Performance Update & Market Comment H1 2023

A tough market and the case for screens

Disclaimer: This is not investment advice. The statements in this post reflect the authors opinions which may be biased or wrong. The information presented may not be accurate. The author owns shares in the companies mentioned in the below table. He may buy or sell shares at any time. Please do your own reasearch.

July is almost over and I have yet to post my performance update per 30 June 2023. So here come the update and a few thoughts on the market and my process. The Augustusville Portfolio was up 13.6% in EUR including dividends in H1 2023. While satisfactory in absolute terms, the performance of the portfolio (blue) was slightly worse than the S&P500 in EUR (yellow) and the DAX (red), yet better than the STOXX 600.

Performance Drivers:

Here is the attribution of my performance to various positions. The way to read it is: Of the 13.6% we made in H1, 2.9% were coming from TIM. I left out anything that had an impact smaller than +/- 0.2% and there was also a positive contribution from FX of +0.5% (I do not hedge FX).

Of the six losers displayed, only Texhong and We Connect are still in the portfolio, both will be scrutinized during H2 2023. Digital Media and Carisma were special situations that did not work out as planned.

Also, I exited much of my German basket which turned out to be lower quality than I had hoped. In the case of Endor, I lost faith after they had to significantly adjust their reported results, probably after discussions with their auditor. A similar case was United Mobility (UMDK; not in the table above) where the company was unable to file annual accounts in time and the new CFO resigned after one month. Both positions are now exited, I was not careful enough when entering them and made unforced errors here. In general, I have very little tolerance when “funny” things appear to be going on in the accounting/reporting space.

On the winning side, the acquistion of TIM SA by Würth and Logistec announcing its strategic alternatives were big pluses. My biggest position Odet announced the sale of the Bolloré Logistics business at a favourable price (in my view) and I expect further repurchases and at some point a simplification of the group structure. In the meantime, I will be happy to hold. Fairfax was discovered by more investor but I still think there is some more potential here. The group will benefit from higher interest rates and the insurance operations look strong. Fairfax is still trading slightly below book value and I do have some trust in their equity investment process, in particular if the market tanks. My timing on the Lastminute entry was surprisingly good (does not happen often). After the run-up from 21 to 28 CHF/share, I sold the position since I am not 100% convinced that it is still very cheap and corporate governance is still shaky. The portfolio is still relatively young and there are more changes than I would generally like, so I am still not in steady-state mode, but getting closer to it. I have a decent watchlist of companies and am looking to selectively adjust the portfolio and recycle capital that comes back thtough dividends, resolved deals or sales.

Market Comment

It was a tough quarter for investors and the overall environment remains difficult in my view. The market has been expensive for years and while valuations became a bit more reasonable in 2022, prices came roaring back in H1 2023. In particular, all kinds of formerly high-flying tech firms, the Teslas, Rivians and Carvanas rallied hard in H1 2023. AI was the next big story and NVIDIA its icon. At the same time, some fundamental cracks became apparent as higher interest rates weighed on bond portfolios, causing a crisis in some US regional banks. In much of Europe, the economy is still in zero-growth territory while recession expectations haunt much of the developped world. High equity prices mean low prospective returns and one of my favourite illustration is this graph from the Aleph Blog by David Merkel. Who would not want to make 2.4% in large cap equities (S&P500) when bond yields reach 4 or 5%? It does not make much sense.

I am not a macro guy and nobody reads this blog for general market takes. So just one statement before going back to individual stocks: In my view, this is a good time to be extra careful and diligent.

On the other hand, there is a lot of dispersion and disparity in the market. My Twitter Space Co-Host Andy made a good thread on this here (in German but Twitter translate works most of the time) . Essentially, if you look at market segments, large cap US tech is historically expensive. It is a big segment of the market which is why the market overall is expensive. But if you only look at non-US or small/micro cap or non-tech, this market segment as a whole is reasonably priced and there are companies in this segment which are cheap. This is why I think it is possible to compose a portfolio of attractively priced high-quality securities in this market, in particular when you can invest across countries, sectors and include micro/nano/pico caps, unlike many institutional investors. You however have to comfortable to not hold the most popular stocks. I am convinced that such a portfolio will be able to achieve double-digit prospective returns going forward.

How to find these? One traditional way is the classic screener. Financial information is available at cheap prices and using Yahoo Finance, TIKR, roic.ai or some other tool, you can create your own screens. During my holidays, I reread The Little Book that beats the market. It essentially argues that you should buy good (i.e. highly profitable) companies at cheap prices. Greenblatt and the Valueandopportunity blog have argued for EV/EBIT as a measure of cheapness which is great because the metric is widely available. When it comes to profitability, the Greenblatt definition is EBIT/(Net Fixed Assets + Net Working Capital) which I have had more difficulty finding, but is can be approximated by Return on Invested Capital (ROIC) or Return on Capital Employed (ROCE) which seems more available.

So I think, a decent way to build a portfolio is to screen for companies that have, e.g. an EV/EBIT <8, ROIC>15% and any other criteria you might add (exclude certain industries, countries etc.). If you go through the list, you are likely to find some good ideas. To be clear, I am not advocating to look at two KPIs and that is the analysis. It can only be a filter and a first step prior to going deeper and looking at business model, competitive position, management, incentives, capital allocation and so forth. In there will be companies in the list which make for poor investments aswell while great investments may not be included. For fun, here is a selection of my current portfolio with their EV/EBITs and ROICs (the ratios do not make sense for all sectors):

Despite the shortcomings of screens, I plan to perform more screening-based analysis in H2. The reason is that while there are probably 10,000+ companies I could invest in, there is only so much time to do research. There is a lot of stuff to read on websites, forums, blogs and substacks and there is Fintwit and I tend to get carried away by the availability of so much information. Therefore, I will need a simple, systematic way of looking at companies and hope doing that screen-based might be efficient. We shall see.