July Week 1 - Optimistic Permabear - BS on the way up, BS on the way down

Optimistic Permabear - BS on the way up, BS on the way down 

Portfolio Review

So the dry spell continues, although some of those went ex-dividend.

D4T4 & REAT were both impacted on the back of results - D4T4 being hideously expensive already with a 11% growth rate & REAT saying that (similar to last year), there was a bit of a slow down in work post lockdown.

MSFT makes an appearance in the risers - Monster tech - funnily enough it looks quite  way cheaper than TM17 or D4T4 (in the same sector) & has a top three position in Enterprise Software, Cloud Computing, Personal software & Gaming. 

I have said it before (not that anyone would know) & I am happy to put on the record once again - Monster tech is not as overvalued as the world would have you believe, aggressively valued - for sure!!

As for regulatory / antitrust risk, I think the biggest risk to Monster Tech is Monster Tech.

Amazon buys MGM studios > streaming monopoly > Netflix is biggest, Disney seems to be doing fine, Comcast just launched Peacock & a plethora of other partnerships are being developed, niche providers & content sharing platforms like Youtube (they're pretty big).

Case dismissed - H/T @macrodesiac

 

Public Service

Thought I would share a 45 minute video 

Excess Returns - What we learned from our 1st 100 Episodes

Podcast itself is more on the systematic value end of the investing spectrum, but some interesting ideas: 

• Things change & we need to adapt - or as Howard Marks said - Everything Changes;
• Composite value / including intangibles - I dare say that this is all fancy talk for the fact that the valuation factor is probably more effective than the value factor 

Lessons:

A change in the regular scheduling - the above made me think about some lessons & my own investing journey.

In my early days, I was a value / contrarian investor - more accurately I bought crap because it was cheap or alternatively great stories because they fell a lot - the latter less forgivable in my view.

I also automatically added to winners. 

I dare say I was contrarian for the sake of being contrarian

I'd like to think I do neither now (although HAT & IXI) perhaps prove me wrong.

I understand the companies I know better, willing to hold for the long term (vs a 10% gain).

I am still cautious & a permabear type fellow (probably to my cost) but I think what I need to be aware of is:

• A market/macro view should not reduce effort - ponds where I am fishing there are usually good opportunities (much harder to find now compared to 12 months ago), but they are there - and these are companies that would fit the neo investment style
• I let my marco view / dogma about investment style  (eg No. holdings/Portfolio Churn/Insisting on long term holding period
• I don't need to be like Terry Smith or Warren Buffett (I'd like to be), but they can't churn / fish in same pond
• There is absolutely nothing wrong with being opportunistic (renting a stock as it were) and increasing the number of holdings, especially in the short term - I dare say this might reduce complacency with existing holdings as it would force a decision at some stage to replace or not, esp in the low conviction world.
• I am reading Investing for Growth (Terry Smith) & Richer, Wiser, Happier (William Green) - I am glad I gave up (paused) on other more academic macro books - Russell Napier recommendations are great but quite frankly are less useful to me - not being an academic, historian or strategist! 

Cursory Market/Macro Observations

Re the Macro & following from Russell Napier, here is my tuppence, I would suggest inflation is here and a constant.

In reality deflation is the natural state because of human progress.

For those not a fan of Fiat, it takes a lot fewer resources to build a Ford Model T than it did 100 years ago

I should qualify my permabear stance, with I am a very optimistic permabear

My 5-10 year strategist view:

Inflation coupled with the current monetary/fiscal* response in my view is bullish for Gold & if they dare raise interest rates, then I think cash is a reasonable place to hide.

Interestingly, if I am right and those are the correct assets to be in (considering they are very low return), I think we are going to be in a low return environment, unless you can miss out the inevitable capital destruction that precedes a high return environment.

* I would qualify with fiscal response (I refer to fiscal discipline & some semblance of a desire to balance budget) - do it with austerity on tax recipients or do it with austerity on tax payers - that's a decision for our esteemed leaders & the electorate at large. 

I am trying my absolute best to steer clear of politics on this blog!!

I was also going to add a little about what I have been reading about VolSkew, but one of the benefits of me being me now, is that I don't have to pretend to understand what VolSkew is.

Suffice it to say, that if smart money is positioned for a fall & retail is not, Liquidity Injections (Read Bailouts) will be less forthcoming.

Anyway, what I really want to know about option Maths is why Vega is an Option Greek, when Vega is not a letter in the Greek alphabet!

Transactions

Sell LSEG 

• I have no good reason for this, other than I had made a quick 10%, which is a healthy return on a mega cap (Peter Lynch - really should read his book again)
• The other thing was that my macro view seems to be more accurately reflected in the positioning of the wife's portfolio vs mine.
• We have agreed that if I am going to do stupid things, I am going to do it with my portfolio, not hers, so I thought removing a large cap and adding to her index funds would make sense.
• I would expect to buy back - a very good company in a sector that I understand, an (inter)national champion (notwithstanding London was created to finance the empire), in Global Britain.
• Cheap (on a relative basis) considering the multiple they got on Borsa Italiana
• FWIW, I think Great Britain is better than Global Britain, but I also think Aberdeen is better than ABRDN

Portfolio Risers

TM17 up 8.57%

• I wrote about the merits of TM17 in my add last week (particularly timely) & then Richard Beddard also wrote a very compelling article, although I would say that.
• They announced an acquisition of StoryToys - an Irish education apps developer
• On the story front, I think this is on the whole positive:
• StoryToys don't own content  but rather publish apps for other content owners (Lego/Disney is some customer list) for such a small company, which is what TM17 do for games developers
• Namely it is the same process competency
• It is clear that TM17 are on the hunt for talent - I get the feeling that as much as the "Edutainment" vertical, there is an element of "Acquahire"
• On the financial front:
• I find it quite shocking that the company did not detail anything about the performance and indeed the report from the Irish Times (H/T Richard Beddard) doesn't quite reconcile with the statement that it is profitable.
• That said, the consideration is structured intelligently for a company that promises the world in the future - 40% deferred give or take
• In light of the lack of financial details & the apparent inconsistency, I would ordinarily have sold.
• Indeed, if it wasn't for Debbie Bestwick being the largest s/holder, I would have probably sold on the basis of communications, but I don't trade on announcement days (anymore!), I am bullish on the company & the sector.
• On the other hand, it is very very expensive (traditional metrics) & I am not sure how comfortable I am with the disclosure
• Decision: ONE TO THINK ABOUT

CLX up 5.82%

• Flat over 2 weeks!

Portfolio Fallers

REAT down -16.9%

• Personally, from reading the results, I thought they sounded reasonable on the historic & also the Fidelis acquisition.
• Market likely took exception to comment: CoVid reactive business slowing down & not offset in the regular reactive business in H2 (3 months). 
• Apparently had same 2 month slow down last year during reopening
• Apparently, end of June writing - 1st few weeks of high demand returning (including CoVid re-emergence)
• Revenue up 20% at half year to 2.5m, GP at 40% (up from 33%). 771k Net cash after Fidelis acquisition of 1.5m. Small net profit.
• Benefit from operational gearing, benefited from one of emergency contracts at higher margin - true margin closer to 33%
• Delighted with H1, H2 started well - Fidelis record in April & May + recent announcements support strong +ve outlook for medium term
• I think Fidelis seems a very well done acquisition and management talked about the fragmented market - consolidation of suppliers on the call as has been demonstrated by the contract win.
• Notwithstanding what I said last week about portfolio fit, I do think this is an interesting opportunity with a path to a larger business.
• HOLD

D4T4 down - 13%

• Results were not well received and given the valuation, the revenue growth was pedestrian on the top line and also growth in ARR (which seems down from 20s to low double digit).
• Think people are a little unfair on this company - selling a SAAS/ARR story - there is not a single mention of SAAS in their results statement.
• I dare say, Celebrus is an Enterprise/License type product (and the financial services industry does like perpetual licenses), which creates lumpiness in revenues (2nd half weighting), but allows for the development of new products under the Celbrus platform - Fraud Data Platform being Case in Point. A Spawner - which you may hear more about in the future!
• The test of this would be over time to see ARR increase as a proportion of total revenue but the non ARR element stay flat or increase.
• I expect their partners may well be looking at them on the acquisition front.
• They are "investing" in marketing - sure - but to be honest in a world where Cash is on an earnings multiple of 70, marketing investment is probably just as earnings accretive (and tax deductible).
• The outlook comments are certainly positive & I think a new American CEO may well push the dial on being more aggressive around expansion (and product development).
• My biggest issue is the valuation, especially since very large and attractive markets attract competition.
• HOLD - Share price drop overdone in light of outlook comments (I think)

SDI down -6%

• Pulling back after a pretty spectacular run I think
• Torn between do nothing & take some profit

IXI down -5.1%

• Comments from last week still apply - don't like the sustained!
• 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

Updates & Results

Other than updates from D4T4 & REAT (above) and the announcement from TM17 re acquisition of StoryToys, there was a placing announcement Urban Logistics & new Royalty Partner announcement from DUKE: 

SHED - Placing 

• Not really much to say - in line with "accrued" NAV (fancy talk to justify premium to reported NAV)
• 6.1% NIY in a hot sector isn't bad - conservatively financed & moving to premium list.
• Dare say Premium List & bigger M/Cap come with bigger fees to the investment manager & other advisors, with very little impact to me as a S/Holder other than bigger transaction costs.
• I will likely add to my holding and sell out of WHR

DUKE

• New Royalty partner - a generics pharma distributor.
• Do wish they would provide more details but good to see capital being invested.
• Also, pharma generics distributor, which I think is lower risk / less cyclical than some of their previous businesses
• HOLD - Doing what it is supposed to

And Finally

It was US independence day yesterday.

People can hate on America all they want - I do myself - there is an essay I wrote - where I concluded America is a country of hype marketed brilliantly.

But, in an effort to prove I am an optimistic permabear: 

There is no other country in the world that can combine innovation & spirit with geopolitical stability & the rule of law.

Go to the more exciting regions with better growth & valuation, but I think the US probably deserves a higher multiple given that the risk of appropriation is on the lower end of the spectrum & it will be challenged in court and laws will be upheld.

But other than the innovation & capitalism (and some of that crony capitalism), 

I think what US did was to market effectively certain unalienable rights that apply to all people, not just Americans and for that I would like to thank the United States of America.

Also - all the things that make USA GREAT, also make Britain GREAT.