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.
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
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
I have been interested in Baidu for quite a while and today decided to open a position in the company by buying 6 shares at a price of USD 163. I will increase the position when prices turn more favorable.
On SeekingAlpha I have outlined why shares are a buy at current levels in detail. You´ll find the pitch including my valuation model here:
For all the folks in a rush, here´s a fast track introduction as to why Baidu may be suitable for a value investor´s portfolio despite being an internet company and Chinese:
- Sum of the parts valuation results in value of USD 255 per ADR
- or 60% upside until end of FY2017
- Baidu search is significantly undervalued trading at 11x FY2017 after tax profits while growing at a > 20% clip
- Comparable businesses command multiples in excess of 20x profits
- High search margins are buried under large investments into O2O and iQyi
- Sale of online-to-offline businesses and Chinese Netflix pendant iQyi will reveal true earnings potential or provide upside optionality if turning profitable.
Here´s a brief update on what Chinese think of the company and its services. Headline here is that Baidu is unloved but there is no alternative for it, which will ensure growing profits for years to come.
I am currently long Baidu (BIDU)