June Week 3 - Worse of the Worse

Worse of the Worse 

Portfolio Review

Well, after two good weeks and a comment that could only come back to bite me in the posterior, consider yours truly well and truly bitten.

As much as I don't like losses, I do love how the day you feel good about yourself (or more accurately start feeling cocky), the market comes smacks you in the mouth then kicks you in the gut and stomps on you some more.

Went from 12.3% YTD (last week) to 11.2%. 

Not a good week for the portfolio and I underperformed - Best of the Best causing the damage. 

It is my largest holding - What the market giveth, the market taketh away. 

The contribution to the portfolio is as a result of a purchase (as opposed to me having taken a great deal of profits prior to the update).

I must say, it is annoying when one company dominates the portfolio return (although I wasn't complaining much when it was the other way around). Spoiler alert - Its going to dominate this post!

I have been toying with the idea of having a more concentrated portfolio - I think I may need to pull my neck in after a strong bull market!

The market took a small step down, all towards the end of the week - apparently there are reasons - I expect it was just an unwind of overbought conditions, especially in the reflation trade. 

Interesting Viewing

Now that I have made this "unprivate" - publicised stretches credulity, I thought I would try and add some value, rather than just my own rambles, so introducing:

Steve Cohen

I had not come across Stray Reflections or Jawad Mian before, but this interview with Steve Cohen & snippets there of came up on my twitter feed.

45 minutes - maybe something to do over lunch - unless one believes that lunch is for wimps.

Steve Cohen is the founder of Point 72 - high frequency hedge fund (apart from being burned by retail in the Gamestop mayhem), they have a pretty spectacular record.

I don't think there are many interviews around with Steve Cohen but what I found particularly interesting is how much his advice (as trader as one gets) reads across to investors.

I guess risk management is paramount no matter what you do!

A couple of things from the portfolio were particularly apt this week, although I am not sure I agree with the latter:

On dealing with losses (applies to a period of underperformance too I expect), you have to accept that you won't make it all back at once.

He is worried about his losers, doesn't worry about his winners.

I see why, and think it is more applicable to a trader, but as BOTB has demonstrated, its not wise to get complacent.

 

Cursory Market/Macro Observations

OK - so there were some Central Bank speakers this last week.

The Fed came in & moved some dots around, then one of the guys from the Fed said the next day, I think we can raise rates in 2022.

Now I certainly don't read & compare changes in the FED statement or even read the statement for that matter, but if I understood correctly, the central bank outlook is better than they thought & as far as policy was concerned, they were not going to be completely & utterly irresponsible.

In Punch Bowl terms, I think the analogy is: No Guys, we are going to stay sober!

Anyway, the markets apparently didn't like this - What you talkin bout Jerome??

The yield curve did some stuff - long end down, short end up - apparently there is an explanation for this too.

Unconsidered as my view is on such matters, I think all the yield curve is telling you is that we are not going to have a long term rate rising cycle - so as soon as short rates are increased to say 1.25/1.5/2%, there would be some economic hoohaa that would require them to reduce rates from those historically very low levels.

I'd also suggest that the unwind has been happening quietly over the last month or so, FED being ex post narrative maybe?

Queue Permabear: I don't know if there is that much difference in the real world between interest rates at 0.5% or 1.5% or 2.5%, yet there is so much fear that rates might rise early - doesn't that suggest things are somewhat fragile.

Lessons:

Firstly, never ever again say things like EBITDA shines out of my posterior.

Secondly - Having a plan could work - Who would have thunk!!

BOTB more details below - but long story - I had a plan - got ill-disciplined 

Incidentally LSEG - recent purchase - I executed the plan and it is working so far.

BOTB:

So clearly, the share price lost a lot of ground this week.

Incidentally, I broke one of my very recently adopted rules of not trading on the day of the announcement.

Should I have sold/reduced?

With hindsight, obviously! But I don't think so.

It was my largest holding but certainly not an outsized position (>5, <9). One of the things I want to do is concentrate my portfolio more (more on reducing/rightsizing tail than the bigger holdings.

I added to this holding in February & March at the time of updates & placing (around £24) and was happy with those purchases.

At that time, I noted that this was a large holding and that I would need to stop adding & based that any further additions would have to be done ideally below £20.

I felt it was better than fair value for the business given the profitability & growth, without the forecasts being met. 

If 20% further growth (as forecast) came in 2022, then it was cheap.

The point of stopping additional adds was so I could run it if the share price continued to progress.

I then added further in April, May & June - all small in the context of the holding & portfolio. 

June was just stupid - it was gambling on results being well received.

April & May were ill-disciplined and I think a case of me wanting to do something & I dare say holding cash / watching the market go up & missing out on the March dip.

In particular, the May update suggested that they weren't at the same levels of momentum (and perhaps I should have picked up on this) - if not as a signal to sell reduce / at least not add - and indeed your notes on these purchases said - stop / enough now.

In addition, there was strong element of why was this not a bigger holding at the outset.

In particular, when 888 reported in March/April 2020 (around 80p), you said this was great, but you preferred BOTB (CORRECT). 

Didn't add due to arbitrary rules around minimum M/Cap and missed out on 888 as well!!

In terms of investing, I think when opportunities are plentiful you can be aggressive, if you really need to hunt & rely on relative valuation, then you should be defensive. 

I have been of this view all year, but boy does this market not want to relent!

With hindsight, I certainly would have been far better served using the cash to add to one of my lower sized holdings. 

I would be lying if I said my additions did not reflect an element of falling in love with it, it was being spoken highly among respected investors & some highly respected investors came on board. 

This was probably most apparent when I was ignorant/dismissive of any potential signs in the May update and added against the plan, against the price momentum & business momentum (latter being rate of change point - lets not pretend I knew more than I actually did).

Its all very well running winners, but remember:

JUST BECAUSE IT IS A WINNER DOES NOT MEAN IT IS GOOD & THIS WORKS BOTH WAYS

My view on the Update & Holding

The circumstances of the March placing, Slater on board (I don't think his style is predicated on the next update) and a director spending £500k have not changed - as much as people who are down on the day want to blame nefarious directors for their own actions. 

Funny how when its profits, its all me, when its losses its the directors or the market or the FED or my style being out of favour.

On the plus side:

The business is highly profitable, has reached a step change, has launched additional competitions (expanding the potential customer base) and is working with a much larger customer base.

Digital marketing is a skill & I don't think the results that were generated in the past year were just dumb luck. The activity relies on tests, different campaigns

Management referred to a drop in engagement, not in revenue & from what I can tell, there was half on half growth in revenue. and margins were maintained even with lower prices.

As I said on twitter, revenues growing up while unit prices go down speaks well to volumes and in the business model with pricing & the prizes (+cash composition), there are certain levers to pull on margin..

Finally, this is a management team that have delivered in spades this past year and for many years previously - quite frankly I think they deserve a little better than to jump ship at a single statement, but to each their own.

I wish management would publish more data on their customer base, revenues/customer, churn - basically some of the data they use to manage their marketing & asked management (via their PR advisors) to consider publishing more data in this regard.

I am hoping Non Executives & Mark Slater will have more influence than I.

Moving away from hope & history:

Clearly, something is not going as well as it was & it has surprised management. My speculation as to what it could be in varying degree of severity:

• End of lockdown/reopening & temporary blip vs full on lock down (Lock Up) last year. This is where additional data would be useful because there was a summer opening last year too - how does it compare?
• Working with a much larger customer set, an additional customer will be less committed (early adopters), lifestyle competitions has less engaged customers - this is natural as the business grows?
• Apple released a privacy update in late April - I am an Android loyalist, but I understand this asks people to opt in to being "followed by a cookie monster" from a given app.
• Specifically, this could impact their own app or their distribution apps (The Instatwits & Snapbooks of this world).
• It could be a temporary problem that could resolve or it could be disruptive and we can expect far lower levels of engagement as a permanent fixture - and therefore a lower return business.
• Given in app purchases are likely subject to "Apple tax", this could create meaningful issues for the progress of the business.
• Competition & in particular better and deep pocketed competition (I see some competition but nothing major or better - biased as I am!)
• Customers are bored of the game - i.e. they come on - play a few weeks, don't win a prize and then go away. Companies with high churn have to spend a lot of time & effort staying still.

I would hope from the above, that I can make a somewhat independent assessment, even though said assessment it being made after the I already added.

If I had obeyed my own rules, I would have done this first (which I did less formally) and assessed after a night's sleep, unencumbered by the emotions of the day / at the time.

Having written all this down, I think I made the right decision in adding (but I would say that wouldn't I).

The reasons are fairly straightforward:

• The results were fantastic - indeed if you take out that one sentence, shareholders (or at least I) would have been purring.
• We do not know what the issues are (they may be really bad) but equally they may be minor - jumping to conclusions - the nature of digital marketing is that some things work incredibly well & others don't & the digital advertising model is flexible in pivoting towards things that can work.
• A director purchasing £500k in the placing & the special dividend do not indicate that this is a board that is worried & feels they need to throw all their available cash into marketing.
• I have sufficient faith (call it misplaced loyalty) in the management team to give them some time.

All of that said, and writing all this down - this makes perfectly clear that the April to June were wrong & in theory these ought to be reversed.

That said, in the absence of further information about the somewhat reduced engagement, I have no interest in selling at the current price. 

Good businesses with good management don't (usually become bad businesses overnight), when businesses reach step change in their volumes things can go wrong (and result in drawdowns). I understand sticking through such issues is the birth of 100 Baggers.

Why did I read that book - until then I would have been ecstatic with a 5 bagger!!!

Transactions

Sell ELCO 

This was a recent purchase (marked as undisclosed in my earliest posts).

To be honest, it was a sign of ill-discipline creeping in (relative valuation & chasing) that I purchased it at £1.20 when I first spotted it in the high 80s.

It is cheaper than Autodesk for some very good reasons!!!

I think it is a good company and I may prove to regret, but there were issues around governance (and in the interest of being a steward of capital / long term holder), I did not feel comfortable.

Management not disclosing the nature of Shareholder resolutions and brushing it off - personally I think maybe within Companies Act, but it is just petty & stupid.

Also, I wanted to get rid of these tail holdings (I wasn't willing to add given above) and being the most recent addition, an element of Last In, First Out applied.

ADD BOTB

See above

Portfolio Risers

OK, this whole thing is getting seriously long with BOTB (Maybe I will move it to separate post) and expand on and amend this post, but for now, lets do some grouping:

SRC up 10.8%, VLX up 9%, D4T4 up 8.8%, DUKE up 6.3% & SUPR up 5.3% 

• Duke was weak so likely a bounce back - they said they would pay a dividend, but this isn't really news. 
• SUPR - no idea - think it was a bit more defensive week - had the feeling real estate in general was doing OK this week.

• D4T4 introduced a new product Fraud Data Platform which based on the demo does sound very interesting. 
• Of course, very large & attractive markets attract a lot of competition, but it speaks well to the management team that they are able to build adjacent products. The fit with their existing customers & their current distribution all give them a helping hand.
• However, for now it is an early stage product and we need to see how it develops. Market clearly liked it & they probably have earned a bit of trust to give them some credit with the new product.

• SRC announced a JV partnership given up 25% of Grainault (I think) for the development & then distribution of the adjacent land they got from Belgium purchase (I assure you my actual notes are more detailed.
• This speaks to management I think - that was basically nothing that they have created into a producing asset - I like what this does for my portfolio re Cyclical/Materials, Buy & Build with good management & supply shortages (I think one of the builder merchants this week announced that they will source cement from other areas).
• The Greenbloc product also has potential

• VLX - results well received and rightly so - if I may plug - VOLEX Preliminary Results

I am happy holding all of those but if I had to make a call:

• I would add (SRC) - the holding is rightsized but adds a lot given portfolio make up. 
• Volex & D4T4 hold (given margin & valuation concerns respectively). 
• DUKE - I think is still cheap but is right sized in portfolio given it is more an income play.
• SUPR - Good REITs are trading at premium to NAV - Hold and nothing more

Portfolio Fallers

BOTB down -24%

• I think I may have already covered this one!!
• Hold, expensive given M/Cap and the results were a little bit not sure but real profitable company in a proper theme - Note admin sale transaction pending

BMY & REAT down -7.6% & -5%

• No news on either of these, I expect it is a pull back after both have been on the rise and had a very strong 2-3 months

Updates & Results

Again, in the interests of this not getting ridiculously long, I think it already is, I am going to be very brief.

Boo

• Solid update from Boohoo 
• UK & US up 50 & 40% respectively, ROW & Europe down on PY - 2 year growth rates are very impressive for US.
• Suggests they may well have cracked the US 33% of revenues. UK at 50% - the biggest parts are delivering
• GM at 55% (down on PY but in line with 2 year previous) - they flagged returns . 200m Net Cash, down 76m - 143m CAPEX
• Cash from operations suggest 67m in 3 months
• Debenhams Digital Department store launched, Dorothy, Wallis, Burtons added. 
• Distribution center in Wellingborough online and another to be in Daventry Q2 21
• Guiding revenue growth of 25% & Adj EBITDA at 9.5-10% - Medium term guidance 25% growth & 10% margin unchanged

• Given the growth story, one could argue this is cheap, but like with so many things relies on multiples staying at their current levels (or the growth is sustained longer than can be reasonably estimated)
• That said, of my current holdings, from both a sizing perspective & attractiveness perspective, I think this is pretty high up on list to add.

D4T4

Fraud data platform (above in risers)

SRC

JV with French Aggregates business to take 25% of production & assist in development (above in risers)

VLX

Results well received and rightly so - if I may plug - VOLEX Preliminary Results

TPFG AGM Statement

• Fantastic results but seems to be the case in the sector at the moment:
• LFL revenues up 29% on 2020 & 26% on 2019, 
• LFL Mgt service fees up 29 & 19% on 2020 & 2019
• Sales was pretty much WOW numbers: 
• Sales growth due to bubble markets up 36% in TPFG & 97% in EweMove on 2019
• 10% higher sales fees due to higher property prices
• EweMove after a while seems to be getting traction (30 new franchisees)
• LSL partnership received positively & Hunters integration well.
• Well placed on strategy to deliver LFL growth even after conditions normalise.

• Solid hold - Might even be an add - based on "strategic initiatives set to drive organic LFL growth even as conditions normalise" - not sure how much I believe it (especially those sales numbers)

TSCO 

• So when I talk about concentrating my portfolio, Tesco is near top of mind.
• It is a low margin business in a hideously competitive space.
• I hold it as a bond proxy / dividend stock and I do think if anyting is cheap in this market, then Tesco probably is one of those companies, as demonstrated by the bid for Morisons.
• Interestingly, I think Morisons bid is low - I thought that would be better short term but preferred Tesco as I could hold for 10 years and collect the dividend.
• If my goal is to maximise the return of the portfolio (or invest in quality companies), this clearly does not fit.
• That said, it is doing something, is part of the income / bond proxy set of holdings (which is a distinct portfolio) and in that context it is a good holding & is serving its purpose.

• As far as the results were concerned, LFL sales were up 1% give or take (forecasts seem to be around 2%), which may explain the negative share price reaction. UP about 8-10% on two years ago - I was more interested in this and I think that is a strong figure, esp as prior year included stock piling.
• To some extent, one of the good things about this business is that the results don't matter too much - want to keep eye on margins and balance sheet (which they don't talk about)

• I bought this because I thought they were doing a lot for their customers in terms of repeat / customer offer / store & Jacks.(basically a couple of years behind WalMart). 
• I shop there so it is nice to get some back in dividends
• It is a defensive stable stock with some short term upside (from my observation picnic in the park is popular & supermarkets benefit) / if people need to start saving money / people are perhaps more in habit of cooking at home (not if Just Eat et al are anything to go by)

• HOLD (Reluctantly)

Well - that was a long one - but I am glad I did it!

And to end - a personal anecdote

This was a weekend I did not have as much time as I hoped.

As I get older, I think I have learned the virtues of just filling the walls, rather than arguing about whether the walls need filling.

An argument on whether I should hoover after applying the filler, I thought I might win - and like with markets, despite my expectations and research, I was way off.

Long story short - I filled / patched up walls & hoovered most of the place twice - I was wrong to argue & I still love my wife.