Today I sold my stake in Chinese search giant Baidu. The reason behind it is straight and easy: Valuation exceeded my Price Target of around USD 255 per share. In my opinion a margin of safety is not given at this price. Further share price appreciation hence will be based on shaky growth assumptions, that I am not willing to pay up for. (especially in a market where European Junk-bonds yield lower than 10-year treasuries, a levered tec-fund can raise capital at 7% and the only justification to hold on to stocks is the fear of missing out on yet another rallye)
The Investment in Baidu yielded a 43% CAGR with only very little risk of permanent impairment of capital.
Trying to mechanically reduce the process of discovering undervalued equities to a few value ratios such as P/B, P/E or EV/EBITDA can hardly translate into sustained outperformance of the broader market. If this was was the case machines would have replaced every single money manager long ago. At the same time prices for stocks screening favourably would be bid up and the opportunity would cease to exist. Unfortunately this means that a straight-forward checklist, purely based on a bunch of financial ratios, does not help at all.
To define the checklist that can be of help to outperform the broader markets it is necessary to first outline the playing field and from there answer the question of what has to be done to outperform the market.
I believe the playing-field looks like this:
MEI Pharma is an idea brought to my attention by a fellow value investor. Thanks a lot!
I believe that the essence of value investing lies in the uncovering of highly positively skewed bets. Such bets feature the favourable combination of very little risk for permanent impairment of capital and high reward. Value investors focus primarily on the mitigation of downside risks when evaluating whether or not a security is investible. Doing that they seek comfort in robust cash-flows or tangible asset bases that serve as solid lower bound to share prices. Only when it can be assured with reasonable certainty that the downside is minimal an investment awakens interest.
Pre revenue cancer therapy developer MEI Pharma exactly ticks this box. Immediate downside is very limited given the equity is trading at net cash, while the upside is a nice 7.5x. Continue reading
Another year has gone by and I can announce that for the first time in this blog´s short two-year history I have squarely beaten the S&P500 by 4.9%. The value of funds invested is up 18% from the beginning of the year and the S&P500 closed 13.1% higher (in EUR). I am especially happy about the results since they were achieved by employing a very rational approach that I am confident to be able to replicate in the years ahead.
For each company that I bought shares in I could determine with high certainty its intrinsic value and document most of the analysis here on this blog. As a consequence I achieved healthy returns with Clydesdale Bank, Baidu, IBM, RCI Hospitality and Davita. Many of these fine companies are still far away from my target prices and will hopefully serve as foundation for next year´s outperformance. Continue reading
Turning Point Brands (TPB) is a textbook low risk, high return investment with immediate catalysts. Based on conservative assumptions I estimate that Turning Point Brand´s equity provides at least 80% upside to today´s valuation. The company is in the business of selling other tobacco products, which among others includes moist snuff, chewing tobacco, cigars, cigarette paper and liquid vaporisers. A 2016 IPO has provided relieve to TPB´s sky-high pre IPO debt load. Further refinancing and deleveraging of the balance sheet, which is supercharged by utilisation of loss carry-forwards, will reveal true earnings power of the business in 2018. Fetching a conservative multiple on 2018e earnings of 15x, implying an earnings yield of 7%, I arrive at a fair value of USD 23 per share. Continue reading
Selling some few hours prior to a neat 20% rally sucks (See the RCI Hospitality chart below). I guess we´ve all been there and we cannot undo our decisions. What we can do is trying to avoid similar unnecessary letdowns in the future.
To do this I will try to put down some principles that might keep me from hastily hitting the sell button Continue reading
There was recently a major change in my portfolio that was left unexplained until today. I quietly sold off my entire RCI-Hospitality-Holdings (RICK) holdings after having beat the drum for the company for quite some time. Therefore, I feel that I owe an explanation of why I have done so.
As you might have noticed I was quite fond of RICK´s insanely cheap valuation. The position was bought at levels of USD 8 and USD 10 per share respectively. In my Seeking-Alpha analysis of RICK I determined the company to be worth anywhere between USD 12.50 on the low- and USD 16 per share on the high side. Continue reading