October Week 1 - BOO you October Week 1

Public Service & Macro - 6 whole weeks of Macro;

Transactions - Valuation Jitters; #QTX

Updates from: #FCAP, #IHC, #REAT, #TSCO, #VLX

After the travails of September, October has not started too well either, but straight into it, with a catch up on public service & Macro Observations.

Still no editing so my apologies in advance.

If wondering, October Week 2 might be up later but think I am going to take a break for a while so likely be tomorrow - which will be portfolio specific only (hence the long public service / Macro catch up here)

Public Service

During my hiatus, I did a little reading, listed to a few podcasts & watched a lot of TV.

Audio/Physical Books

Anarchy by William Dalrymple - very good - I thought the first part about the empire was an attempt to get operating leverage from past research into Indian history.

Angrynomics - it would have been very good but I think the message is now somewhat tired/repetitive - that does not mean to say it is wrong - only 5 hour conversation - very easy audiobook

George Orwell: 1984 & Animal Farm - I had heard so much about these books & never read them because I figured I already knew the story - interestingly that is also what the Narrator said (Stephen Fry)

On the podcasts front - nothing new but I must say I really enjoyed listening to Jase Trading Bases on Twin Petes Investing - his content is well worth checking out

Respect the technicals even though I won't buy Water Intelligence because it is dripping with red flags - seem to have gotten on fine since I sold!

I have also been listening to The Acquirer's Podcast - all are interesting - good for confirmation bias - value people over there - not sure why but Episode 35 stuck out - I like the fly fishing analogy.

Also, I watched Squid Game (among other things) - a plague on viral marketing / network effects / need to fit in - because there is 10-15 hours I will never get back. 

Strictly Come Dancing would have been better (I am not a fan!)

In my humble opinion, a better use of Netflix would be Billion Dollar code (I think the prophecies have been severely dramatised), Freedom Writers & The Guilty (similar time commitment I expect).

Cursory Market/Macro Observations

A whole month and two weeks of Macro all in one post - this will be fun.

China Real Estate

So we had Evergrande - is it a Lehman moment or is it something else.

I think one of the reasons the Lehman moment is remembered as the Lehman moment (versus the AIG moment) is that Lehman was allowed to fail (given mass bailouts ex post, it was probably a mistake) - I think Chinese authorities are happy to learn from others and will probably make different mistakes.

Is it systemic & will it impact the west - if there is a meaningful slowdown in China constructions, resources are at risk and countries that are heavily dependent on resources will be impacted - looks like China authorities are going to reduce reserve ratios to stem the dramas - deleveraging is painful - how painful remains to be seen.

For more risk to the West - people maybe interested in some of the developments Ocean Wilson Holdings is responsible for (especially if China says make sure you prioritise China Real Estate over international oeprations.

Michael Pettis on twitter is worth following if interested - these things take a while to work out and maybe a China hedge would be to NFT Michael Pettis - I'd be long his views over the next 12-18 months.

Bank of England

Bank of England has been causing quite the ruckass lately talking about how they are going to tame inflation with a rise in interest rates. See how it goes but if they raise 4 times by end of 2022, I think a lot of UK PLC might be having their own Lehman moment (considering the number of house purchases in the last year, with several I expect on 2 year fixes.

I think the commentary was more nuanced and if there are 4 rate rises by end of 2022, they will be 5 or 10 basis point rises as opposed to the 25 we are accustomed to. I am not aware of any reason other than custom that it is 25 basis points - but the finance industry does like round(ish) numbers - if rates do rise I would be worried about holding housebuilders / companies reliant on transaction revenue - fortunately for me TPFG has a letting business.

More interesting (perhaps worrying) was the commentary earlier which I think did not get enough attention (maybe it did - I was not really following) but they said that if they need to control inflation, it would be appropriate to do that via interest rates as opposed to QE.

Independence aside, that sounds like monetary financing / fiscal dominance (assuming the government needs to keep borrowing - which it does) - and yes I understand on technicalities QE is not monetary financing - but if it walks like monetary financing & it talks like monetary financing ...

Monetary financing maybe the most appropriate strategy to meet their mandate but still think it may have got more attention.

Inflation/Data/Bank Results/Markets

Borrowing from Week 2, but last week the data and results were unquestionably good.

Blackrock - WOW - Banks - WOW.

Goldman Sachs wins the squid game - BlackRock deserves the new title of Vampire Squid.

BofA guiding towards loan growth, NIMs improving, reserves still being written back - Investment Bank results bode well for Barclays. JPM more cautious on outlook but a bank where risk management prudence is taken very seriously (from what I hear), GS ditto - not surprised that they are the better performers.

GS transaction fees make FCAP look pedestrian and they like to grow organically.

JPM & MS making strides in Wealth Mgt & they have their eyes on the UK - long term with all the Fintech & US entry - I'd be worried about UK banks.

The FED has a REPO facility for bank excess reserves (deposits) - and they get 5 basis points on it as I understand - seems a good way for them to be scalping 5bps on a $1.5 trillion - but Banks are fine - the rescued the system - Thanks Central Banks & Banks.

I have not spent any time looking into this Repo thing - have stopped clicking on Zerohedge tweets and no longer am paid to understand these things so that might be completely wrong

Still don't buy banks - should get over my anchor on Blackrock (ex-holding) & buy back!

Retail sales beat estimates (a value number - inflation can cause a beat!), jobs strong, claims going down - labour is now not a demand issue but a supply issue - isn't that interesting - FED will start tapering in November.

Inflation was transitory but as it turns out it is variations of transitory which are slightly more permanent although some of the transitory could return.

I am more concerned about PPI vs CPI - which indicates margins are getting hit, but then when I saw Pepsi Results - WOW - I would really like to own this company - very few companies that big where I can say I like every product they sell (probably not tried them all!)

I understand a Cheetos Haloween costume is being released.

In all the drama of the last few weeks and explaining Risk On title from October Week 2 - what I found interesting in these 6 weeks of dramas is:

Energy & Industrial Metals are outperforming Gold;

Sensitive / Cyclical sectors vs Defensive sectors - column 2 is last 4 weeks as of 18th October.

I expect small caps vs large caps / value vs growth would show something similar.

I think we are peak supply chain dramas - I am not sure how people define shortages - but numbers are up 10-15% on 2019 in many instances - suggests that production is just fine - but there seems a lot of demand around - nobody's fault (apart from the companies failing to deal with production challenges) but thank you central banks & governments for the infinite stimulus - clearly that had no impact on Aggregate Demand while Aggregate Supply was constrained with restrictions on travel / Zero Covid goals  / materially reduced air cargo capacity - again nobody's fault (apart from companies failing to deal with production challenges but thank you governments.

With all the inventory build, I think Post Christmas sales are going to be good & I see that Tesco has turned stock up early for Christmas into a marketing campaign (at least in store).

In my own portfolio, there was quite a lot of churn and cash placed in October Week 2.

I don't particularly follow market (beyond cursory observation) and focus on picking individual companies.

In 2021 I have been lazy and probably a little dogmatic about not wanting to buy what I consider "Pure Value" - Vertu Motors springs to mind - although I am pretty sure part of the dogma was price anchoring and I think not responding to conditions has been a factor.

Given that there was a lot of churn - I also spoke about cash levels being too high - I think holding cash is useful and I would be less concerned if I could hold cash equivalents / cash with some sort of yield, but those are not the times we live in.

I hope I will not need to withdraw (income or capital) from the majority of what I report for many years and given that cash is so the wrong place to be - I am struggling to buy the All World Market (because of valuation and index composition) - less worried about the UK other than the lack of tech exposure - but the ructions in the last weeks created opportunities and I was quite aggressive - perhaps a little too aggressive - but 20% cash is still above what would be the ideal level.

In the short term, I am not sure what it the right asset/security to be in - In the long term, I think cash is almost certainly the wrong security to be in.

With stock picking I can manage it - for my wife which typically looks at passive vehicles - I am struggling unless I try and be clever - and that cash balance needs to be dealt with one way or another.

Details to be provided in October Week 2 and of course I may change my mind on a dime!

Portfolio Review

So another week of losses and this time Mr Market was not cranky - did say it was stock selection.

A few sales in the week, unfortunately Boohoo was not one of them - I have since capitulated!

Boo you October Week 1 & as a pre cursor to October Week 3 - I see it us over 10% since I sold!

A repeat from earlier - some of it was invested in September, but not much on a net basis.

Cash levels are too high in the context of investment horizon - think it is time to do a little more than window shopping.

This was actioned and then some in October Week 2 - thinking on Monday, I might have been a tad aggressive - probably because it is a down day (at time of writing).

Lessons:

Firstly, there were too many company reports in September - partly timing driven, but if there was ever a good reason to cut the number of holdings.

If the issue is portfolio size & comfort level with absolute size of holdings - consider a return of active/self managed capital.

Secondly, don't be rash, especially when the technicals are telling you to not be rash. Tate was a classic example - added quite a lot, even though note said technicals look ugly. Cash earmarked for a purchase is profitable if it is purchased cheaper on a downtrend even if valuation is fair.

That said, with respect to cash balance - the portfolio position size issues as the portfolio evolves apply to excess cash too - for now that is something to be aware off - not sure how to use that information yet

Thirdly, respect the technicals - whether you care or not, other people do - @Stealthsurf was very interesting - and that he says he is a risk manager - Need to improve technical analysis capabilities even if not being used - Note this was a lesson from 2020 & progress has not been sufficient.

Fourthly, the whole point of writing things down & having this journal is to look at things without the effect of the market & the colors / external influences - if you override what you wrote down, you need an Management Override note to explain why.

Fifthly, once a decision is made - especially for holdings that are loss making - don't let the loss interfere with the decision - a couple of pennies here and there will (hopefully) be immaterial in the long term. BOO you October Week 1.

Finally - with all the technical lessons - don't start trading/investing on technicals - it is not what you do, nor what you enjoy.

Transactions

Sell QTX (tiny bit left a la ARC) 

• On valuation grounds & jitters - too expensive and I can't get comfortable with those multiples - even though I agree that measuring this business on earnings alone is not fair.
• To be honest, even when I purchased I was uncomfortable with the valuation & I am not sure I would make the same decision again.
• As it turns out, the CTO sold majority of his holding around the same time I sold- good / lucky timing.
• Very good company - glad the small piece will keep me following properly.

Portfolio Risers > 5%

TSCO 11.2%, TPFG 8.73%, FNX 6%, IHC 5.91%

TSCO 11.2%

• Who would have thought my boring income stock which as a hard core capital allocator I would exclude would be the biggest riser & capable of a 12% move in a week.
• Upgrade to guidance & cash generation, Bookers recovery & outperforming in retail - I shop there and I am not surprised - think they are doing good things in the space
• Capital return program, removing pension from net debt - big recovery payment post sale of Asia - SUPR (buying back own properties - improving property backing) - share buyback - basically doing some of the financial engineering of PE
• First use of capital is to re-invest in the business and customer offer (AKA Price/Margin!!) But with online, CAPEX & new Urban Fulfilment - increase size of market/asset turnover
• Given competition growth relies on ability to increase market share without hurting margins (gross difficult I expect), more hope on Op Margin - beneficiary of £ stregnthening - installed base might help with market share / customer offer but will not improve margins IMV
• HOLD - Solid income stock & maybe getting more efficient but that is all it is.

IHC 5.91%

• Interim Results well received reported Revenue at 21m - up 47% with acquisition - EBITDA 3.6m, Op Profit 2.6m, branded products 55% & 8m Net cash 
• Alphacore - orders up 104% on PY, SLE6000 approved Japan/China - acquisition synergies and product mix - GM improved 1% to 52.5%
• Revenues in line but with cost control - profit to be slightly ahead - Cenkos raised EPS forecast by 12% - 3.8p to 4.2p - 30x pretty much
• Good work on margins given prioritising organisation/R&D/commercial/regulatory teams to facilitate growth ambitions - Looking to reduce cost of components suffering higher increases, SLE integration largely complete
• Alphacore - order increase in UK & using rental model for first time - will expand/replicate model with international distributors
• 1.4m capitalised development costs - double the whole of prior year, big working capital outflow - which is odd considering - Look out for those receivables - selling internationally / China - sometimes the cash does not turn up
• Quite a short update and no details re the original business - expect it is down 4% ex the NHS ventilators - Think it was a good acquisition but I am not sure if this is masking the previous business underperforming - business development/R&D/New Products/International - making the right noises
• Certainly not what can be described as cheap but ambitious plans and making good progress towards them - applying the lessons - technically it has broken out from 7 year resistance & respected those levels
• HOLD - Issues with position size might drive sale - don't think it is a sell in the context of a long term hold, would like to increase but not at current prices

TPFG 8.73% & FNX 6%

• I discussed in my September review - both very good companies - TPFG was briefly my largest holding (at end of Week 1)
• Would love to think I influenced TPFG but my pixel date was after the movement referenced above.

Portfolio Fallers > 5%

UPGS -13.1%, BOO -12%, G4M -11.4%, ARC -8.5%, BOTB -8.4%, GETB -6.94%, QTX -5.21% (above)

• UPGS & G4M I expect are a function of supply chain jitters / online slowdown readacross from Boohoo & Asos which were punished severely on their results
• GETB, ARC & BOTB the move is probably within their normal spreads but it was not a good week for illiquid small caps (at least in my portfolio)
• Arcontech I think is looking interesting & I am tempted to add back my earlier sale but on October 11th, I see that Leon Boros reduced quite significantly - I understand from previous work he understands the sector well & certainly knows the company well & probably had a chance to speak to management - None of this is relevant & I would still think it is worthy of more than a non holding.
• BOO - continuing the run from the September results - as mentioned in my last post, I capitulated and BOO is up some 12% since I sold - If I had sold on the warning - I would be better off by 10% & if I had sold when I decided to sell as opposed to dilly dallying waiting for a recovery I would have been flat!

Updates & Results other than those covered above

FCAP, REAT & VLX

FCAP Half Year Update

• I purchased this ahead of the AGM udpate where they issued strong guidance and material deals closing for Canvedish - they were not joking about that - up 286% (which means H2 will be less good - Deal fees are very very lumpy)
• HY Revenues up 5% on PY, Cavendish M&A up 286% to 16m (4m PY). Ex Cavendish 15.6m (down 4% on 16.3m PY). Institutional stockbroking up 19% to 3.9m, trasnaction revenue down 14% to 8.7m
• Diversification strategy paying off & Cavendish seems to have outperformed in a very strong market - 18 M&A transactions, public & private - decent dealflow
• Pipeline healthy & now feel confident (not confident before?) of revenue in line with upgrade guidance of 45-50m.
• Not expensive in context of peak earnings - revenue forecast for full year seem achievable, I would say beatable - still paying a near 5% dividend forecast - previous reasons to buy confirmed/strengthened
• ADD - Starter position - thesis being confirmed - NB was add at AGM Update
• PS Added in October Week 2

REAT Contract Wins

• Number of recent wins - one is 550k over 3 years with 3 year extension option, number of smaller to medium sized contracts, 3 year terms - reactive cleaning for rail/housing associations & 3 in maintenance/cleaning/hygiene - Adds maybe 2% to revenue in current year but should be a positive development, although very limited in current year
• Too small - probably shouldn't have purchased in first place given criteria - will hold for now - technically seems to have found support on decent volume
• HOLD

Volex Acquisitions

• Promadex & Terminal & Cable - CAD 22.5m funded from existing debt - independent operating businesses, mgt retained - Combined revenues 31m, EBITDA 2.9m, PBT 2.4m - 7.7x EBITDA 
• Promadex - wire harnessing domestic appliances & advanced manufacturing in Mexico - x selling for DEKA & global manufacturing base
• TC - rugged harnessing - leading defence supplier, complements Irvine & longer term contracts as well as expansion to "off highway" (construction/industrial/agriculture)
• Think they should have provided stand alone revenues as well - both interesting acquistions (not overpaying on face of it) - Richard Beddard comments re confused strategy ring true
• Might be market related or Richard Beddard related but post Irvine I felt more comfortable and now less so - technically looking pretty good but fully valued in my view
• There have been director purchases (again) having added previously - Options vest in year to 2022 is also a concern.
• I would include Volex (where as an external shareholder) I don't get the warm fuzzy feeling of being a co-owner and feel I have to let the management ownership do the talking 
• On a valuation perspective, they seem not too far off fair value today assuming they meet their 2024/25 targets, unless it is a much better business then / growth sustained - they have been through a similar story before & it has blown up before - maybe different this time - will complex assemblies stay complex?
• HOLD - Few new ideas that I am thinking about and this may well be one to take out mainly due to position size and not comfortable adding at current levels

And Finally

Mark Minervini has been making the rounds on Twitter - never read any of his books (maybe I should) 

Guruleaks - What does Upstart do?

I have a begrudging respect for people who are able to trade blind on the company & purely on the chart - and if they are able to do so profitably, why judge.

If it was me, I would have said as such.

Adieu