Q1 Update
Disclaimer: This is not investment advice. The below article is for enntertainment purposes only. Views expressed may be wrong or flawed. The author may own positions in the stocks mentioned and my buy or sell these stocks at any time without prior notification. Please do your own research and do not rely on the below.
Q1 is in the books and the Augustusville portfolio has gained about 5.7% (EUR pre-tax) throughout the quarter. While this translates into 24% p.a. and is therefore a more than satistfactory result per se, we are lagging the wider market with most major indices, in particular the tech-heavy ones, posting higher returns. There is a share of “negative alpha” in the portfolio: The merger arbs in Spirit Airlines and iRobot did not work out and some of the shares we own (like Delfi) lost ground in Q1. We are not losing sleep over this at all: We are not too interested in running the “relative performance derby” and even less so on the short-time period of one quarter. Fund managers may be encumbered to justify their returns for such short time frames. Fortunately, the Augustusville structure is that of a family office (run for patient family members) and permitting us to focus on fundamentals. Fairfax was the biggest positive contributor in the last quarter, notably despite a short report by Muddy Waters which was weakly argued in my view.
Our portfolio is relatively low on tech exposure and free of any AI plays. We have avoided the magnificient seven which are great businesses yet look richly valued right now. Moreover, we have not participated in anything related to crypto currencies or tokens, the intrinsic value of which we do not understand (if it exists at all). Overall, the market action of Q1 has alienated me. It seems like FOMO and meme stocks are back (just look at the insane action around ticker DJT) and the optimism priced into large-cap tech and large-cap quality stocks make me expect poor forward returns. Earnings yields getting are unattractive compared to bonds: Mr. Market is in such a good mood that I expect it to worsen from here. I will post some slides from the formidable JP Morgan Guide to the Markets to underpin these points:
I also posted an update in the portfolio section a week ago and as you can see, very little trading happened during March. That does not imply the portfolio manager is not working; There is a lot going on in the markets and the developments are followed closely. The watchlist has been extended and I continue to evaluate positions through the reporting season. When 2024 started, the idea was to make it the year of the crocodile: Watch the environment carefully, be patient and act decisively if you see an attractive opportunity.
If such an opportunity can be found in today’s markets, it is most likely in neglected corners of the market where not a lot of people are looking. This is, for one, the micro and nano cap space. There is essentially always something to do in micro and nano, but also as a group, these shares have not participated much in the bull run of the M7 & crypto. Moreover, if you are prepared to leave the US, there is a decent opportunity set to be found in this sector. The advantages of small companies have been described many times: Their is less competition since many investors (like institutionals or index funds cannot buy them) and more ineffiiency because only a few investors cover the companies while you have 50 sell-side analysts looking at Microsoft. Oftentimes, small businesses can be understood more easily because they are less complicated. On the flipside, all the really successful companies are big and no company has a plan to remain small. So the businesses of large caps oftentimes are more proven.
The second area of the market where I think a shelter from crazy overvaluations may be found, are special situations. I like to keep a number of those in my portfolio because they are fairly uncorrelated to the broader markets and in many cases self liquidating. If markets tank and things get cheap, selling your shares feels painful and it is great if a special situation works out around the same time. There are various service which permit you to track Special Sits, you can follow some accounts on Fintwit or subscribe to (paid) services like Special Situation Investments or Inside Arbitrage which do the work of screening and tracking the situations and, in the first case also provide a valuable investor community for discussions.
In the following, I will provide updates to some nano caps and special situations investments in the Augustusville portfolio.
Odet: Odet to me remains the mother of special situations given its holding structure with a large discount to NAV, pending sale of large assets, share buybacks and spin-off history and potential. We have experienced more of this in Q1 with Odet’s listed holding Vivendi advancing on a 4-way split and further buybacks within the conglomerate (a purchase of Odet shares by SOFIBOL). Meanwhile, the sale of Bolloré Logistics to CMA CGM was completed and Bolloré/Odet sit on a lot of cash. LEt’s see what happens next.
I am pretty excited to see the Annual Report of Funkwerk. The supplier of train communication systems appears to have had a stellar Q4 or some unexpected special effect. Back on November 29, Funkwerk reported a 9M EBIT of 12.8m EUR and a full year expectation of 18-21m. Preliminary full year figures however show an EBIT of 27m EUR, implying a Q4 EBIT of 14.2m which would mark the highest quarterly EBIT in history. The company however produced a sober press release, emphasizing the “EBIT below previous year’s level”. Let’s see if the numbers get confirmed, but it seems to me that the Thurungian firm is better at operational execution than at self-promotion to investors, which is fine to me.
A company I own but have rarely discussed is Eurotel, based in Gdansk, Poland. Eurotel is a Polish distributor / reseller for Apple, T-Mobile and Canal+ products and operates both only and through physical stores and online. Many of their customers are businesses and they often do not just sell the product, but service packages. After a record 2022, the outlook for Eurotel in 2023 had darkened and as expected, sales and earnings came significantly lower than last year. I believe the effect is temporary and the business should grow over time. Even in 2023, Eurotel managed to generate a profit of 4.63 PLN/share and expects to pay a 4 PLN dividend versus a share price of roughly 42 PLN. I am not a dividend junkie, but I like cash-generative businesses and I do not mind receiving dividends.
Hortico aignificantly underperformed its 2022 number, producing a net income of 10.6m PLN versus 17m in the previous year when it benefitted from an extraodinary effect from the sale of one asset. Sales improved sequentially over the year and I hope growth is in the cards for 2024. Even for the status quo, Hortico generates capital returns of about 20% and is conservatively financed with close to zero financed with close to zero financial debt and an equity ratio close to 60%.
Nilorngruppen is an early reporter in the portfolio and so we already have Q1 numbers. The business appears to be picking up a little bit, with increases in order intake, revenue and profits and operating margins. Also, management took a relatively optimistic stance for the remainder of 2023, pointing to a strong March and hopes for the Outdoor segment to improve by Q3. When I wrote up Nilorn, I called it a “cyclical compounder” imlpying it will not improve every quarter but experience better and worse times. Yet, the business should do well and improve over an extended period of time. For 2024, I hope for an EPS of 6 SEK/share or better.
Nordwest Handel is my most recent write-up. The distributor reported strong earnings of 3.93 EUR/ share for 2023 despite a decline in sales. In a slowing market, the company managed to reduce its working capital to generate cash and announced a dividend increase to 1 EUR/share, for a yield of almost 5%. Given the malaise in the construction sector, 2024 started slowly in terms of sales, but I remain convinced of the capabilities to company which will soon open a new storage center and it working to extend the reach of its own brands.
I hope you found this “tour de force” and the general thoughts helpful. Feedback/Thoughts/Pushback are most welcome.
Thanks for a very good blog post and portfolio review. And stable returns should not be underestimated - it may indicate moderate risk-taking, a a good thing in the long run.
For Nilorn, it has recently been highlighted as a top case by a respected, highly skilled analyst in a Swedish podcast (Market Makers). The view is that there is a relatively large upside (30-60%) and not much risks, although you can never know everything. I just wanted to add this comment to let you know that the company has a good local reputation, e.g. the cheapness is not due to questionable quality.
Disclaimer: I don't own Nilorn myself but I definitely think it's an interesting case!
Thanks again for the portofolio review. Very generous of view. Funkwerk and Nilorngruppen looks interesting. Thanks for putting those on my radar. Eurotel I would be careful, this is the type of business that can be disrupted in the digital era, just my 2 cents!