Portfolio Update June 2023

Buys and sells in the last 3 months

Disclaimer: This is not investment advice. The author is long most of the names mentioned in this post. He may buy or sell shares in these names at any time without prior notification. His views may be biased and the information presented here is not to be reilied upon. Please do your own research.

After some deeper-dive write-ups, it is once again time for a portfolio update which I want to use to comment on how some positions have done and on the changes I have made. A few months ago, I introduced the Portfolio tag on my substack and while my formatting has not been consistent, you can see how the portfolio evolved, month after month.

In normal times, I am not the type of investor who trade in and out of large allocations. I will rather build positions gradually and wait for them to play out. Sometimes this takes a bit of time and I am usually willing to give a position 3-5 years to deliver the results I hope for (15%+ p.a. IRR). Also, I generally think that many investors trade too much, maybe because they think that they always have to do something. I am not immune to this. If you spend a lot of time on research and getting to know new companies, you also want to get a result from this. And the result for the investors means to do a trade. I have to remind myself that more trading is not related to better performance and patience is a virtue in the markets. Charlie Munger famously mentioned that he has had years in which he did not trade at all. For me, this general rule of patience does not apply (1) if cracks appear in the thesis, (2) for special situations with a catalyst or (3) if I would like to use the money for better ideas.

With that thought out of the way, let’s see how the portfolio has changed over the last 3 months or so.

Less Cash, still 28 positions

While the number of positions has not really changed (we are still holding shares in 28 companies), the cash ratio has come down from 13.4% to 4.6%. On aveerage, my position size is a bit bigger than it used to be and I exited some companies where the positions were tiny.

I feel that position sizing is not my strongest spot when it comes to investing since I tend to find a lot of ideas which I like and then find it difficult to decide which one is really the best. Therefore, I roughly equal-weight them and just put a bit more weight on the ones I think are “safer”. At the same time, I am well aware that too many share will mean that nothing really moves the needle and it is impossible to follow them all. Therefore, I do not thin it makes a lot of sense to hold positions which are smaller than 2.5% or 3%. If you are not convinced enough of a company to give it a 3% weight, then maybe you should not hold it at all. One reason for some of my smaller positions is that I am still building the position (I often do that gradually and in some illiquid names it can take time). Over time, I would still be happier with <25 positions. I expect the TIM SA, ALJ Regional and Sio Gene Therapies to resolve in the next quarter and will also review the portfolio based on quarterly results. So a number of portfolio companies will go out.

Drought on the Special Situations Side

Sio, AlJ and TIM SA currently form my “self-liquidating” bucket. I have kept such bucket for some time and call it “self-liquidating”, because the plan is to only buy and then never care about it anymore because the company is either acquired or liquidated. I do appreciate this time of exposure in particular in expensive markets (like we are in), because (1) it is only mildly correlated to overall market moves and (2) it provides a cash return hopefully at a time when markets get cheaper. While there were plenty of these relatively attractive situations last year, they are now mostly concentrated in “broken biotech” firms or really illiquid (OTC markets, Börse Hamburg). It seems like there have been less deals, the spreads have been less juicy and I have had less time to look. If you have any good ideas/write-ups, I will be grateful.

New positions:

Next. let’s see what is new.

Eurosnack is a Polish producer of biscuits. I had recently set up a screen for Polish companies which appeared attractive to me and I wanted to keep some Polish exposure post the TIM takeover. There was a good piece on Eurosnack by Iggy which provides a good overview. The company is still tiny in terms of market cap (70mm PLN) and has been growing their presence in supermarkets and their revenues significantly. Last year they were doing 115mm PLN in revenues and as of May, they are runnign 36% ahead of last year. The company has produce operating magins of 4%, 5% and 6% in 2020/21/22. If they can do 6% again on 150mm PLN revenue, that might be 9mm PLN in EBIT on an EV of 74mm, so EV/EBIT just above 8. Seems attractive for me for a growing producer of packaged foods. Obviously, there are significant risks involved, including low liquidity.

Hortico is a somewhat similar setup, a Polish supplier of horticulture products and a distribution business of fertilizers, seeds and related products. The market cap is about 65mm PLN. Covid and the boom in garden-related products was a bonanza for Hortico which managed to grow its revenues by 50% (2022 vs. 2019) and increased its margins significantly. Cased on 2022 numbers, Hortico trades at an EV/EBIT of about 4x. That sounds cheap but it may not be if Hortico again returns to 2019 profit levels. While I expect some reversion, I do not think it will be that harsh as Hortico is also fundamentally a better company, which operates at a greater scale and has opened new markets (like Germany). I was even more encouraged for Hortico when I saw that Alluvial Capital has a position there aswell.

Legal & General is my British addition of the quarter. I described it in detail here.

Nilorn of Sweden is another position I have written up.

Surgepays is another idea I discovered on the Toffcap Substack. If you are not following this substack, you definitely should because, despite its dar colour-coding, there are bright ideas to be found, including various posts on Surgepays. The company is a major beneficiary of the Affordable Connectivity Program (ACP), providing highly subsidized (almost) free internet to low income households. It has ramped up their business recently and in Q4 became EBIT-positive for the first time. I think the company could well do an EBIT of 20+mm USD (anf growing) versus a current enterprise value of 95mm. They do rely on the ACP for this which may not be prolongued and there is some churn. Still I think this is an attractive situation and like to be involved.

A&O Johansen caught my eye because it is active in a similar industry to TIM SA. It is a distributor in the construction industry and distributes tools and materials for plumbers, electricians and so on. The company is still led by the founding family. It has grown nicely over the years.The company has built a good online platform and expanded across Scandinavia. At a market cap of around 200mm EUR, it is still relatively small. The company trades at an EV/EBIT around 6x and so far it expects to continue improving results despite the very difficult construction environment.

Sold positions:

I sold out of a number of portfolio positions, often because they were small and I was lacking the conviction to increase them.

Endor however was dynamically kicked out of the portfolio after weak Q1 numbers and this press release in which they (or more likely their auditor) in May 2023 realized they had reported too high sales and EBIT numbers for 2022. To me, such a statement is indicative of either aggressive accounting or not having your numbers under control and none of these are acceptable to me. Combine this with a promotional CEO and a some headwinds post the Covid boom and I did not want to be inveolved anymore, even though I find their products and brand quite interesting

Invision is a case of a company in which I was just not convinced enough. The company is active in specialized softmare (call center management). It is owner-operated and some good investors are involved. Still, Invision did not manage to ramp up their revenues the way they had promised. I also found their CEO too optimistic and sense that there may at some point be a need for a capital raise. Against this background I exited, realizing a sizeable loss.

Doccheck was also a small position which I somehow could not get myself to increase. The company is running (1) a network for doctors to exchange knowledge, (2) an online pharmacy and (3) a marketing agency for pharma products. It is basically centered around the interests of doctors. Overall, the segments have been profitable and the pharmacy overearned during Covid. The company is run by its founder and majority shareholder who in my view is a creative entrepreneur. What I did not like was capital allocation. When they generated a lot of cash from their pharmacy, they invested parts of it in gold, forest and bitcoin. I do not need a company to do this for me. Moreover, I was uncertain about the prospects and so I got out.

Far Ltd. is an Australian oil company I bought as a pecial situation. However, my impression was that despite tiny buybacks on the open market, there was not much progress and sold - too early apparently, because a week ago, the company announced a capital return and the stock price rose. I need to learn to be more patient with my special sits.

Muehlhan was invested as a special situation in the portfolio. After selling a large part of their business, the company traded below what I though was net cash. However, they did not really to well on distributing that capital and initiated a big special dividend rather than a share buyback. As dividends in my situation are taxed more punitively than capital gains and I was not clear about the path after that, I sold my position around 2.55 EUR. I still left money on the table since the 1.00 EUR dividend followed by an offer to buy out minority shareholders at 1.75. So, finally, this is a candidate for my self-liquidating bucket :-)

Next step

In early July, I plan to post a performance update for the portfolio, comment on some positions which have not changed and share some thoughts on the market. Thanks for reading this and I hope you find it useful. Feedback highly appreciated.