July Week 2 - It was coming home, but it went to Rome

It was coming home, but it went to Rome

Portfolio Review

Portfolio up on the week marginally & a couple of sales in the week.

The cash balance has built up as a result of sales and think we are now happy with the cash balance give or take. It also reduces the number of holdings, so that is going in the right direction.

Risers in the week were IGP (on a positive update), BNZL on a broker upgrade I believe & TSCO, I expect on some Morrissons excitement.

The fallers did not have any news to the accompany them, but my general observation is that the market is looking like a period of risk off and in my own portfolio, there certainly seems to be some "profit taking", which for some reason is different to selling.

Public Service

This week I share the latest episode from a podcast that I listen to nigh on religiously.

Jim O'Shaughnessy & Denise Shull

Making Intuition Work for You

I don't think Mr O'Shaughnessy needs any introduction, but in this podcast, he talks with Denise Shull - a performance coach for Portfolio Manager - think a real life Wendy Rhodes from Billions.

Apart, from being an armchair portfolio manager, I am also an armchair behavioral economist (regular economist too - of armchair variety!)

Anyway, at the risk of spoiling it, Daniel Kanhemann is wrong!

I am not sure I agree, but my opinion is worthless.

The reason I wouldn't agree with that rather System 1 triggering statement is that I actually found these ideas (first time I heard them) very compatible with the ideas in Thinking Fast Think Slow.

What I found particularly interesting, is the idea that you to make a decision, you need a "feeling" or anticipation thereof, to actually be able to make decisions.

If I understood correctly, one does not decide to fight / flight, or alternatively make a considered probabilistic decision on the likelihood of being able to outrun or kick a$$ vs a Lion, without a feeling about what it would be like to be eaten by a Lion.

Where does it fit in my own decision making - well obviously I believe the companies I own are good companies and expect their value / share price to increase over time.

However, when it comes to decisions around position sizing, adds/reduces/sells, I am virtually certain part of my thought process is how it would feel if I was wrong & right.

Eg When I reduced UPGS, I was worried about shipping costs impacting (already quite low) margins. Certainly, I reduced on the basis of if the price got hit for this reason (with my larger position), I would be very annoyed.

My thoughts on BOTB have been well documented, but I feel less responsible for news that came as a genuine surprise (notwithstanding ex-post signs & events identified, most of which were prior to the surprise in question). 

In effect, my loss aversion was stronger for one rather than the other, because of a feeling I anticipated.

I dare say this played a part in my sales this week.

To be honest, the above could just be a very verbose way of saying fear & greed, but I think I will need to listen to the podcast again & give this some thought.

As for Jim O'Shaughnessy, obviously I do not know him, but every time I listen to this podcast,  I think: "When I grow up, I want to be that guy"

Lessons:

I think I am going to have to think about the lessons this week from the above and actually think about the podcast in more depth.

I am also reading Investing for Growth by Terry Smith & it is very interesting actually catching up on the events & thoughts of yore & certainly renders the cursory market & macro observations rather worthless.

 

Cursory Market/Macro Observations

Yields came down & by quite a lot & quite quickly, Monster tech rallied.

Well, Monster Tech is a macro play - more duration than a 30 year Treasury will give you, so when bonds rallied, the longer duration bonds rallied too.

As much as media likes to make a drama, I think some of the yield action seemed like a bit more than a 1 sigma event.

Clearly the reasons for the rally were technical (fancy talk for we don't know) - my broken record says moves are more violent because there is more leverage in the system - and to be fair to the talking heads, leverage is technically a technical factor.

Incidentally, has anyone noticed when things are down (and they don't know), it is referred to as profit taking as opposed to what might be more accurately be described as selling.

In other news, Christine Lagarde (of ECB fame) has published a review with a new inflation target & climate hoo haa as part of policy making. This will be followed by another presentation where I understand the idea is to use less jargon & make things simpler.

As much as I like non-Economists running pseudo economic political institutions (I think we can all agree the ECB is not independent) dumbing things down, I wonder if Ms Lagarde is aware of the number of acronyms that have been introduced in the last 12 months & the 108 months prior to that.

As for the impact, I doubt their ability to not meet a different target matters all that much in the grand scheme of things.

As far as climate considerations in policy making and this applies to all Central Banks.

Let us assume (You see - Armchair Economist), that climate change has economic impact, then it should form part of the policy considerations of a central bank.

Of course, it would also suggest that they need to bolster their ranks with very different expertise.

Then again, Heads of the US & European Central Bank are not economists, so what's in an academic qualification.

This market is showing that accounting isn't all that useful either!!

Transactions

Sell TM17 

• I was a very reluctant seller here - I think this is a very high quality company & pretty much has everything I would look for.
• The reason for my sale, the valuation suggests everyone else thinks so too & the announcement last week.
• Given management & the purchase price, I don't think this really falls into the diworsification category, but something about this market where anything new (a risk) is treated as unabashedly positive.
• That said, the disclosure around the acquisition & in particular the statement that it is profitable when reports suggest otherwise was something that didn't sit well with me - as I said last week - any other company I would have sold immediately.
• Trading at 11x Revenues, 50x multiple (although the cashflow multiples are a lot lower - one of the reasons I am a very reluctant seller) & 10x book value with this doubt for me was enough to sell.
• Also, I wanted to get over this 100 bagger never sell dogma - Quite frankly, if you own things at 50x, they are highly unlikely to 100 bag (I expect you would need at least 3 of those bags to come from multiple expansion).
• If the valuation is more palatable, then I will certainly look to buy back & in the mean time, will follow with great interest.
• This may prove to be one of those why did I sell, although it is down from my sale price - Yay me!!

Sell D4T4 

• Another reluctant sale, sold on valuation grounds again for the main part especially in context of certain risks.
• A new & exciting product launch is certainly attractive but if I know anything about business (perhaps I don't), large attractive markets tend to attract competition.
• In the back of my head, given the capability of the core product and the space they are in, their revenues should be going faster and operating leverage should be kicking in - it isn't in the short term.
• Management changes & quite the restructuring in the operation of the business, new product with new marketing teams - these changes could all be absolutely fantastic. 
• As I noted last week, maybe they are moving to a more aggressive US style land grab approach and given the sticky customers it makes sense.
• I was also impressed with client gains outside of their core which suggests that there is a real path to a much larger business.
• However, similar with TM17, the above creates operational risk (and I dare say in founder owner managed businesses have a culture that might be impacted, for the positive or negative but may cause some churn in the staff
• Again, multiples in the high 50s, negative earnings growth & some of the operational risks I refer to above & my comments on the valuation of MSFT (and other US software companies) vis a vis their growth, I am not sure I could justify holding D4T4.
• Obviously, if I had sold this a week earlier when I commented on hideous valuation on the fraud data platform rally, that would have been smarter but plus ca change.

Portfolio Risers

IGP up 11.8%

• Q1 partner relations bearing fruit & new partners to come on line, good time for sector.
• 6 new customers in Q1, 600k in revenues most of which is recognised in current year.
• Forecasts - 11.5m (vs 11m in PY - suggests beat - & if momentum continues, could be subtantial beat)
• Fantastic margins & all the good stuff that comes with a software business.
• Valuation has caught up now on forecasts, but the deferred income on last update was interesting.
• If it wasn't for liquidity / MCap / (and valuation given liquidity & MCap) + customer concentration, I would be happy for this to be a larger position.
• HOLD to ADD

TSCO up 5.83% & BNZL up 5.23%

• No news that I am aware of on either of these - don't usually see large caps here without news!
• Tesco I expect is getting some positive read across from the Morrisons bid and Bunzl I think has a broker upgrade.
• I don't think Tesco will be acquired (or will be blocked if so) - 30% or so market share isn't going to be asset stripped.
• Personally, I am more bullish on Tesco post these bids - if two of the largest competitors are focused on financial engineering, I expect Tesco can benefit - I do feel it is the most compelling offer among the supermarkets (accessible to me) - which maybe a sign I should not be a shareholder.

Portfolio Fallers

IXI down 8.72%, REAT down 5% & UPGS down 5.43%

• Noise & I have the feel that people were generally cutting risk & some of the micro caps / illiquid and big risers are most impacted.
• IXI had some warning buyers recently (myself included) so perhaps shaken out.
• UPGS similar - guessing some people were in the placing saw a rally & decided to exit - I did think of flipping too but I think a lot!!
• REAT - absolutely no idea - probably some following from the results last week

Updates & Results

This week has updates from Intercede Group (above) and also Somero & Quartix, the latter two having less impact on the market price. 

SOM 

• Ahead of - strong end to H1 & continuing to H2 - Revenues upgraded 10% to 110m$
• ADJ EBITDA upgraded 16% to $35m & Cash upgraded 20% to $33m
• Cash generation is rather remarkable - software esque, especially given most software companies don't generate cash!
• Growth in NA especially - order backlogs going to 2022 and Across the portfolio, but especially boomed screed, Warehousing - US is booming - they talk about non-residential construction, Residential also - +ve read to Ashstead??
• New products anticipated before year end, Europe & Australia & new products - in line with expectations (which are to contribute meaningful growth in FY 2021), all other regions as expected.
• All very positive + How goes the US, ROW follows? Given order backlog to 2022 & it is largest product outperforming, more upgrade potential.
• Heavily cyclical - pricing in structural growth but fulfilment centers also have capacity / subject to cycles and lower maintenance requirements? What is the horizon for the activity boom?
• In the context of the market, it is very reasonably valued, if we boom it is beneficiary, in low growth - there is some structural gas in the cylinder come.
• HOLD to ADD Position size - correct - Re Add - am I underappreciating the structural growth / being too demanding on valuation?

QTX

• Fleet No clients up 1.5%, No of units up 8% - UK slower but Europe & US strong - seems something Europe likes about this (New territories, ex Low base)
• In line with expectations - higher levels of stock impacting free cash flow & higher component costs/order quantities - costs not expected to impact financial results.
• Cash flow will be impacted by stock levels - if inventory needs to be maintained - will be able to deal with procurement.
• Overall fleet installation growth - 13% ahead of 2019 - UK (-10%), France (26%), USA (11%), ROW (858%)
• Insurance - pretty much dead now - 7% of revenues in H1 - due to supply shortages - not renewing - only provide to existing policy customers - separate fee for maintenance. 2022 3% of revenues.
• Testament to the growth is by voluntarily withdrawing from insurance, they are able to meet expectations & Testament to capital allocation by Mgt - closing insurance I expect is not easy given that’s where it started. 
• UK will be area of focus - apparently 2019 was flattered by large wins. It has underperformed others - again showing some management capability.
• I stand by the slightly mis-understood (or more accurately masked) part of this business by exiting the insurance & upfront investment costs depressing earnings.
• I thought long and hard of selling this on grounds of valuation (similar to TM17 & D4T4), but in the end decided against it.
• In part because it is a smaller holding and I think it is fair to adjust those earnings, which makes the valuation more palatable, albeit still high!
• HOLD - in context of position size, at some stage might need to do something about it.

And Finally

There was a football game at the weekend.

I never get particularly excited when England play in tournaments (non tournament international football being worthless), probably because of past experience.

This time I got excited, mainly because most of the good teams got knocked and England were on the right side of the draw (much like that amazing semi-final, where they lost to the Belgium B team to secure the draw).

Oh well, it went to Rome - as the French might say - plus ca change.

FWIW, I think Sancho should have started in stead of Mount & Grealish taken a penalty (Rashford has missed quite a few). I am a United fan.

Anyway, I think these kids are absolutely remarkable & deserve all the praise they get.

And in an effort to spread some positivity, I understand there have been some abhorrent comments & actions.

Personally, what I would do to such people would result in my entering politics which I avoid (here).

I am glad Tyrone Mings said what he did - for once I hope the media do make a big drama.

However, my twitter feed rather than abuse reflected outrage that such things take place.

I think we can be proud of our conscious as well as the remarkable young men that represented us with dignity & integrity.

Adieu