August Week 2 - Part 1: The Best of times, the worse of times

The media is dead, long live the new media;

The climate is dead, long live the new climate;

My portfolio is dead, long live the new portfolio

So I guess writing a blog post following a quote from Charles Dickens must be the height of arrogance or as a minimum an undue amount of pressure.

The week was going really well - there were a few reports, things were light, met a few friends in the week & my portfolio was going up.

Interestingly, enough, while not quite back at the June 14th value (which was near enough an all time high), it was getting close.

Then Friday happened & I am not especially superstitious but Friday the 13th Man - its like straight up WTF man.

The events of Friday are to be covered in a follow up post - Worse of the Worse - The Sequel.

Public Service

What Most People Think

A podcast from Geoff Norcott - more entertaining than my usual fayre but I like the guy (probably because I usually agree with the content) but also, I think it is quite nice having someone saying what many people are thinking in non-obnoxious way.

The Substack Economy

Infinite Loops & Jim O'Shaughnessy make a second appearance. 

I can't do this weekly & keep providing brand new things, I am neither that creative nor that interesting.

I dare say any readers are probably already aware of anything I do share.

It has become somewhat recurring for me that people I speak to seem to have switched off from the news. 

I certainly have - hopefully I stay aware of what is happening but I don't watch the News or Newsnight like I used to.

I have some issues with how the news channels but I won't go into them.

Obviously I don't consume all news & I am unfair especially around the dangers of social media, but maybe because I really only engage with #FINTWIT, I find it nowhere near as toxic as suggested.

Social media will make an appearance in Worse of the Worse - The Sequel.

Substack is interesting - if viewers are getting frustrated, maybe the journalists are too - they don't want to write about Carrie's puppy but are being forced too.

I write here as opposed to twitter - one of the reasons is character limits.

Another reason - if anyone reads this, they actively chose too, not twitter's algos.

I understand this thanks to the podcast!

Cursory Market/Macro Observations

This week and linked to the above media posts, I thought I would share some thoughts on ESG Macro given the UN climate Change Report.

There was the usual - what about the other countries (that we outsourced are production & emissions too) - Pot, Kettle, Black!

I specifically tuned into the news to see the coverage because I didn't have the time or inclination to read the report myself.

I watched Newsnight after I read this Spectator article BBC guide for covering climate change;

Channel 4 News complained about the right wing politicians/media already being difficult bringing up Alok Sharma's travel.

TBH - I saw such references on the Spectator too - maybe they have a point about "right wing" media.

I much preferred Channel 4 Newscaster telling me we are going to hell in a handcart, rather than the BBC communication model version. 

Communication classes irritated me in the MBA.

To young aspiring MBAs - those communication classes will do more for your corporate success than all the accounting, marketing & corporate finance classes put together! 

The reason being - once you tell me I am going to Hell in a Handcart - I might say Cool, lets enjoy the ride.

If you say: When you ...., I feel ... - apparently it makes a difference!

As an aside, I think the "right wing" is better at conserving scarce resourced

But back to investing

ESG is a thing for sure - I am not a climate denier - the climate is there, it exists, its real.

I haven't read narrative economics, but for me there is a world of difference between ESG (which is so much broader than E) narrative & actual ESG.

For example, I think Facebook & Twitter probably score quite highly in the ESG universe, not followed the science myself: 

But is their product that much less addictive than tobacco?

Are tobacco companies working on ways to make their product more addictive engaging?

Do drug dealers call their "customers" users?

If I had the influence, I would vote against most remuneration reports I see and this desire has only increased as I see emissions targets forming part of compensation.

If you really like the environment so much CEO & Remuneration Consultant, why don't you reduce emissions for free?

As for investment managers, if ESG is so integral to your investment process Mr/Ms Fund Manager, why didn't you tell anyone about it until 2020? 

I can recall  some Mr/Ms Fund Mangers saying we will underperform by excluding certain companies & prefer to influence change.

Call me a conspiracy theorist, but the distinction between whether a manager wants to exclude or influence is a function of momentum not climate.

Portfolio Review

A week where the portfolio was down 0.4% on the week when the index was up 1.67%.

Only one transaction in the week - small reduction in FNX, on the back of the Simon Thomposon effect.

Announcements were in my view positive (bar one) & the market received them well (bar one).

Its enough to make you want to start reporting Adjusted Results.

ChaMaths unfortunately only works if you are outperforming a bear market.

Lessons:

Will be reserved for the sequel edition of Worse of the Worse.

Transactions

Reduce FNX 

• With a 27% rally in a week, it got quite big in short space of time, esp considering it is illiquid & new listing.
• I got lucky on timing, decided to bank some of that luck.

Portfolio Risers > 5%

HAT up 15%

• The market reacted more positively to these results than deserved I thought, but I understand Simon Thomson may have had something to do with this.
• Pledge book starting to recover - at 52m end of July vs 50m end of June - Activity levels 90% of pre-pandemic - 80m pledge book pre-pandemic
• Scrap metal & gold trading - down on PY - lower gold price - couldn't auction & had to scrap
• FX still slow - think will recover - 1.2m from Furlough - 4.7m total profit - 3.5m ex-furlough - call full year around 10m PBT - 32m cash, 135m NAV, 110m NTAV - 20-30% discount to book
• Outlook comments reasonably confident in recovery - risks around this - did not like the presentation - 2019 should have been presented - and the one mention I noticed was to flatter performance
• Pawnbroking revenue 18.5m - no recovery annualised would imply 10% increase on PY -  GP improved 10%, 15% before impairment - core 60% of Gross Profits
• Personal loans will become smaller part - good - based on S166 review - No information whatsoever - pretty poor 
• Gold & Pawn scrap - down 15-20% - GP more impacted - lower prices - pawn scrap expect is a function of pledge book too - 10-20% of GP
• Retail sales up 26% to 12.4m, margin 41% due to provision writeback - 46% ex provision vs 41% PY
• Good increase in dividend - 4p (from 2.5p) - solid balance sheet ex S166 risk
• Benefit of a value stock - results are not particularly pleasant reading yet share price up strongly
• Recovery thesis there - but slower than I expected - in event of furlough/employment windback - the items purchased may rebuild pledgebook
• Not sure I enjoyed reading the results - versus other holdings - more complexity than I would like considering the M/Cap / profitability
• As a value/recovery play - it will need to be sold at some point - attracted by the cheapness / differentiation to other portfolio constituents / Gold
• On valuation - good upside even without any improvement in book value - Historic P:TB 1.2-1.4 range - which would suggest M/Cap closer to 140m vs 100m currently, P:B historic = 1 - ditto 30-40% upside
• Add based on valuation / recovery potential & portfolio dynamics, no good reason to sell given valuation except
• Conscious of reg risk & hard nosed quality biased long term capital allocation - this would not fit.
• At the time I finished reviewing the results, my conclusion was Hold to Add.
• However, reg risk is blow up risk (so has to remain small in spite of "Value" & not captured in "Stockrank") & that is with the ST bounce an odd place - Far be it for me to judge but I think "net cash" in a lending/FX business is "inventory". 
• I didn't enjoy reading the results & if I have to read a lot of reports, I'd rather it be a pleasant experience.
• SOLD on Monday 16th August - maybe rash & it would be a lie if the sequel is not having some impact here 
• An approach I have adopted re selling vs holding, especially on smaller positions or things I don't consider long term "compounders":
• Would I buy at today's price if I didn't already hold - if no, then it should be sold
• In this case, we have gone from 30-40% upside (and the upper multiple is pre-reg) and that is now down to 15-25% - given the risks I wouldn't add.
• More I think about it, if I am looking to make 10 - 20%, why do it with illiquid sub 100m M/Caps (especially given volatility)
• Also, I realise now how much is common with ST tips - sincerely hope it was an unconscious bias - some were before he tipped (very nice) & others a long time after. 
• This also reduces some ST exposure - and something I will need to think about with my holdings.

IHC up 13.90%

• Quite the bounce for an in line update - there was some weakness - I don't think ST mentioned it this week.
• Growing interest in new range of SLE products (all over world - so far seen Japan & China) and Viomedix disposable respiratory products
• Move to new site in Croydon in 2022 - delayed - don’t want to disrupt production - look forward to 2nd half with optimism
• HOLD

DUKE up 7.78%

• This move was more in line with what I would have thought & I am not sure if it received any favorable coverage in the week.
• Received net cash of 6.9m£ - successful exit from Irish insurance broker - 29.4% IRR - highest ever - invested since 2018
• 35m in liquidity for investments - further validates model etc - utilised buyback option as deal successful
• I am still somewhat torn on this as a financing model - you take the risk - if it pays off you get your return & have to walk away - it doesn't pay off, you are stuck with write downs or some sh1tbag equity warrant thing
• HOLD

CLX up 14%, IXI 10.4%, SUP 6.93%, BBOX 5.76% & BOO 5.18%

• Noise mainly I expect
• CLX risk management is to looking even sillier - interestingly I thought that should be done with another holding, but more on that in a different post.
• Suggests that there is a fair amount of demand, just there was a persistent seller & had a bounce since they are out.
• BBOX - I remain baffled by the willingness of efficient market participants to pay a substantial premium to book value (which gets bigger), when those book values represent market value. 
• I met someone who does Private Market Real Estate - there is a lot of capital going into logistics/distribution/last mile. 
• I think many capital intensive industries go through phases of boom & bust. 
• I think the market has environment may have resulted in some people mis-allocating capital - REITs should be more dull unless you are losing a sh1tton because of leverage?
• BOO got some positive media coverage I think.
• IXI - No idea.
• SUP - No idea.
• ALL HOLD

Portfolio Fallers > 5%

BOTB down 48.8%

• Stay tuned for Worse of the Worse - The Sequel - Things can always get worse

Updates & Results

All the updates during the week are covered above so nothing further here.

BOTB update covered in a separate post.

And Finally

I mentioned a couple of weeks back that the last week of July was tough and I loved it.

This week was much harder, even though it was a lot less work but weird as it sounds, I still loved it.

Annoying as it is, this unfortunate serendipity is one of the things I love about markets - the day you start feeling good (like in May/June 2021), the market comes and punches you in the mouth.

And sometimes it follows the punch in the mouth with a swift kick in the genitals a couple of months later (Went to a self defense class this week - I understand it hurts both sexes the same).

I would be lying if I said this last week didn't hurt, but at times like this I am reminded of my wife.

She lives with me, so I don't forget her, but:

She is an amazing person.

Her best quality is that she can (and does) tolerate me.

Number 2 is she will literally walk through hell with a smile - and I am glad for it because it allows me to do so and I tried my best to do so this week - it was mostly easy because it was only one day that sucked!

I tried my best to maintain a sense of humor & am trying to do my bit as a good citizen of FinTwit. 

I didn't appreciate what I perceived (perhaps wrongly, but I don't think I am alone) as Schadenfreude which is why I made the comment I did.

If I lashed out or offended anyone, I'm sorry. 

Adieu