I just wanted to give a quick heads up that a short report is out on one of my holdings.
https://www.cloudythunder.com/
Quick thoughts are that there seem to be some merit to their claims, I dont think the company is a zero though. Just less profitable (or even loss making) than it appears if they are right. They dont seem to have been so fraudulent as that all sales are fake.
Also the company is listing in mainland China. Its very unusual for Chinese to “China hustle” their own mainland population. One thing is Hong Kong or US ADRs, but you are in deep trouble if you hustle the mainland population. So the report has some parts that are hard to believe.
2019 was a disappointing year from the perspective of not nearly meeting the returns of my benchmark MSCI World. On the other hand the portfolio is at all time highs and has in total delivered a fantastic return since I started the blog. The Global Stock Picking portfolio is up 14.3% in 2019, that compares to MSCI World Total Return (i.e. including dividends) up 28.4% on the year. The GSP 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 7.8% of my portfolio during 2019. The volatility of my portfolio was 9.7% vs 9.8% for the benchmark.
I concluded my last years performance review with that I thought we had now entered a bear market. I probably held that belief sometime up until the summer. This created a certain defensiveness in what I invested in. For example I increased my positions in tobacco companies and other more value related positions. In hindsight I also spent a little bit too much time on my Speculative investment bucket, with a number of investments, like JD, UR-Energy, Irisity and Swedbank. I made some attempts at looking at new sets of companies, like 3D-printing. Where the holding AK-Medical became the best “play” on this theme. This became a very lucky timing, since the stock doubled in a short time-frame after I bought it. One of few holdings really saving my performance during 2019. This was also the year of the trade war escalations and Hong Kong protests, which put a dampening mood on the Hong Kong exchange, where I have a number of holdings. But the company most directly affected by this that I hold was Dairy Farm listed in Singapore. It’s most profitable market Hong Kong was hit hard and Maxims which runs restaurants in HK is now hated by a large part of the population.
Conclusions
Some conclusions has emerged for me during 2019, not at least from my post the other day where I went through all stocks I sold. By the way, that post is now updated with all the missing graphs and comments. Apologies for this, it was a long write-up and something went wrong when I was cutting and pasting pictures/text. Let’s move on to my 2019 conclusions:
1. Only buy companies where I have an edge in my investment
If you are a frequent reader of my posts you will have seen that I talked more and more about edge in the past year. I only want to only invest into companies where I can at least hypothetically see that I could have an edge in my investment. The easiest example of a clear edge is that the stock is overlooked. Often stocks are overlooked because they are small illiquid companies, but it could also be for other reasons. This gives me an opportunity to buy a good or great business to a low valuation if the few market participants looking at the particular company has not managed to price the security “correctly”. There are many other edges, which I have explored and mentioned in other posts. This means I will more or less never invest in a company like Microsoft, or Apple, although they are fantastic businesses. Does that make sense when they have been among the stocks that performed best in the world in 2019? Well, to me it does, because if I’m buying stocks without any type of investing edge, I might as well just buy an Index ETF! Actually the end goal of this blog has been to explore if I’m good enough at this to long-term beat the benchmark. Against all the clever people out there in the world, managing to pick a basket of large cap stocks that significantly out-performs the benchmark, is very very hard. I think there are some people clever enough to do just that. I’m not that clever, I need something easier, where I have a head start to do well. I took quite a lot of action in the portfolio during the autumn this year due to this: Portfolio changes.
2. Focus on finding good and great businesses at as reasonable prices as possible
It was clear from all the companies I sold, that not nearly enough of them are actually solid businesses fundamentally. The graphs I presented of all sold stocks, where stock price graphs, and that can deviate from fundamentals obviously. But not for so many companies over such long periods of time. I hope I have improved already since those investments I sold back in 2017/2018, because too many of them where pretty poor companies to hold long term. Which means I should not have bought them in the first place (always easier said with hindsight). I like to buy growth at a reasonable price but I need to get a touch of more quality into these businesses as well. I hope if I redo this exercise of “here are all the stocks I sold in 2019-2020” sometime in 2023, then a big portion of the companies I sold would still have done reasonably well. The portfolio should be of such high quality that the stuff I sell, I sell because I found something even better to put in the portfolio, not that the previous investment was fairly mediocre to begin with. Of course that has never been my intention to invest in something mediocre, but I need to come up with more solid investment cases and less opportunistic/turn-around etc.
3. I’m good at swing trading
I think a third conclusion from tracking all my buys/sells, I’m actually pretty good at swing trading stocks. I have since I was a kid been sitting watching stock graphs. Somehow I have a pretty good feel for when companies are at infliction points and I manage to pick them up quite often just before they rally. On the other hand I managed to find a few pretty terrible infliction points on the downside as well, like buying Dignity 2 days before a -50% day, that still hurts, a bit. So I will keep my Speculative investment bucket, because it suits me as an investor, I just need to be better at only swinging the bat at the best cases I see and then focus most of my time on point 2 above.
I noticed over the past months that a lot of my initial holdings, from when I started the blog has been performing extremely well. I always try to evaluate if what I have been doing make sense, or if I should change my investment strategy. So I decided to check, how well has my starting portfolio done in comparison to my real portfolio? In my real portfolio (as you know) holdings have been sold, trimmed and a lot of new holdings have come into the portfolio. Has all the work of throwing out old investment cases and adding new ones added significant amounts of alpha, or has it even been destructive?
My assumption is that I just hold the starting portfolio from March 18th, 2016. Since one of my holdings, SAFT was bought by Total, that holding is just placed in cash. Because of this cash levels will be high and on average at similar levels to my real portfolio.
Starting Portfolio
So how will this starting portfolio hold up against all my “clever” moves where I took profits in some holdings, cut my losses in others and found new good investment cases?
Somewhat crushing results, where I’m exactly neck and neck with my starting portfolio. Looking at risk adjusted returns I’m slightly slightly ahead. My real portfolio had a standard deviation of 12.4% versus the starting portfolios 13.6%.
How the result was achieved for the Starting Portfolio
What happened?
Basically the explanation is that I made the mistake of selling two holdings that did extremely well after I sold. Zhengtong Auto and Highpower International. I didn’t have the staying power and bought into other holdings that did well, but not nearly as well as these two. Other than that, I made the right decisions, exiting many of my other holdings like SAS Preference shares, Criteo, Ctrip and MQ holding, all four under-performing quite a lot.
But how ironic to end up in the same place after 1.5 year of struggling to beat the benchmark. Hopefully I at least learned a thing or three, that’s the main point of all the hard work..
After listening to interviews with both the CEO and the largest owner of Casino and betting affiliate Catena Media, I started to understand this niche market a bit better. I decided to take a position in this gaming industry niche. Gaming affiliates has been a pretty murky business, with a high number of very small companies (more or less one guy sitting at home creating a homepage). But it has also been an insanely fast growing and lucrative business. Catena Media is organically and by acquisitions building up to be a large dominant player in this market. They recently took a step to invest in the Japanese market. It probably won’t be easy to break through in the Asian markets, but the Swedish gambling companies are very much at the forefront in general. So this can be a first step towards new growth for Catena.
This is a high risk position, but I feel I have space to take risk in my portfolio right now, cash-levels are very high and I lowered my Beta my taking less bets on China and buying more quality companies. So I initiate this at a 6% position, since I believe it is a good entry point, where the market has oversold this holding on scares of majority owners exiting the company. Which was in a pretty clear way denied, by the majority owner in a recent interview. Also the company looks cheap valuation-wise. A full analysis might come at a later date, but right now I’m focusing on finding more new investment cases.
A quick post to state that as of today’s close I sold my full remaining position in BYD.
EV mania
When I started this blog 1.5 year ago the first EV mania wave had passed, Tesla had been treading water in the 200 USD range for a few years. But I was convinced that this rally still had more steam, the wide public had not yet caught this massive change that was upon us. Now I would say everyone is on the “EV-train”, in the sense that everyone now believes EVs will take over the world in the coming 5 years. I have no idea how far this EV-mania can go, perhaps are we still in early stages and valuations will double from these levels. But I feel the easy money has now been made. I was right, EVs are taking over, now the whole world agrees and anything touching EVs is rallying like no tomorrow. Look at the Global X Lithium & Battery Tech ETF share price and traded volumes.
So for me this it the time to start being cautious, be thankful that the investment thesis worked and stop being so heavily tilted towards this theme. Outside of this “blog fund” I also been invested in this ETF, which I now also sold.
Portfolio wise I still have 2 holdings geared towards EV exposure, LG Chem and Coslight. For the long-term I keep LG Chem, will I believe will be one of the big battery providers to the western car makers. I also keep Coslight which as a small cap is still at a low valuation, and I think there is a potential for a multiple expansion if this mania continues. It has lately also sold parts of its battery factory for laptops, to gear itself more towards batteries for the Chinese EV market, which I don’t think the market really picked up on (yet).
So once again Rottneros delivered a solid top-line, but magically did not transfer fully to the bottom line. This time the company just refers to “non-planned costs”. Next quarter (as has already been guided) will also be bad due to a problem at the Vallvik plant, and the quarter after that is the seasonally weak quarter, due to the planned stop of production. I start to feel like this is a broken record with the same tune, there is always some reason why this quarter is not being as profitable as it should be. With the risk of me becoming a type of investor I don’t want to be (thinking too short term) I anyway decided to sell today. I decided that if EPS for the quarter came in under 0.3 SEK for some reason, I would sell, and I stand by that, although it might be somewhat short sighted. I can’t fully trust this company since they don’t seem to deliver like they did 3-4 years ago, so out it goes.
One should mention that pulp prices are extremely favorable at the moment and SEK still very weak vs USD and EUR. They have a golden opportunity in this market and I think with the top-line production increase, the market traded this stock back to flat for the day. Also there is a dividend that is received as of tomorrow. And that makes me happy, since I then managed to get out with a decent profit (+8%) for this trade, although in my view it was a shitty bottom-line given the nice pulp pricing currently.
Quick Portfolio update
Unfortunately my plan of lower portfolio turnover is not working out that well, and my cash levels (after Rottneros sell) are now very high again (~18%). Still struggling to find good investment cases, might use the cash to add in some of my names that have been trading very weak lately, another update will follow.
Looking at my portfolio, after suffering massively from the weak performance of my previously largest holding Coslight Technology (I will revisit this stock as well), my portfolio has now kind of recovered on the rising market tide. As you again can see, my portfolio still has the higher correlation with Hang Seng and follow upwards as soon as the index does well.
A couple of stocks have lately particularly helped performance
Skandiabanken – solid results lately with good lending growth. The market is also starting to reprice Norwegian banks in general, but slightly also increasing Skandiabankens P/E multiple more in line with the large banks, in my view with a higher growth rate, it should rather be on a P/E premium. Let’s see how that goes.
Ramirent – A stock that I believe is this perfect late cycle holding, which with it’s leveraged business model, will start a similar exponantial stock performance as 2006 to 2008. The latest quarterly figures were a strong beat and the stock traded up significantly.
YY – It would have been better investing in the competitor MOMO, but this has also been a good investment. Results that came out were pretty decent, market having a bit of a hard time valuing the company, its now a story of two parts. A solid user base of highly profitable user listening to girls singing and playing, only one problem, it has stopped growing. And another leg of extremely strong growth in the online gaming broadcasting, again only one problem, it’s currently not profitable (slight loss). My thesis still stands and that is why I like the stock, the singing girls is a value play and generates wonderful cash-flow to the company, in my mind you get the tremendous online gaming business for free and currently almost only paying for the cash-flows generated by the first part. Although I’m sure Mr Market has valued this company on the margin as a much more complex mix than that
A couple of stocks have lately been real dogs
Coslight Technology – I also expressed this in my hangover post below, but the stock continues to underwhelm. I think the market is scared of the potential price pressure on batteries, lead by Tesla/Panasonic and their Nevada factory ramping up, in combination with the short term oversupply in the battery market, which I mentioned before. The facts are still that this company at least in the past has held a cash-cow position in a smaller pc and mobile game company (which as a separate company should trade at high multiples). On top of this we are looking at a huge ramp up in demand of batteries over the coming 5 years mainly from EVs, but also Power companies building reserve power solutions, electric motorbikes and our continued usage of phones/laptops/tables/drones etc. Maybe maybe the pricing pressure will kill this company, but it might as well be the car companies that get squeezed in the fight for survival and the battery companies will be in a solid position to deliver the most important component to the car, in the same way as the engine used to be that component.
Xtep – Here I can’t see any major news, the stock is very tired, trading down without any news. Citic securites initiated coverage with a buy rating a few days ago but the market just responded by trading it down a few percent more. Either this is a fraud, or a bargain, in China you never know. What I can say is that in other cases, like Zhengtong Auto I have also been shrugging my head for a long time and then the stock suddenly do pop, unfortunately as you know in that case I sold before the pop. But momentum in this stock looks awful at the moment.
Well I didn’t get many days of celebrating a first year of strong performance, the hangover came quickly and pretty brutally. I was very upbeat about the upcoming annual report for Coslight Technology. They even released a profit alert a few days before, which I took as support that second half figures would come in strong, just as the first half had. But I couldn’t have been more wrong, the second half did not come anywhere near the first half. The market was rightfully pretty brutal today, trading down my largest holding by -20%. What one could ask though is, how the hell is the HK exchange rules set when a company is obligated to send out a positive profit alert before its year end figures are released, which refers to the old information released in H1. You live you learn, but this time it cost me some money too.
So what happened?
Lithium battery sales did not continue to increase, but rather flattened out. So even if it’s profitable business it did not grow profits or margins (both flat).
The company is not able (or does not want to?) to entirely cut the lead acid battery business (I had thought they were switching over the last production to lithium only), and this still loss making (20 cents per share loss only from the lead acid battery for H2).
The gaming business which has been a solid cash-cow came with a very weak H2, Average half year profit has been in the 15 cent range, in now came in at 3 cent. This was the biggest surprise for me.
So H2 profits for the company became a disappointing EPS of 0.04 cents. Where I had expected around at least 20 cents, but hoped for 25 cents.
I’m not ready to give up yet though, so I keep my shares.
Lithium battery sales long term case still looks strong (EV S-curve coming in a few years), although many companies are ramping up production, there is far fewer that has Coslight’s track-record of selling quality batteries (not even Samsung SDI has managed that as well as Coslight).
Still hopeful that they will cut their losses in the lead acid business, or that it turn profitable (competitors in lead acid like Tianneng has been talking about better margins going forward).
I hope the gaming business can bounce back, although I do not have much support for that more than that historically over all the years they managed to keep and grow this business. I believe if they spun out the business with it’s track-record, given how hot mobile gaming companies are today, just that company could be worth somewhere around 30-40% of Coslight’s MCAP.
Sell Summit Ascent Holding
Another report, on the same day, also disappointing. The volume ramp up I was speculating about, did not materialize in Q4 and I exit this position which was my smallest holding and more speculative (high risk/reward). In hindsight I should have been more patient to wait for a better entry level in this more speculative trade and this would have been a profit.
This is going to be a very short update. Life has been very busy lately, moving country and a new role at work. I expect to start writing more frequently again. I’m currently in Shanghai on business trip and the latest on the ground data point is that regulators are putting in place very strict capital controls. Most of the controls has been through as it is called “window guidance”, where they tell banks that they need to change their procedures for controls of capital flow. Not good and many call this turning back the clock 10 years in terms of capital opening, something that needs to watched closely. I don’t think this has got enough attention in media and markets take it a bit too calmly – but maybe it’s just me that is wrong.
Hong Kong stocks are lagging, perhaps because of the above mentioned reasons, but it feels rather like more short term worries over US Gov rates and new scares that the Chinese property market is wobbling. Even so I find the significant pullback in some stocks unwarranted. In particular Coslight, I will write a longer update shortly, but if anything the business case for Coslight is even stronger. I think the stock is easy to manipulate with fairly thin volumes and it is now oversold, I’m using the cash I have left to make it a high conviction position again. More portfolio changes will follow soon.
The Swedish Krona (SEK) is plummeting further after the Riksbanks latest communication of a lower for longer scenario. In a fairly short period of time the Krona has gone from fairly strong to weak, particurlary to the USD which strengthen against more or less everything. In a perfect world a stock denominated in SEK, with earnings in EUR/USD should correct its stockprice to reflect the now weaker SEK. But we do not live in a perfect world, and potential bargains could exist out there.
Winners on the weak SEK
A company which is a obvious winner on the weak SEK, has its costs in Sweden but sells all its products abroad. Good examples of such companies are Swedish pulp and paper companies. They usually source their timber/wood locally, use electricity from Sweden and has its labour costs in Sweden. Whereas the pulp is sold on the world market, with prices set in USD.
Most such companies are currently trading at high multiples at a point in time when pulp prices are at high historical levels, but i think i found an exception in the small cap lists in Sweden. The company is called Rottneros and has a somewhat troubled history ending in a rights issue in 2009. Since then they have shaped up considerably and the stock is in a nice uptrend and still trading at attractive multiples. Given the SEK plunge the operating margins are looking very nice indeed. On top of that the electricity cost is hedged, and they are rolling into lower and lower locked prices.
Risks are obviously if pulp prices on the world market plummet, I have no edge at all to predict those, but i can note that they are high from a long historic perspective.
Since Im sitting on the beach writing this i will do a more proper write up at a later time. As of close yesterday I have taken a position in Rottneros of 5% of my fund.
Ericsson
One word about Ericsson as well, the share price has continued to fall sharply and this is also a company benefiting from a weak SEK, as well as from an US investors perspective 44 SEK per share is a lot cheaper today than it was a few months ago. Im willing to continue my Value bet here and take another 2% of my fund to double up the position in Ericsson.
Short update on changes in portfolio. Im happy with the performance of Netease and chose to close the rest of my position on todays closing price. This trade has given me an average return of almost 50% in about six months time. Great company but current valuation has as much to live up to.
I have become more skeptical about MQ for various reasons, mainly due to online shopping which seems to eat into margins of all clothing companies in a way i didnt expect. So I take my loss here and sell the full position. Right now i feel comfortable sitting on some cash (lowering my beta) waiting for new good opportunties to arrise as well as allocalate to new investment ideas.
