June Week 4 - Buy the Dip, but what is a Dip these days?

Buy the Dip, but what is a Dip these days? 

Portfolio Review

Another poor week with severe underperformance given the pretty strong rally in the markets (everywhere) - FTSE All share total return above think the all world was not too dissimilar.

 

BOTB is still doing the damage & dominating portfolio returns. This is annoying, but I won't complain given that I didn't complain when boot was on other foot. Adjusted for BOTB, I am up for the week.

A crumb of comfort in the fallers is that none of them released any news & are pretty illiquid small & micro caps, whereas the risers were on the back of +ve updates (ex BMY, which I think recovered after a pullback in the previous week).

Indeed, I think there has been a general change in sentiment towards risk off (Monster tech, Treasuries, Large Cap over small cap) - suggests people are building liquidity / preparing for what might be a more turbulent 2nd half.

Public Service

In continuing with the theme of unprivate, here is my bit of public service this week:

John Hussman - Market Comment

Released on 13th June, but I don't think margins are ever as urgent as they appear to be (not sure anything really is)

Anyway, it is always nice to have my permabear outlook reinforced by someone smarter & with more Mathematics.

Key takeaway from me from his comments (once you have read one you have in large part read them all) is that valuation (multiples) drive returns.

Yes bond yields are low & therefore valuations are justified. May well be true (empirically it most certainly is), but that is just fancy talk for saying if you stay invested, returns are low.

Of course, for the finance industry (which is selling as much as managing finances), having realised that clients can't eat a relative lunch, they suggest clients develop a taste for relative risk premia.

In the meantime, a bunch of Consultants, Bankers & MBAs (who can't actually do anything themselves to improve a business) rely on financial engineering & Tax structuring & suggest it is their genius that delivers these returns.

I expect a trained monkey can hire a bulge bracket investment bank, a magic circle law firm, a Big 4 accountancy & create some pass through entities in different jurisdictions depending on whether they pay interest or receive interest!

But then again, they pay the most, so they it will attract the best monkeys!

As an aside, my cynicism/glib towards the industry speaks to sour grapes - I would have loved to be one of those monkeys!  

On the matter of being a permabear, Tim Price is more articulate than I am 

Better Permabears

Whilst I agree, the more I think about it, as satisfying as it would be to be intellectually right, the outcome itself will be less satisfying (for me and many other people who neither deserve nor necessarily understand) the system.

I stand by my base view of financial repression - interests rates will lag inflation & any increases will be swiftly followed by decreases.

 

Cursory Market/Macro Observations

Well after the central bank dot hoo haa last week, people came in to buy the dip.

I was intrigued by my comment last week, missing out on the March reflation dip and started thinking, what passes for a dip.

Indeed, if a dip is a fall in valuations, I would say that in March 2020, Microsoft fell to 18x current June 2021 forecasts & & 20x forecasts at Jan 2020 - a peak yield of 1.6%.

Call it sour grapes, but to suggest that this wasn't a back the track up purchase (without hindsight) is in my view a very credible position.

What passes for a dip - I hear wonderful ideas like 5% is a pullback, 10% a correction and 20% a bear market - each of which happen with descending frequency.

In the 6 months this year, I may have missed some, but we have had this year:

• The coup dip early Jan;
• The great reflation in March;
• The Fastly dip; and
• The Dot Dip

On a separate note, isn't it remarkable how all this Maths, Stats & Econometrics keeps delivering such round numbers!

As far as macro/market is concerned, I wonder why I follow (waste my time on it) and I think the honest answer is I enjoy it - in particular elements related to market structure.

Perhaps my time would be better served focusing on the infinite game (teasing there!)

Lessons:

In light of my comments above re dips & some battles with myself, I think the lesson is - don't change your view every few weeks/months - 5% pullback at market level is not attractive enough (in my humble opinion)

I will eventually get round to writing up (publicly) my lessons for 2020 but actually I think I might find lessons from H1 2021 more interesting.

Not sure about others but I have found this harder than last year & I think that might be a function of some internal conflicts I am having as I try to develop my style & maybe there is some change from what I initially anticipated.

Key things to balance - Investment style vs Opportunities (Read FOMO)

Maybe it would be a good idea to write up the How I Invest section, but as a series of dated static posts so I can keep track of the evolution

Transactions

Add TM17 

• Have held for a while & feel it is too small a position so bring into line, but still quite small on valuation grounds.
• I am very bullish on the gaming sector in general - portfolio should reflect this, this is only holding (apart from RBLX & PRX outside).
• Easily my favorite in sector on basis of conservative accounting / returns on capital / back book which indicate intangible value.
• That said, do think the sector in UK trades at a premium to international.
• NB - ESPO/GB potential purchase for wife's portfolio

Add UPGS

• Opportunity to add on back of placing to acquire Salter Brands - earnings accretive brings improved multiple;
• Growth levers for Salter (particularly international) & improved operating margins & owned revenues should give company higher multiple;
• Faith in management enhanced - communication & knowledge of company (vs for example Venture Life Group)
• Placing 15m (at £2.10) funding acquisiton of Satler. 34m purchase price funded by 15m Equity, 10m term loan & existing debt - Post acquisition EV = 187m + 34m = 221m
• Forecast PBT of 10m + 4m from acquisition / synergies - 14m - 15x Operating Profit
• Adds Salter Scales to existing Salter license (16m revenues), removes license renewal risk & potentially some revenue synergies (eg Scales are stocked in electronics stores), where UPGS don't operate
• Not sure where the health/fitness tracking fits & why did directors not participate (they are well invested);
• Illiquid & had a run up - maybe perfectly valid but any disappointment will probably cause problems (like when 1st listed - far lower risk business since then)

Reduce CLIG

• One particular purchase was just as a short term opportunistic to reversing that (later than I intended) + maintain cash levels post purchases;
• Happy to hold - cheapest asset manager in sector (albeit given growth constraints in core strategy, perhaps a valid discount). 
• EMG has been weak but value strong & also capacity constraints so half year might be a little weak

Portfolio Risers

G4M up 9.78%

• Very well received results and forecasts upgraded by some 50% - did feel they were too light.
• FY22 will not be same level as CY - doesn't expect same level of trading in H1 (CoVid comparatives) - sustainable & profitable growth long term Q1 ahead of Board's previous expectations - good portion of gross margin retained - FY 22 likely to be ahead of (Board's previous) expectations.
• Interestingly, this had a big run up (stockopedia Jack Brumby) & then pulled back on the back of fear - think BOTB has kicked some complacency among holders & non holders;
• Anyway, results were excellent & even on the operations front things are going well.
• Dare I say, this does seem to be showing some coffee can type characteristics (albeit growing by building more warehouses is capital intensive. 
• Unlike Amazon AWS - check out Amazon up 400% from October 08 to 2013 (a measly 400%) vs 2013 to now (a bitcoinesque 1100%)
• Back to G4M Revenues up 31% to 157m from 120m - 15% improvement in gross margin at 29% (25%) - impressive
• Active customers - up 30% to 1.06m - net cash 2m - EBITDA up 150% to 20m (from 7.8m) 
• After a heap of crap, I make free cash of 7m (adjusting a little for the working capital build)
• Focusing on growth & European expansion - Barcelona is indeed a good location as covers South France, Spain & Northern Italy all by road + port.
• Own & other up above 30% (Own slightly higher) & acquiring brands, benefitting from scale.
• FX effect not disclosed - given inventory build & US costs for own brand, that might be driving margin benefit.
• HOLD - there might be some weakness in future hopefully overreaction against tough comps - think it is pretty much right sized for now.

BMY up 7.9%

• Flat over 2 weeks!

D4T4 up 7.43%

• Launch of FDP was very well received - very big market & some interesting spawner type characteristics;
• Hold - results coming - hideously expensive but very interesting product;
• That said, I did look at Prosus & Adobe - both of which I hold - not sure D4T4 is deserving of the same multiple as an Adobe, but UK is cheap they say.

IHC up 5.36%

• Well received update with not much information to be honest but seems positive on the whole;
• Interest in products remains high & strong order book.
• SLE integration & facility improvements ongoing - SLE integration having +ve impact on wider group
• Confidence for this financial year & beyond
• HOLD - would be add ex valuation grounds.

Portfolio Fallers

BOTB down -17.1%

• Weakness continues - to be honest I have made my decision with this holding - watching the price what people say on twitter is not helping anybody;
• May not be a smart decision - time will tell - Infinite game - but another week like this and I'd suggest it gets into cheap territory.
• HOLD

IXI down -8.19%

• Illiquid - think there has been a general feel of risk off - I was not all that enamored by the results but market reacted positively and since has pulled back
• A profitable company in a very interesting space is a rare find.
• HOLD - In absence of new information & the nature of this holding - do nothing is default

GETB down -6%

• No idea - noise - illiquid
• Do nothing

REAT down - 5.8%

• No idea - noise
• But, this is not in line with M/Cap criteria (although that criteria is itself arbitrary) & there is definitely an element of FOMO/chasing when this was purchased
• That said, it does have very interesting outlook & path to bigger business.
• Do nothing

FNX down - 5.6%

• No idea - noise - illiquid
• Given metrics / sector / Mgt skin - I would probably like this to be a bigger holding that it currently is.
• Want to see the results first though - there was some one off in prior year - so this may be an opportune IPO
• Do nothing

Updates & Results

Other than updates from Inspiration Healthcare & Gear4Music (above), there was an update from Bunzl.

BNZL

• U/L revenue 6% higher on 2019, Revenue 1% higher (6-7% on constant currency)
• Recovery in base business offset by CoVid orders (Higher margin)
• Op Margin 1% ahead of 2019 (smaller CoVid orders)
• Revenue guidance retained (underlying moderately higher than 2021), margins adjusted to be slightly ahead of historical levels
• 2 acquisitions (Harveys - Oz - Cleaning & Hygeine) & Comax (very Bunzly in sectors) - 18m revenues (4 & 14m) - 116m spent on 6 businesses in half year.
• Would suggest this is one of my favorite FTSE 100 companies - certainly one of the great sleep easy investments (Until it is not!!)
• HOLD - Doing exactly what it is supposed to - do like holding companies where you don't have to even bother looking at results.

And a personal anecdote to end on - I am not big on exercise, but have decided to get some personal training  - historically I would have baulked at the idea of paying for an hour what I could pay a month if I was actually motivated.

I justify it to myself as follows - invest in yourself. 

I dare the fiscal & monetary authorities to debase or appropriate that.

And on that rather anarchistic note, A Dieu