January Week 1: Minutes that shook the World

And took Markets back to 22 December 2021

Where is the Premium?

Risers: #SRC #SDI #SOM #NRR

Fallers: #UPGS #MSFT #DUKE #CLX

Transactions: #AIR

Updates from: #SDI #SOM #SUPR #SRC #AIR

Public Service

Everyone is trying to predict what is going to happen over the next 12 months - value is cheap and all that.

I think Jeff Bezos said something along the lines of  the antidote to anecdotes is data or maybe he said something else about reconciling the two - it serves my purpose to not verify!

Albert Bridge Capital - Where is the premium

Pictures are indeed worth a thousand words and worth looking at to see where the premium really is. My anecdotal observations would support this view but as with aggregates, they hide details (like 5 stocks driving returns) unless you seek them out.

For example in the UK, banks, miners, energy companies show a lot of growth and are cheap on trailing earnings - I think it would be bold to expect the same growth to repeat like last year.

No expertise whatsoever but someone told me in 2016 no less, that miners are best bought at very high multiples because that represents depressed earnings.

If I had too, I'd say low return asset intensive businesses are best bought at a low multiple of book value (but what isn't!!)

A lot of portfolio reviews were put out from various PIs and I think they are well worth a read. Thanks to Mark Simpson - Danger Capital for all the summaries from Small Caps Live and thanks to all of you for the feedback (my first non-spam comment) and not laughing at me.

A few others came up after this - they are all worth a read but I did like Simon_Brilliant Leader probably because I see a similarity in styles if not ability.

Also, honourable mention for Scott Porter who remarkably brought us lessons from Bruce Lee - be like water!!

Cursory Macro/Market Observations

It was all going strong, Santa had forgotten to leave and carried on rallying as the new year came - clearly he did not receive the minutes of the last FED Meeting.

The minutes were released on Wednesday and the markets no likey - FED go TapeRRRRRRR (extra Rs indicate faster tapering, rate rises & QT).

The next day we received newsletters with headlines like Minutes that Shook the World - which I think can be described as journalistic exaggeration at best.

Apparently inflation is out of the bag - did folks miss 2021?

Got to feel for the FED no

Why are they not raising rates with inflation and the economy strong? 

Why are they raising rates with inflation and the economy strong?

There was also a jobs report or 3 - the one that matters I understand was on Friday - I had better things to do.

What I found interesting was not the drawdown on speculative technology/growth or even the Monster Tech inevitables. 

Majority of these have been showing relative weakness over the Santa Rally phase and certainly the months prior - pretty much since the last updates - less so Apple but that seems to have joined the party

 

3 trillion is the TOP! 

But rather the sectors that showed strength:

Over the last week (not a very long time and subject to all kinds of flows/reversals after year end), energy and financials outperformed vs utilities/real estate/staples - rate sensitivity notwithstanding, in a risk off environment, the former would be lagging.

Zooming out might tell you something different as might the first 70 minutes of 10 January 2022.

Quick word on 2022 Outlook

I was a lot clearer on my "outlook" for 2021 than I am today, hence less comments on it. Personally, I think you are far better off betting on a travel recovery today than in 2021 (I am looking at Saga as a way to maybe play this given the insurance business or alternatively service providers). Similarly, I would have been more comfortable blindly adding to financials/energy this time last year.

It is probably better that I am not able to make the macro calls so I can focus on companies - my holdings on the whole have very good balance sheets & should benefit from higher rates on their net cash. 

Outside the leveraged world of capital markets (Wall Street vs Main Street as it were), I am not sure how much difference there is between rates at 0.25% or 1.25% - consumer squeeze is coming regardless.

My top 5 holdings are Bloomsbury Publishing, Property Franchise Group, Tate & Lyle, Supreme & Somero. 

Tate I think is due a re-rating as the business starts to look better & income funds stop selling down.

The others I am confident will beat earnings (Somero has already guided as such in December, so unless they pull an Air Partner, doubt they will upgrade again), but given the strength in 2021, I have no idea how the share prices will react.

They have all had a very strong year and are cyclical  (less so with Tate & Supreme) - while I don't think the outstanding earnings will repeat in 2022 especially for TPFG, I think the earnings levels and longer term growth is more sustainable than the market is giving credit.

For the long term, I think these are all buy and hold core holdings - while there might be some tinkering, I hope to hold all of these for many years to come. 

Cash is currently just above 20%, which is at the upper end of where I keep it (used to be 30% upper end) and with 29 individual holdings have room for at least one more, otherwise cash will be placed into existing holdings.

In the event of pull backs, I will likely add to the second tier holdings - the 2-3.5% range - Sigmaroc, Games Workshop, Cranswick, Premier Foods & Computacentre are higher up on this list. BATS too but less comfortable (or more comfortable, less sleep easy).

The chopping block has:

Unilever - other preferences in sector - held in "income" account - BATS would deliver more income, far superior valuation & same growth.

Glaxo - competence & think the spin off will result in me having two businesses that I don't want and one I don't understand - same thought process as BATs.

EMIS - small position size combined with valuation means I can't add.

I am not going to be rigid with 30 holdings - if I sleep easier and get lower returns with 32, so be it, but at 35 I think I will employ a one in one out principle.

Portfolio Review

So the start of 2022 where once again I lag behind my chosen benchmark (but not UK's Warren Buffett who invests primarily in the US).

In deja vu from 2021, the portfolio has little or no exposure to Banks, miners, energy companies. Where it does have exposure to a miner, it is a gold miner neighbouring Kazakhstan.

Fortunately, SRC in the basic materials space added a little something as did the receipt of some dividends - my last update said to add - I didn't.

On the other hand, SDI which I reduced as my last act of 2022 provided a positive update specifically delivering on the things that made me reticent about selling on valuation grounds. 

2022 is going to be fantastic!

Lessons:

A check on the 2021 lessons - hard work - was an easy week but good on the reading outside portfolio & deep dive into one new candidate & shallow dive into 3 - valuation prevents further diving. Dogma - did buy Air Partner on day of results (no trading on announcement day needed flexibility). No tinkering done - at 1 per week - my trade run rate is 52, which is good - maybe I should set a flexible cap on trades per year.

Transactions

Buy Air Partner

• A holding I sold in November of 2020, with notes at the time - Better opportunities, very low dividend as rebased. 2nd half not confident. Might be beneficiary of freight/Brexit delays as well as vaccine logistics.
• Think I pretty much called it correctly - as far as the other opportunities, some did well others less so (BooHoo & LoopUp)
• Anyway, this is the second materially ahead of expectations announcement in two weeks and trading on a single digit multiple. While the logistics is not going to repeat, there will be recovery in the air services/safety side & with acquisitions, business is less cyclical and balance sheet is strong with the cash backing. JetCard plays the luxury (inequality) theme + sports events with crowds.
• Always been a decent quality business (albeit cyclical, less so now) - share price not reacting to +ve updates because coming up to the accounting issues price levels.
• Treatment - maybe a trade, could be an investment. Not going to be an investment because the trade went wrong - Run profit, cut loss - how earnings progress for 2023, fall off in freight vs recovery in servicing.

Portfolio Risers > 5%

SRC 18%, SDI 10.2%, SOM 8.26%, NRR 5.56%

• Somero - I get the feeling it is in a lot of people's favourite picks for 2022 (which makes me a little disconcerted). No news but certainly a positive update in December & the succession announcement was very well communicated & likely allayed a concern that shareholders had.
• NRR - I think this is part of the value rotation / Omicron not as bad as feared re restrictions and what not.

SRC up 18%

• Well, at the last update my notes said to add - if I had used the proceeds from SDI sale to buy, I would feel like less of an ass for reducing SDI.
• Maybe I would have done but with the acquisition & director purchases, I think the share price has got some short term excitement.
• Acquisition of Johnstone quarry group & Guiting - Specialist supplier, Oxford & Lincolnshire - high end housing - 8 quarries & two processing sites, SW England - 86mln tonnes freehold reserves & 40 year life - £35.5m - funded from existing resources (Debt?)
• 14.7m Revenue, 5.9m EBITDA & 3.6m Op Margin - immediately earnings enhancing on "underlying" basis - assuming 6m LT Debt & 3.6m in plant Hire contracts
• Can say 45m EV - OK multiple - founder staying on in advisory capacity
• Also conditional acquisition - 14.5m for two further quarries / additional mineral reserves - attractive location to JQG - market access/footprint - Complete between H2 2022 and H2 2024 - delivery of quarries & mineral resources with planning permission - Interesting - they have form in acquiring some valuable things on the side of buying good things
• Buy and build cyclical business late cycle or timed build back better perfectly - who knows but one of the few ways I have exposure to the latter
• ADD to HOLD - might need to pay up but probably shouldn't!

SDI up 6.93%

• All the reasons I was reticent about reducing came out in a single RNS - but I sold on valuation grounds & this RNS does not change much with respect to valuation especially with the share price recovery.
• Deposition business acquired for 4.9m - vapour deposition - 2.5m revenues, 0.7m EBIT - immediately earnings enhancing - Very reasonable for the nature of the business - do like semiconductor production/equipment given CapEx cycle
• Atik cameras - further firm order for cameras in PCR machines - year to April 23 - still pandemic related.
• Looks like I was wrong on this one re valuation stretched - this should certainly justify, if not enhance valuation
• Hold to Add - Purchase shares sold or at least some of them?

Portfolio Fallers > 5%

UPGS -8.58%, MSFT -6.62%, DUKE -5.85%, CCC -5.22%

• UPGS - I am not sure what drove the fall - they went ex-dividend & people do strange things around ex-dividend. I thought BME results bode well for UPGS (or at least not concern). Anecdotally, I did a walkaround over the weekend - furniture retailers (SCS, Carpetright, DFS - dead), furnishings on the other hand (Dunelm - lively) - HOLD
• Microsoft - refer to minutes that shook the world - I know it is overvalued but sell it & replace it with some sh1tco at 10x - no thanks - I'll see you in 5 years. I wait for the day where flows before Pros results in a dislocation in Monster Tech like ESG is doing in tobacco (to pick a sector at random) - HODL
• CCC - participating in the tech wreck & technically looking like it has rolled over from the previous trend - I accept that it has re-rated and might be at or around peak sales but I don't think this has a speculative valuation by any stretch - updates indicate that they are struggling to fill demand, which is not the worse place to be - HOLD - Monitor price action - gut/analysis/expectation says Add
• DUKE - No idea - has been weak since results - has someone spotted something? - the results were good - Market has reduced for me - HOLD

Additional Updates & Results

Only Supermarket Income REIT with another announcement - fairly standard stuff - not worthy of separate bullets, but anyway.

SUPR

• Sainsbury have exercised option on 21 of 26 stores in the JV with some pension fund. Price to be determined based on open market rent/standard contract - should be positive for NTAV - Very rate sensitive.
• Acquisition of Sainsburys (34 yrs, 7 yr RPI linked) and Asda (1st Asda - 10yr, 5 yr open market rent review) - 55.1m 5.3% NIY (Better) & refinancing (good - spend less on arrangement fees).
• ASDA (higher risk tenant I think) - will renovate for docking centre/fulfilment - standard contracts
• HOLD

And Finally

Some entertainment from the OG

Charlie Munger Roasts

Because where would the world be without laughter and Charlie Munger's one liners

Adieu