasing sales. I can’t really stand though that not only is my investment reliant on the CCP from a general Covid closure etc perspective, but also that they decide how much margin will be left from their central purchasing. When the stock had bounced about 100% from it’s bottom I was still at a significant loss, I sold my shares at 8.77 HKD (my average was 12.2 HKD).

ZimVie – New holding!

I will try to find time to do a proper write-up of this one, so see this as teaser. ZimVie which is active in dental and spine implants was spun out from Zimmer Biomet early this year. This is a spin-off story which spun out at a bad time when the markets just started to sell-off. With low buying interest in general, in combination with a large proportion of automatic sellers (Index funds etc) which has no interested in holding this, sold at whatever price they got. So a high quality asset sold off tremendously and I picked up some shares when it technically seemed to had bottomed out and also fundamentals started to improve in the latest quarterly report. Both the dental and spine areas is something I researched a lot over these years. Again you have to be a long time reader of my blog to remember the post I did related to neck problems. But the dental topic has been more active given my three part series as well as updates I made along the way on my large holding Modern Dental Group.

Dental implants is a very attractive segment to be in and competitors like Straumann (listed in Switzerland) are trading at insanely rich multiples due to this. Also the disc replacement product ZimVie owns Mobi-C is not the cutting edge version anymore (newer probably better products have been launched by competitors), but a very important point is that its the FDA approved version that has the longest track record. This is worth a lot especially for doctors who are hesitant to switch from disc fusing, which is still the gold standard in the industry. All the long term studies on Mobi-C (and other disc replacements) are VERY clear, the patient outcomes are better with disc replacement than fusing. So the fight for Mobi-C is not really against other disc replacement but getting doctors to move from fusing to disc replacement and here Mobi-C wins, since they have the largest set of data on safety and long term outcomes. Given this assets (and others not mentioned) the stock is VERY cheap compared to peers and if they just stabilize the business somewhat and perhaps in some segments even can return to growth, this can be a 4-5 bagger.

The risk I see in ZimVie is that Zimmer Biomet loaded the company with a bit too much debt, but the free cashflow of ZimVie is very strong so it’s not something that stops me from investing. Sales are actually shrinking these past years (they also try to cut less/none profitable markets) there is a risk that this is a melting ice-cube type of investment where if the market does not revalue the shares in the coming 2-3 years, the fundamentals deteriorated to the point that the current share price is more in line with how it should trade. Given these characteristics I see the investment as more speculative than a solid long term holding (for now).

Links to relevant write-ups on spine and dental:

The Dental Industry – Part 1- Overview

Dental Industry – Part 2 – Labs and Distributors

Smartphone usage – ticking time bomb – Part 1

Enquest

I wanted to diversify into a new oil holding and not only add to Tethys (too much single stock risk) and I was very impressed by a write-up of Enquest (unfortunately in Swedish: https://aktieingenjoren.blogspot.com/). I have slowly built a small position here but then UK came down with increased taxes on oil companies based in UK, which Enquest is. So this killed some of the upside in the case, again I go a bit wrong on the Macro when I invest in UK. I’m clearly not up to speed on what goes on in UK politics etc. My plan before the tax increase was to scale this to a larger position that is now put on hold and perhaps I will even sell Enquest for something better.

Smaller other changes

I have also made smaller reductions and additions in my existing holdings. In general I have added to some of my high conviction cases, like PAX Global, Modern Dental Group and LiveChat. Reductions in Synektik and Nagacorp. These changes are on the margin though but has still concentrated my portfolio a bit more than before.

I’m super bullish especially on PAX which has nothing to do with the China sell-off, their products are sold worldwide and from everything I can see and hear the FBI incident was a nothing hamburger. Bank of America is almost only selling PAX point of sales machines and from just travelling the world one can observe that these machines are winning ground in a market which is in general is growing super-fast. A lot of countries have significantly accelerated credit card usage or like many do nowadays, tap their phone with a virtual credit card inside. This is forcing every small and large business to invest in this and PAX is in a leader position with the best proven Android products out there. This should not be a P/E 6-7 company with a 5% dividend, P/E 12-14 with a 2.5% dividend is a reasonable low valuation, so 100% upside in my view without stretching the case at all.

As it stands this is the current portfolio: