April Week 2 & 3: Page 6
Markets/Macro: Page 6, Seriously
April Week 2: All quiet, but busy
Updates: #SDG #TPFG #CMCX
Would love to share something super insightful but with two weeks the blog is too long.
Secondly and more importantly, if I try and force things when I don't want to / it's not easy to do, then this is no fun to do and that is not in keeping with my new found freedom!
In the immortal words of Homer Simpson,
"Son, You learned an important lesson today, If something is hard to do, it is not worth doing"
Cursory Market/Macron observations:
So must have been a slow news week because even though we knew Macron would win the French elections 1st round comfortably, apparently Far Right Candidate Marine Le Pen was gaining ground.
I thought her name was Marine Le Pen.
We should be thankful - Geezers need excitement, if they can't find it, they seek violence.
Meanwhile, Elon Musk made a Passive, Active, Passive, Activist investment in Twitter to save us from the censorship.
Maybe Elon cares about the civic town hall like Jack cares about the civic financial architecture or maybe they just want to get richer. For people who hold Twitter stock and believe it to be fundamentally undervalued, the poison pill presents an interesting opportunity to get rich.
FWIW, I don't think Twitter is all that censored.
FWIW, I think part of the reason Elon is doing this is because he wants to show he can't be touched by the SEC 'cus
Damn, it feels good to be a Gangsta!
I guess it matters to markets for the same reason Kim Kardashian matters to whatever it is that the Kardashians matter to.
More relevant to markets, there was central bank speaking & more inflation hoo haa.
Inflation - may even be starting to provide some ammunition for team transitory to make a Phoenix like rise.
Central Banks after all are going to control it - reduce Balance Sheet / raise rates - you name it, its on the table - and this time they mean it.
Except for Europe - where we are still waiting for Germany to tell Madame Lagarde to do her job.
All because Macron didn't want a centrist opponent!
All of this causes bond yields at the long end to go memetastic and the inversion is so last fortnight!
150 bps this side of St Ledgers Day with inflation still going crazy (after all, the Fed can't print more ...Real Good**... may cause inversion again - or is that reversion?
Quasi government entities with long duration cashflows at high valuations no likey, Elon Musk aside.
** Looks like all those nutjobs that think about money in the context of commodity exchange sound a little less nutty, present company aside.
Portfolio Review(s)
April Week 2
April Week 2 - a pretty good week for the markets, less good for me but still positive territory - company updates are coming out pretty good independent of Mr Market. Some holdings are even going up for no reason - is it that risk on feeling again?
My portfolio tilt to value/dividends continues but it is doing nothing for me because rather than a tilt to value, we have a tilt to energy / commodities (not sure if they are value relative to their own recent history) if you consider price to book - a fair measure in my view if your industry of choice is capital intensive commodity.
Dividends are comforting!
Transactions:
SHED - Sold - overvalued / expected / required return, proceeds used for DLG & BDEV.
As I may have previously mentioned, I don't like the premise of paying a premium to book value for mark to market institutions, especially where the underlying Return on Equity / Capital is quite low.
IGP - Sold as covered in the previous week.
Didn't like the style of reporting and no growth. Operating leverage without growth is of little use. Bruce Packard (who's weekly is well worth a read) covers it well.
DLG - Purchased - Income portfolio - Part of the tilt to value I reference above & buying before ex-dividend as referenced last week. Note to self - Dumbass!
High dividend yield and low price to book - brand equity is not captured in the book value. Given nature of operations - product is a legal requirement for large part of the business. Combined ratio fall should be offset by the rise in investment income & nature of operations mean investment book ought to be lower duration & recycled faster into higher yielding assets.
They didn't offer me a price for car insurance - suggests pricing discipline & for those that like shareholder yield over dividend yield - share price gets any lower we will be in the teens!
BDEV - Purchased - Income portfolio - Part of the tilt to value I reference above & buying before ex-dividend as referenced last week. Note to self - Dumbass!
Low price to book and decent yield - at that price to book, where the book value is mainly land and housing inventory, the valuation is only justified if they expect write downs on the land bank / inventory.
Given 25% gross margin & current inflation - writedowns would in theory be below replacement cost & housing materials have seen mbusiore inflation than apparel (I think).
Structural/demographic - housing still there. Housebuilding boom - if my cynicism is warranted the lobby will receive incentives to build as opposed to subsidies to sell.
Updates & Results:
SDG:
- A license renewal for Bed Linen, was due for renewal in 2024 but done earlier because they wanted to work on new lines to develop new products. 1.4m in revenue for three years licensing - accelerated income.
- Given the valuation, business momentum & brand value (their customer base or those at Harrods probably less hurt by inflation), this is probably my favourite stock in my portfolio - doesn't feel peak earnings given the licensing deals (high margin) .
- Former PI/Trader favourite and do want to check the revenue recognition - very full sized in that context.
- HOLD
TPFG:
- As what is teetering around my largest holding, you can imagine that I went through these results in quite a lot of detail which I shan't repeat (boy that sounds pretentious even when written!) and Belvoir's the day before as well.
- The historic results are pretty spectacular and those growth quantums cannot repeat this year or ever - a step change in the business however, notwithstanding the Hunters acquisition.
- Admittedly I am talking my own book, but the big difference between Belvoir & TPFG in my view was in the outlook, which I read as Belvoir will outperform in a less buoyant market whereas TPFG are looking at growth in the current year.
- Pretty much both of them are the perfect business if inflation is what you are worried about - businesses that can grow (revenues structurally linked to rent inflation with no real additional capital required to grow).
- Don't take m word for it - Old guy who had lost it but is nows kicking ARKKSE (viva Buybacks!)
- The Chairman/Founder who is retiring wrote a letter well worth reading and certainly was reassuring as a shareholder.
- All of that said, I cut my flowers by 23%, 10% in April Week 3 & 13% today - it was very big especially in the context of liquidity - as much as I would like not to care about quote risk - I do!
- HOLD
CMCX
- A very short update, certainly reassuring in the context of the no news sell off that took place.
- Net Operating income of 280m, (H1 126m) - top end of guidance. Gross client leveraged income 288m (335m -14%), Leveraged trading revenue 230m (349m, -34%), Non-leveraged 48m (H1 24.2) (55m -12%)
- FY operating costs 173m - Higher operating costs next year, marketing & personnel, Singapore & 2 other jurisdictions launch & non-leveraged
- Client numbers similar to last quarter (lower), APAC record AUA/clients (good - part of thesis - revenues flat mind)
- UK non leveraged platform, launched internally - set for release in Q2 2022. It is interesting that this was ahead of time and budget but missed the ISA deadline / lifeline - odd planning!
- A strange one to be honest and one I find hard to get comfortable with but that is because of the volatility in the business.
- Clearly benefitted from higher volatility in quarter/H2, has a number of growth initiatives and it is a way to play the higher volatility theme.
- Excluding the volatility in the business, it meets a lot of criteria for long term compound / clear growth initiatives & like OZ/NZ exposure.
- HOLD to ADD - Too cheap to sell, lots of reasons to add - manage business volatility with position size, which leaves room for small add
April Week 3
Well after a quarter where I was enjoying my relative lunch and at least in part due to the well received updates from a number of my top holdings, April week three brought me back down to Earth.
For those that remember the start of the year, Supreme was a top holding and came back a lot - didn't care too much because it was a false price - well now I do!!
Transactions:
TPFG - Reduce - as discussed above
NRR - Sell - the reported portfolios will be all equity / cash - not sure where proceeds will go but will top up holdings in income account.
This was sold and repurchased in wife's SIPP - her existing allocations are cash / bit too growthy with a few tilts. Adds value to her portfolio and uses cash which was excessive - now better balance across two of us.
Updates & Results:
CLX
- Acquisition of iTrinergy - Software designed test networks for software application/digital transformation testing market. 1.4m Revenue 80%GM, 60% Revs N America.
- NE-ONE hardware & software based Network Emulation platforms - Pre-deployment real world testing core business - also pre-deployment testing of moving from on premise to cloud (growing segment)
- Scale the existing business using CLX network, particularly in US. Military/Gaming/JPM/Juniper (impressive list for £3.5m!). Then 1.4m revenues over 16 years, likely no profit
- 2.5m, with further 1m contingent on Sales in 2024 payable in cash/shares 322k max shares.
- Was able to ship all orders planned for March, 22 slightly ahead. Order book continues to build / at record levels currently - significant sustainable growth over coming years - will provide guidance on 23 & 24 in full year results - iTrinergy earnings accretive in 2023 / significant profit contributor in subsequent years
- HOLD to ADD - Big position, expect it to get bigger on this update - probably been a little too cautious with this - which might be a consistent theme! But can often be helpful!!
SUP
- Revenue at least 130m & Adj EBITDA at least 21m - in line. Vaping 10%, Sports Nutrition >100%, Batteries/lighting 2-5% - GM higher in all areas. Vaping - Sainsburys/Morrisons/Discount, govt support - double digit growth will continue, Batteries/lighting defensive - higher GM due to better buying power
- Normally, you'd think nothing to worry about with the share price drift, but then the IPO curse strikes:
- RM price inflation, Whey powder especially
- 2023 - profitable growth driven by Vaping tempered by commodity price inflation in sports nutrition & higher wage/transport costs
- Forward purchased Whey to mitigate, reviewing potential price increases/general operating/production/distribution costs
- Wasn't expecting the update today and was a reduce based on the Folio check - maybe I should have been less complacent at the start of the year re quote risk!
- Hold to Reduce depending on price action - expect price action will take care of the reduction for me! And 'twas thus!
- Note: Pretty sure one of the reasons this was not sold was loss aversion.
- Note: When the add because trading update would be well received went to plan, it was a cut - remember opportunistic works both ways & cannot be laissez faire about opportunism.
MONY
- Revenues up 8% to 92.3m (85.5m). Down 10% LFL Insurance 41.1m (flat), Money 24.8m (up 37%, 18.1m), Home 9.1m (down 65%, 26m), Travel 3.2m (0.4m), Cashback 14.1m (acquired). Full year EBITDA around 2019 levels, profitability H2 weighted.
- General insurance - FCA gudielines - higher retention (good for DLG), search traffic competition intense. Travel insurance close to 2019 levels
- Money - recovery in borrowing & bank promotion offers - good - part of thesis. Home in line with Q4 21 - no energy revenue as expected
- Travel - best quarter in 2 yrs - Ice travel revenue synergies being worked on. Cashback strong in travel but weak elsewhere (consumer spending!)
- Agree on strengthening and strength of brands / consumer saving in squeezed environment. MSE has strengthened over last month.
- Reading this update, I think why do I bother with "Value" but then the share price reacts favourably and I guess this is why - down at least 10% on purchase pre dividend!
- HOLD
FCAP
- FY Revenues 52.4m - up 12%. Retainer 6.2m up 3%, Transactions 15.8m (down 26%), Insti stock broking 5.9m (down 13%) - Capital markets total 28.3m (34.5m - 18%)
- Cavendish 24.1m up 99% from 12.1m - more complex exquity market in H2 particularly after war in Ukraine
- Revenue upgrade - from top end guidance 50m to 52.4m - profits remain in line with expectations - flaw in business (shareholder model) - profits accrued by employees
- HOLD - Cheap / business owner mindset - under management will be a growing diversified financial services business - unlikely to be pleasant - correct position size in context of s'holder model!
AAZ
- It really is remarkably cheap - production ahead of Q1 last year (down sequentially) but prices not so much and added copper
- Solid balance sheet - $40m in cash and inventory - 30% of M/Cap - Azerbaijan risk - strategically pretty important (and sadly I expect economically/societally irrelevant)
- HOLD: Record lesson for future - can get exposure without competence - do it smartly!!
- Note: This record for the future is probably fancy talk for loss aversion!
TSCO
- Again, I could provide the details of this update but I am sure more accurate regurgitations are available elsewhere.
- Market did not react very favourably, which is understandable given that they have reduced guidance for operating profit - inflation is biting.
- I don't have 1st hand experience of damaging inflation in life or in investing (present times excluded) - sometime I read results, I look at the valuations on what used to be Quality at Any Price and think maybe I am underestimating the inflation risk to businesses assuming the market is somewhat efficient.
- I dare say market efficiency, my assessment & inflation itself have pretty wide ranges.
- The results are fine - I am a customer and it is pretty obvious they are doing a lot to improve the value proposition and customer experience and trying a lot of things to improve the same and it is good to see that reflected in customer metrics.
- Tesco Whoosh & "Dark Stores" - 4x the pick rate - interesting that they are moving on these themselves vs Sainsburys/Morrisons partnering with Deliveroo - benefit of scale / vertical integration or just capital intensive?
- But my own store - part converted for Dark store and things moved around - kind of annoying!
- As I have said previously, as a hard nosed capital allocator I would not hold this stock
- Low margin / low return business - 37bn in Assets to get a 2.5bn in Operating Profit
- Doing a lot of good things but all that hard work & Capital investment goes just to keep the business still. Gross margin is less than the operating margin for majority of my portfolio - -
- But I hold and may well be adding to the holding because of Property assets 16.5bn at NBV, 18.1bn in Market Value - that covers a huge swathe of the 30bn EV / 20bn M/Cap one would think & probably makes this more attractive than recently sold SUPR!
- From a portfolio perspective - something of a stalwart / cash equivalent and arguably better than cash given the freehold backing & the dividend is well covered, balance sheet better than it has been in a long time
- HOLD to ADD - Portfolio fit with add given SUPR disosal & position size. Not the best place to optimise long term Return on Capital
And Finally,
Something you may not know about me is I am a Manchester United fan - have been since the glory days - it has also likely piqued my interest in the stock market.
I told my Dad to buy stock in Manchester United (because I discovered they were listed when my Dad was watching Working Lunch or checking Pg 200 on CEEFAX.
They got a bid from Sky a month later.
He was then talking about BT with someone in the late 90s - I wasn't asked, but I blurted out that it would go up - they agreed - the stock ends up 16% in two weeks, which I would not have known about unless my Dad had told me.
Was around £4 back then so probably not the best pick!
They asked how I knew it would go up - the truth is I didn't even know I had a 50% chance of being right, but I imagine I made up a reason and thought oh this market stuff is easy!
FWIW, the next stock I suggested he buy was Google at the IPO. He didn't listen.
I expect it was easier to do if you had not gone through the .com bubble beyond the suggestions above.
Anyway, the reason I bring up Manchester United are playing Liverpool today - the last few seasons have been tough - we are used to much higher valuations as supporters - for the first time I am genuinely scared as to what awaits us.
Adieu
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