It´s been a while since my last blogpost. A lot has happened. First, I decided to stop blogging in German language due to the low overall interest in stock markets and finance here in general. I guess “Once burnt twice shy” describes how German speaking countries feel about risky investments.
Second apart from a cosmetic language change I want to leave a few words on the development of markets. Markets, both domestic and international, were and are still driven by central bank monetary policy. The Fed´s December rate hike as hasn´t been well received by market participants with the S&P500 falling about 5%. In hindsight the Fed funds rate increase was probably ill timed, with progressive weakness in the Chinese economy and less than stellar growth in the US. This comes in addition to mounting deflationary pressures driven by low commodity prices. Of course currencies also reacted to the now diverging path of monetary policy. The dollar further strengthened against almost all major and emerging currencies and seems to be on its way to parity with the Euro.
Naturally these developments have impacted the portfolio, which was down 5% in Euro terms for the year 2015 vs. a gain of the S&P500 (in Euro) of 10.6%. Stock picking last year for me has clearly painted a bleak picture. The decrease in the Portfolio was largely driven by a combination of falling commodity prices and a lackluster performance of core holdings partly offset by a strong dollar.
Earnings of National Oilwell Varco and its Spinoff Distribution now have been hit hard by the fall in oil prices which led to dramatic cuts in upstream CAPEX. Naturally new orders for Rigs dried up sending south the share prices of suppliers of the same.
Especially the weak performance of IBM weighed on the portfolio returns. While the turnaround at big blue seems to be on track, “old” business deteriorates at a faster rate than anticipated. Coupled with a strong dollar revenues are down heavily, which is punished by the market. However, I remain confident in the future of IBM. At current valuations (P/E below 9) IBM does not have to grow to be a profitable investment. Flat revenues coupled with buybacks would be sufficient to justify a significantly higher share price than today. This is a pretty low bar for IBM to take, making this an attractive investment. I expect revenues to be flat year on year beginning 2017, given abating headwinds from FX going forward.
Chicago Bridge and Iron massively under-delivered as well. While the backlog of the construction company grew with new projects they had to take a big hit from the impairment side. Turns out CB&I overpaid for its acquisition of Shaw that saw large cost overruns in two of its nuclear projects. The division has now been sold and a stronger CB&I should emerge. However, the impairment has left the balance sheet highly levered and has damaged trust in the management, that clearly did a bad job in communicating the risk factors associated with their nuclear division. With a P/E of around 7 there is not much downside from todays prices with a the prominent nuclear risk factor divested. I expect a reversion to P/E ratios of about 10 due to the high quality back log. This represents a discount to the valuation of competitors and would translate into a stock price of $50. If management can execute strongly there is more upside to be expected.
Strong Dollar, or weak emerging market currencies has especially effected those holdings with large international exposure. In my case Tupperware, Philip Morris and IBM. Philip Morris and Tupperware stocks have delivered acceptable performance in constant currency. Philip Morris performance could even be described as strong with the company taking market share from its competitors and growing volume in some regions. Going forward I expect continuing strong results from Philip Morris with considerable upside in case of stabilizing FX in emerging markets. A reinitiating of the stock buyback program would present an additional option to the upside. Same goes for Tupperware that is even more reliant on emerging markets, some controllable events have impacted performance in the last quarter, sending down shares by about 15%. I believe this is a good opportunity to further buy into the stock.
All other holdings have performed well. In 2016 I will try to reduce the dollar impact of my portfolio by focusing on investing in European equities, which after recent market corrections have arrived at attractive valuations.
I hope to be able to dedicate more time to the blog in this year and deliver some interesting content.