Alphabet, annual review, balance sheet, bubble thesis, crypto, Donegal Investment Group, inflation, KR1, KR1 plc, multi-bagger, owner-operators, portfolio allocation, portfolio performance, Record plc, Saga Furs, Tetragon Financial Group, VinaCapital Vietnam Opportunity Fund
At this point, maybe you’re done with 2021 – right?!
But face it, we gotta look back to figure out how we arrived…in this mess today! And hopefully recall & reinforce any lessons learned. ‘Cos sure, there’s plenty of good & bad luck involved, but outcomes for both nations & investors are ultimately a result of our (cumulative) decisions & actions, often stretching back years. And last year, as the pandemic dragged on, our drinking problem got a wee bit out of control & we enjoyed that punchbowl just a little too long. And now it feels like the inevitable hangover’s finally starting to kick in.
Well, except for those who started early…God love ’em, how many punters have been trapped in a savage bear market for almost a year now?!
But for the rest of us, last year’s market was the pandemic silver lining. As always, the US led the way with a 26.9% gain in the S&P 500. [The Nasdaq still clocked up a magnificent 21.4% gain, despite some sectors being deep in bear market territory]. Europe was nearly as magnificent, with the Bloomberg Euro 500 clocking a 19.7% gain. And Ireland & the UK brought up the rear, but still delivered higher than average returns, with a 14.5% gain for the ISEQ & a 14.3% gain for the FTSE 100. [On both sides of the Atlantic, the FTSE 250 & the Russell 2000 enjoyed similar 14% gains, whereas a risk-off/stonk bear market reduced the AIM All-Share to a mere 5.2% gain]. Notably, despite H2 price reversals & increasing volatility, all major indices – with the exception of the ISEQ – climbed steadily & closed out the year near annual/all-time highs.
My FY-2021 Benchmark Return remains* a simple average of the four main indices which best represent my portfolio…overall, they produced a benchmark 18.8% gain:
[*NB: I’m adopting the STOXX Euro 600 as my new European index in 2022.]
Of course, if you’re American, please feast your eyes & again puzzle why anyone would ever be dumb enough to buy non-US stocks!? [Beep, beep, does not compute..!] I say that because maybe – just maybe – this is the year home bias finally comes back to haunt you! Or not…alas, it’s a cruel truth that when the US market sneezes, world markets are expected to catch a cold. [Rebranding a US mortgage/subprime crisis as the #GlobalFinancialCrisis was the biggest & most successful #gaslighting of the 21st century!]. But still…surely this is the year to consider diversifying at least some of your portfolio away from a flailing Fed?
And that’s the risk we’re facing: The Fed delivered all the fun & games, and all the juiced-up returns, and now it’s gotta (at least pretend to) take the punchbowl away. ‘Cos #inflation was the real story in 2021… Just look at the US: After a multi-trillion orgy of COVID-inspired fiscal & monetary stimulus, non-means tested #stimmy checks (& credits), unemployment check increases/extensions, student debt/rent jubilees & eviction moratoriums, supply chain disruptions, etc. etc…not to mention continued low & negative nominal/real rates. How could anyone have possibly believed this wasn’t inevitable, and/or this was somehow transitory!? US inflation actually quintupled last year, from 1.4% to 7.0% – with recent momentum suggesting an even higher rate to come. [And Eurozone inflation went from a negative print to 5.0% today!] But in the markets, the only real indicator we saw of this – apart from booming equity markets – was a mere 60 bp increase in the 10 Year UST, to a 1.51% rate as of year-end (& it’s still sub-1.80% today).
So here we are…with the Fed apparently hell-bent on restoring the (imaginary) credibility it lost decades ago, stretching all the way back to ’87 when Greenspan (& Washington) fatally confused Wall Street for Main Street, and decided it – and conveniently, the elite – should be saved accordingly. It’s been a slippery slope ever since, one lubricated by 5 decades of budget deficits & debt. And so, I must wheel out my usual question:
‘Do you really think we came this far…after decades of deficits, trillions in money-printing, and tens of trillions in sovereign debt…to suddenly decide one day to get fiscal religion, turn off the money spigots, and embrace the agony of full-blown cold turkey?!
Yeah, of course not…’
And that’s still true as ever… Sure, we have a new priority – this inflation’s obviously much bigger & hella different than anything we’ve seen in the last 15 years. But that doesn’t change the fact that the Fed, White House & Congress are caught between a rock & a hard place here. If the Fed was serious (as Powell now claims to be) about killing 7% inflation in a booming economy – US real GDP grew 5.7% last year & accelerated to 6.9% in Q4 – arguably, that would require a 12% Fed Funds rate today! And obviously nothing remotely like THAT is going to happen… In fact, companies (& investors) now enjoy a radically easier monetary environment, with the real 10 year rate now sub-(5.2)% – that’s ten times the sub-(0.5)% level it was this time last year – and precious little chance of it going positive again for years to come.
So no, don’t think for a minute that there’s any real plan here…we’re stuck in extend & pretend land. That being said, Biden’s approval rating is getting hammered & US Consumer Confidence just fell another 5% – to 10 year lows – as consumers now grasp the money-bazooka’s always available for economic & unemployment setbacks, whereas the Fed & the government appear to have no real tools or experience to fight inflation. So clearly something needs to be done…and that’s talking big about rate hikes & even shrinking the Fed balance sheet. And so far, the market (& the media) is swallowing it. ‘Cos thanks to idiot investors who bid up #meme/cloud/SAAS/SPAC/etc. stocks to crazy bubble levels – and are trapped in a selling begets selling (& narrative) bear market ever since – there’s this weird schadenfreude in the air now that all us sensible investors should suffer bigly too, which has permitted the Fed to act tough & lower its market put accordingly.
[I’m NOT suggesting a 35% Feb/Mar-2020 collapse is on the cards – COVID was so fast, so big & so scary back then, it took time for the Fed to get outta the headlights & implement what was otherwise a likely down-10% put].
And so, the Fed will finally proceed with some rate hikes…while desperately praying the inflation rate stabilizes, and hoping some transitory components will ease back & supply chain/labour issues resolve themselves. As for any (serious) shrinkage of the balance sheet…well, I didn’t believe it could happen for the last 15 years & I don’t see it happening now. Like taxes, and like all new spending, the expansion of the Fed’s balance sheet was initially intended to be a temporary measure…that quickly turned into a permanent entitlement!
And the White House & Democrats (& media) will step up the campaign to #gaslight the nation that inflation isn’t so bad…what better middle-class privilege is there than to presume you won’t lose your job, you can still pay your bills & your house is worth more while your mortgage is worth less! Alas, the same logic obviously doesn’t apply for the financially vulnerable…but we can see a narrative emerging that the inflation impact (& even the rate itself) is higher for low-income consumers, which suggests it will be addressed & subsidized accordingly. [Much in line with Biden’s redefinition of what infrastructure is & his new slogan ‘Spend more money to get less inflation!’. We also see the same logic/narrative emerging in Europe, specifically focused on domestic energy/electricity costs]. A campaign to blame large corporates for inflation & accuse them of price-gouging is also stepping up here…of course, this is just another form of government price control (not to mention the usual hedonic quality fudgery of the CPI), though I wouldn’t be all that surprised if actual price-controls were ultimately proposed (in specific industries).
And yeah, that’s about it…that’s the plan! And the reason Powell’s touting such an open-ended Fed plan. Inflation could peak, it could be potentially massaged lower, another new COVID variant could emerge, supply chain issues could resolve themselves, workers could realize this new #GreatResignation zeitgeist is just journos day-dreaming, the economy could actually slow*, the equity market could keep falling (& the bond market could join in), the media narrative could change…any & all of these could be ultimately be cited as a reason to put all this tightening on hold. [None of which has happened yet…which hasn’t stopped Kashkari coming out already & calling for this precise pause!] And in the end, it really doesn’t matter…peak Fed Funds forecasts are all somewhere between 2.0% & 3.0% in the next couple of years. Which, regardless of inflation, will inevitably leave real short/longer-term rates firmly in negative territory, and most likely at significantly lower levels than we saw early last year. And that combo. of higher nominal rates & negative real rates is the ultimate exit plan here…i.e. the ultimate money illusion for consumers & the media to fall for all over again.
[*A slowing economy is perhaps the most under-estimated risk right now – a lot of COVID-related government spending should (in theory) disappear by default, and politicians could accidentally (but temporarily) blunder into some kind of austerity theatre here. And US consumers today have NO experience of 7% inflation…we can assume they’ll go hog-wild with trillions in COVID savings, but what are the odds it might actually scare & sober them up enough to put their post-COVID YOLO spending plans on hold?]
Granted, the market’s NOT recognizing that right now…and the Fed, the government & the media obviously won’t recognize, let alone admit, that reality. So I’ve no idea how much pain & patience may be required here. But I do know the Fed put’s still there (albeit at a lower level), the shitco/stonk bear market was inevitable, irrelevant & will ultimately burn itself out (most former bubble stocks are already down 40-70%), and a 19.2 P/E market doesn’t look at all crazy in light of its earnings trajectory & past/present/future real (& nominal) rates. [And even more so in Europe, where UK & Euro markets have basically gone nowhere for 15 & even 20+ years…and where inflation’s subconsciously preferred to economic stagnation, and will be blamed on Russia & evil energy traders/companies anyway!]
So yeah, again I’ll ask my other recurring question:
‘We’re over a decade now into what’s surely the most unprecedented fiscal & monetary experiment in the history of mankind…is it so crazy to ask/wonder whether this ultimately leads to the most unprecedented investment bubble in history too?’
And remember, I was asking that question long before we crossed the COVID Rubicon into a whole new universe of fiscal/monetary stimulus & accelerating inflation. Sure, you could become a landlord…but I wouldn’t wish that on my worst enemy! [I’m still struggling to scale up an allocation to listed property companies/teams that actually add #alpha, and/or who have carved out a valuable/defensive niche, esp. as I have/will likely continue to avoid most retail & even commercial property]. And listed producers are often a terrible play on rising commodity prices – ask any frustrated gold bug – and while they appear to have caught capital allocation religion in recent years, I bet that goes straight out the window in a fresh commodity boom. [And don’t even get me started on the promoters, fraudsters, partnerships & private/physical commodity schemes that emerge in a real commodity bubble!] As far as I’m concerned, #TINA still makes as much sense as ever – there is NO alternative to equities, and in most scenarios equities are the easy/obvious/best way to protect yourself against inflation.
So yeah, I’m pounding the table & banging the same old drum here…I want to be primarily invested for the long-term in high quality growth stocks, which I continue to analyze & buy via a value lens & perspective. And if you have cash here to invest, take advantage of it! But if not, who cares – ‘cos if you believe in the superiority of long-term equity returns, minimal cash is a normal/default allocation – and there’s just as much opportunity today to upgrade your portfolio. Because the most palatable way to discard low quality companies/loser stocks is when you have a potential once-in-a-generation opportunity to reinvest in higher quality/long-term compounders. And don’t panic & second-guess yourself too much – just accept we don’t know exactly what’s going to happen in the next year, let alone the next month or week – but having a big-picture game-plan & learning to average in (& out) is a great way to remove a lot of the usual fear & greed from the equation, and to keep yourself laser-focused on the long-term opportunities & returns ahead.
And with that, let’s move on…
To my own Wexboy FY-2021 Portfolio Performance, in terms of individual winners & losers:
[All gains based on average stake size & end-2021 vs. end-2020 share prices. All dividends & FX gains/losses are excluded!]
And ranked by size of individual portfolio holdings:
And again, merging the two together – in terms of individual portfolio return:
Yeah…even in my young & callow days, I never really imagined I’d ever finish up a year with a +133.8% gain!
It’s just extraordinary – obviously there was a lot of hard work (& patience) involved, but I still feel truly blessed – and hopefully my wife thinks so too, when she sees it & it finally sinks in! Especially when it follows a +56.4% gain in 2020! In fact, what’s even more incredible is that all those gains were basically earned in a single year…i.e. in the twelve months ending Jun-2021, I actually racked up a +267% gain:
Of course, the usual reply-guys will ascribe it all to some lucky YOLO bet on KR1…and frankly, totting up the pounds & pence involved, I couldn’t give a damn! [Particularly as my return would still have been a multiple of my benchmark, even with no KR1 in my portfolio]. But I gotta stress it wasn’t some stupid pandemic YOLO meme stock – as I’ve always recommended, KR1’s a great long-term/diversified 3-5% crypto allocation for any investor. As it was for me, a small high-potential stake I bought four & a half years ago – which was still just a 4.5% holding at the start of 2020 – and it’s been a huge multi-bagger since! And I’m just as pleased with other multi-baggers that have come to fruition in my disclosed (& undisclosed) portfolio – in fact, I noted in my recent decade anniversary post that I still own 4 of the top 5 performing blog stocks to date (& the fifth just received a takeover offer):
And among my undisclosed multi-baggers, I’ll mention two stand-outs…Apple, which is not in my disclosed Wexboy portfolio, but I did mark it with this post (when it was on an ex-cash 10 P/FCF & just ahead of Buffett disclosing his stake!). I also kept accumulating a holding in 2020 & 2021 that turned into a multi-bagger – so much so, it surpassed Alphabet as my second-largest portfolio holding in H2 last year – and was then fortunate enough to see it subjected to an actual bidding war. Hence, the dry powder I still have on my hands here…
But anyway, the celebrations are done – yeah, it was a great Xmas & New Year! – and if you’re a regular reader, you already knew this kinda return was coming. Now the challenge, looking ahead in 2022 & beyond, is to make even fraction of that return…so let’s catch up with my portfolio here:
i) Tetragon Financial Group ($TFG.AS)
FY-2021 (11)% Loss. Year-End 1.0% Portfolio Holding.
For the second year, Tetragon’s my only loser…maybe the market (& management) are telling me something?! Despite that, TFG’s not a traditional value trap – per the latest Nov factsheet, NAV’s up +2.2% YTD, but December tends to include a significant catch-up in non-public stakes/holdings (average Dec NAV gain of +6.3% in the last 3 years). And TFG continues to compound at an average 10%+ pa over the last 5/10 years. But that’s cold comfort when TFG’s discount has widened out to 67%…which, coupled with a hefty dividend yield/payout, means the shares are actually down in the past 15 years! And price drives narrative, so sentiment will remain dominated by the most aggrieved shareholders. Management’s no help either…they may not have screwed over shareholders in the past decade, but they obviously have little concern for the current share price/multiple & have engineered TFG into a net debt position, a convenient excuse for failing to aggressively buy-back shares.
[Less conveniently, Ripple just announced a buyback of TFG’s $150M Series C stake at a premium plus accrued/interest/dividends, so that should put TFG back in a net cash position…noting it also has $100s of millions in (relatively) easy to liquidate event-driven investments, NOW is the time for shareholders to again press management for a substantial tender offer.]
The hiring of Jefferies & filing for a SPAC last year did appear to be an attempt to explore a US market listing, but there’s been no progress since (& SPAC sentiment’s turned negative). The big catalyst here is a raging bull market in listed alternative asset management businesses & the surge in related US/UK IPOs over the last year/two – which makes TFG’s $35B asset management platform a more & more compelling acquisition target. In the end, that’s the business investors are now buying into (#infrastructure crown jewel Equitix alone, for example, accounts for almost 50% of TFG’s current market cap), with a $1.7B alternative investment portfolio thrown in for free…but the timeline for realizing that value’s unfortunately at the pleasure of Reade Griffith, as TFG’s controlling stakeholder. And with Griffith turning 57 in a few months, who knows…that could well be this year, or we could see the current status quo maintained for years to come.
ii) Saga Furs ($SAGCV.HE)
FY-2021 +24% Gain. Year-End 1.1% Portfolio Holding.
Is it churlish of me to be dissatisfied with Saga Furs’ +24% gain last year?! But c’mon, it was a monster year for Saga…as the last man standing, it’s the fur auction house globally (with its main rivals gone bankrupt, or in liquidation), European supply has been permanently reduced with the Danish mink cull, consumer demand remains steady, and fur pelt prices moved higher accordingly. This fed through into a massive 150% increase in auction sales to €392M, which delivered an 81% increase in turnover to €51M (as usual, auction commission rates flex higher or lower with volume), vs. flat operating expenses due to Saga’s restructuring efforts in recent years. This leverage produced a huge swing in earnings from the previous year’s loss to €3.63 EPS. For perspective, pelt prices, auction sales & EPS still remain significantly lower (on similar pelt volumes) than the average €725M+ in sales & average €4.70 EPS (& peak €6.00 EPS) we saw a decade ago at Saga Furs….though less-regulated/lower-quality Chinese fur producers have obviously added more volatility & changed the price dynamics of the industry over the last decade.
But the industry’s new supply-demand also presents a tempting opportunity for those same producers to raise quality/standards & support/encourage higher prices…esp. in an environment where they could obviously be another sub-sector to be targeted for more CCP regulation. Which probably now puts investor sentiment in primary control of Saga’s medium-term share price trajectory. Unfortunately, FY-2021 results were only just released, so last year Saga first looked like a loss-making company (with an erratic recent earnings history) & then traded on a misleadingly low LTM EPS – not something that jumps out at you from a value screen! But with last week’s results, Saga has already jumped nearly 20%, and is now left trading on a sub-0.6 P/B & a 3.9 P/E! [Plus a proposed 9%+ dividend yield!] I know most #valuebros might secretly prefer an OTC stock recommended by a Twitter pal of a Twitter pal that’s pivoting its business with 3x leverage, minimal IR & dodgy corporate governance, and a 4 EV/EBITDA multiple based on a debt paydown & 2025 look-through earnings…but they might be far better off considering a clean, cheap & unique #deepvalue like Saga Furs!
iii) Donegal Investment Group ($DQ7A.IR)
FY-2021 +21% Gain. Year-End 1.3% Portfolio Holding.
Almost 9 years ago now, I wrote an investment thesis that described Donegal as a sum-of-the-parts where management would sell off units, buy back shares & slowly but surely wind down the company – at €3.63 a share, it was a special situation that offered investors a 355% potential upside, even with zero growth assumed – who would have imagined that’s exactly the scenario that’s unfolded since, and that my original price target of €16.51 a share is precisely the recent new all-time-high!
After what was otherwise a very quiet year, that new high was set in November after news of the long anticipated sale of Nomadic Dairy. The sale price was €26.1M, with another €6M of contingent deferred consideration dependent upon Nomadic’s 2022 financial performance – Donegal receives 80% of the total consideration. Since then, Donegal’s announced another (accretive) €20M return of capital, via a compulsory tender offer (to retire 46% of its o/s shares). Once that tender’s completed next month, we finally arrive at the end-game: Donegal will be a €24M market cap company – vs. the last remaining €26M revenue seed potato business, about €5M in net cash & up to €7M in remaining investments & deferred consideration – with very little reason to remain a listed company (subject to all the listing, HQ & overhead expense that entails). I think shareholders can reasonably expect a sale of the seed potato unit within the next year (possibly via an MBO) & a final liquidation. To sum up, my only complaint here is that due to successive tender offers in the last few years – and fortunately, exceptional growth in the rest of my portfolio – my Donegal allocation today is far far smaller than I’d actually like (& nearly impossible to replace). But I guess that’s a good complaint to have…
iv) VinaCapital Vietnam Opportunity Fund ($VOF.L)
FY-2021 +21% Gain. Year-End 4.6% Portfolio Holding.
Vietnam continues to go from strength to strength…while GDP growth was slow at 2.6% in 2021 due to the continued COVID pandemic & export supply chain/logistic challenges, the dong remained strong on continuing trade surpluses & rising reserves, inflation remained subdued (at 1.8% yoy in December), manufacturing & FDI sentiment held up well, and GDP growth’s expected to get back on track for 7%+ in 2022 (esp. with the resumption of international tourism). And as I’d expected, being labeled a currency manipulator by the US also proved a red herring…a great reminder that Vietnam’s a compelling #NewChina opportunity for investors, esp. noting continued US-China tensions with the Biden administration. [Ironically, China’s also happy to outsource production to (& potentially re-route exports/supply chains via) this #NewChina].
This time last year, I noted ‘If this [1,200 VNI] level breaks (a triple top for a dozen+ years) we may have a MONSTER rally on our hands.’ And that’s exactly what happened in April, this level broke…and as intended, I averaged up (at a multiple of my original entry price!), increasing my holding by almost 65%. I anticipate this may herald a new multi-year bull market ahead – we’re now just shy of 1,500! And 2021 was hopefully the first leg of that rally, with VOF clocking up a 37%+ total NAV return…although the share price return was unfairly held back by a steady & rather inexplicable widening of the NAV discount to 18% today. However, that should act as an additional incentive as potential new investors grasp the Vietnam opportunity & notice VOF continuing to set new all-time-highs here.
FY-2021 +72% Gain. Year-End 6.9% Portfolio Holding.
Record roared into 2021 like a lion…as their new $8B dynamic hedging mandate win began to scale up, Record’s year-end 2020 AUME surpassed $70B for the first time in its near-40 year history, up +13% qoq to $74.6B. This mandate win (announced in Sep-2020) also kicked off an aggressive share price rally – which was wonderful to see after REC being neglected for so long! And a great reminder to be patient…in the end, great companies/management teams actually deliver & investors respond by bidding up the shares and the valuation multiple. The shares rallied almost 250% (from a Sep low), with the news of a new $750M Emerging Market Sustainable Fund launch (with UBS) propelling REC to a 100p+ peak in June. This rally also attracted plenty of momentum-driven PIs, who immediately got bored with the normal cadence of Record’s news-flow & developed glass hands as soon as the shares dropped back below 100p (& kept falling). Granted, REC had maybe gotten a little head of itself at that point…but alas, if you’re genuinely hunting multi-baggers, you have to learn to accept & live through periods of over-valuation just as much as under-valuation! In fact, by October, I took it as an opportunity to increase my holding by 20% at sub-70p levels (again, a multiple of my original entry price!).
FY-2022 consensus EPS was also scaled back a little on personnel, tech & new product investment – and a recent lack of performance fees, albeit these have been always been a small % of REC”s total revenue – but at 4.30p, we’re still looking at a +56% yoy gain in EPS & an easy path to 5p+ EPS that I’ve previously detailed. Continued AUME momentum & diversification into higher fee products are a compelling tailwind here…end-December AUME was $85B+, up 14% yoy & this month we had another new product launch, the Liquid Municipal Loan Fund (targeting the German market). Margins are also expanding again, as Record’s recent investment beds down…and while a 32% operating margin may already seem highly attractive, in reality Record can potentially earn double that margin on new/incremental revenue. An ex-cash 15 P/E remains far too cheap for such a well-capitalized high-margin/sticky recurring revenue business! Fortunately, CEO Leslie Hill is putting more effort into Record’s (previously non-existent) IR – I urge you to check out her results presentations on Investor Meet, they’re refreshingly down to earth & exactly what you’d expect from a classic #owneroperator company!
FY-2021 +65% Gain. Year-End 8.6% Portfolio Holding.
Looking back, it’s astonishing that Alphabet’s initial COVID wobble back in Q2-2020 was actually hailed as a sign of impending doom by the usual Cassandras… Since, GOOGL has rapidly regained & reinforced its reputation, once again proving it’s an advertising juggernaut for investors (and an entertainment & education juggernaut for users!). In 2021, Waymo Via signed a new JB Hunt partnership, Waymo One is over a year into its fully autonomous rider-only service in Arizona, Waymo completed a $2.5B external VC round (an emerging pattern at Alphabet units), and overall it continued to make slow but steady progress on its milestones (while rivals failed to deliver & lost focus). The wisdom & success of Google’s Android acquisition was again hammered home in a year where other ad-dependent companies were at the mercy of Apple’s new privacy regime. And speaking of incredible acquisitions, we learned DeepMind had reported its first profit ever (in 2020), on a tripling in revenue to over $1.1B…all still inter-company at this point, but this obviously gives a much clearer indication of what DeepMind is/could be worth today, vs. an original deal value of $500M! And last, but certainly not least, Cloud & YouTube continued to thrive & accelerate adoption with the help of a pandemic tailwind.
All of this propelled Alphabet (briefly) to a $2T+ market cap last year – joining Apple & Microsoft – with GOOGL enjoying its largest annual gain since 2009 & boasting by far the best #BigTech gain of the year. All well-deserved, with revenue growth running at +41% yoy in Q3 & all set this week to clock a similar full year growth rate with revenue well over $250B. Search has now surpassed $150B annually, growing +44% a year, while Cloud is a $20B business growing +45% a year, and YouTube’s now a $29B pa business…which doesn’t even include YouTube subscriptions, which judging by recent Premium & Music subscriber growth is surely $6B+ in revenue now. Putting all that together, Alphabet’s now trading on a sub-25 P/E – and again, adjusting for $150B+ in net cash/investments, capitalizing Other Bets $(5.2)B in annual losses, and estimating the continued investment & under-monetization across its main units, it’s obvious the core Google Search business is still priced in the teens!
FY-2021 +290% Gain. Year-End 24.0% Portfolio Holding.
[WARNING: Yes, KR1’s now grown into a 24% portfolio allocation for me…obviously, a high quality problem to have! But noting its current valuation, #owneroperator team & investment track record, plus the opportunities still ahead, it’s a ‘problem’ I personally remain comfortable with – but please, DON’T try this at home boys & girls, I continue to recommend KR1 as a long-term/diversified 3-5% #crypto allocation in any investor’s portfolio!]
‘KR1 plc…The #Crypto #Alpha Bet!’
Wow, another extraordinary year for KR1 – and me – that’s a +290% gain, preceded by a +447% gain in 2020! But equally extraordinary, such multi-bagger gains aren’t always reflected in the sentiment/narrative you’ll see on Twitter & the message boards. A reminder KR1’s free float is in reality MUCH lower than this table might suggest – and accordingly, price & sentiment tend to be dominated by the marginal investor. Who obviously can have a positive impact on KR1’s share price & valuation – as they did last Feb/March – but also the opposite, with their negative sentiment inevitably reflecting realized & unrealized losses to date, despite KR1’s multi-bagger gains. To be fair, this is mostly short-sightedness…there’s something about crypto volatility that makes investors forget all about normal investment time horizons! Whereas if you believe in crypto as a foundational technology – and realize how early we still are – short-term losses are arguably meaningless in the context of the medium/long-term opportunity & potential gains ahead.
The same is also true of KR1 itself…if you look back at my Nov-2020 blog & the outstanding explicit/implicit deliverables I highlighted, it’s easy to forget how MUCH has been checked off the list since: Rhys Davies has been appointed as Chairman, a new bonus scheme was implemented with an 80% allocation into new KR1 shares, KR1 hit my target 2.5 P/B FV in both Feb & March, new (non-company sponsored) US OTC, Frankfurt & London listings were launched, KR1’s staking operation surpassed the ambitious $1M/month profit forecast Keld made in Dec-2020, Mona El Isa joined as an NED, KR1’s Isle of Man ZERO-tax status was confirmed, the new website went live, all outstanding options have been exercised (except for a de minimis award to El Isa) & the team retained ALL their shares, a new 7-year executive services/compensation agreement was signed with the team ensuring 100% of future bonuses will be paid in KR1 shares, and a new administrator was appointed (to run KR1’s outsourced admin/accounting/back-office function)…not to mention, the team made over two dozen new investments & parachain auction crowdloans since. [And let’s not forget the selection of newly traded #megamultibaggers that have emerged in the portfolio!] All this has been a slow & methodical process led by the Chairman…which we should all applaud, as George, Keld & Janos are the golden geese we obviously want focused exclusively on what they do best, i.e. compounding!
Ultimately, this all leads to the last remaining/most important deliverables – which obviously go hand-in-hand – a professional IR function & an up-listing of KR1’s shares to (say) the LSE (or AIM). Both would introduce KR1 to a much wider pool of investors & ideally deliver a more sustainable valuation multiple re-rating…though contrary to popular myth, KR1’s Aquis listing & minimal IR to date have not stopped it from delivering a 178-BAGGER/165% CAGR to shareholders since Jul-2016! [And yes, the stock DOES track NAV, as we’ve seen in 2021, 2020 & since inception]. To date, the team’s now bought/earned a £20.5M/13.2% stake in KR1, with a majority of those shares only being received in the last two months. I also calculate their stake will more than DOUBLE again when the bulk of their 2021 performance fee is allocated in KR1 shares.
The team have always acted like #owneroperators & now they’ve built up some very serious #skininthegame. As I’ve always highlighted, (proper) incentives drive behaviour & this was always the plan…NOW the current value of the team’s stake in KR1, and the potential for share price appreciation & valuation re-rating, are just as/even more valuable than potential new bonuses to be earned from continued NAV compounding. Not that the latter won’t also be beneficial for the team & shareholders…with the emphasis on #DeFi & #interoperability, I continue to see huge upside potential in KR1’s portfolio & NAV, particularly as we see more & more of the #Polkadot #ecosystem go live this year in the wake of the DOT/KSM parachain auctions & as it becomes more inter-connected with the greater crypto universe via ETH, Cosmos, BTC, etc!
OK, now let’s wrap up:
Considering the year that’s in it, and the unclear/troubled outlook ahead (hey, watch the hindsight…when was the outlook ever clear?!), I want to leave you with a few charts that hopefully offer some useful perspective & some Dutch courage!
The first two come from my H1-2020 performance post…when we were deep in the dark heart of COVID. I recommend reading the post, but I’m repeating two charts here…note I haven’t updated them, but the message remains the same. THIS is how I build a portfolio of high quality growth stocks – we can talk investment theses, metrics & valuations all you want, but when it comes down to actually holding my nerve (& keeping my patience) in the face of fear, uncertainty & adversity, I rely on & sleep easy with strong balance sheets & owner-operators.
In summary, 72% of my portfolio’s allocated to companies with actual Net Cash & Investments on their balance sheet – and I own NO cash-burners – these are the companies that can (& did) survive & thrive during a pandemic, and take advantage of those that couldn’t – and they can do the same in an environment of rising inflation, interest rates & macro uncertainty:
And 66% of my portfolio’s allocated to companies where insider ownership is somewhere between 5% & 50%. These owner-operators‘ stakes are infinitely more valuable than my own…so it’s always their money, their reputation & their legacy on the line, and I’m happy to delegate the sweat & sleepless nights to them accordingly. I also know I can trust them in good times & bad to adapt & grow their business, avoid equity dilution & illogical acquisitions, focus on/invest for the long-term…and above all, to keep #compounding shareholder wealth:
This all makes for a much easier road to buying, holding & compounding… And as I said earlier, NOW is the time to add & reinvest in higher quality/long-term compounders! You have to try average in (& out, ultimately), try eliminate most of your fear & greed by whatever means (& tricks) necessary, and realize the only way you can ever hope to see any/more #multibaggers in your portfolio is to accept you have to live through their (& the market’s) inevitable downturns along the way…and in the end, keep yourself laser-focused on the long-term opportunities & returns ahead. And hopefully, it looks something like this…a ten-bagger & a +26.0% pa return in the first decade of my Wexboy portfolio:
Good luck out there…
Well done on a stellar performance (again)! Just wondering is there a point where you would consider top-slicing some of KR1? – how do you assess the risk of not doing so, now that it’s almost 1/4 of the portfolio’s value?
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Foxy Michael said:
Saga Furs: How can such a value stock be out of sight for so long? Is the market so inefficient in microcaps or is the investor sentiment changing, Wexboy?
I just don’t see how in this very well connected world it suddenly appeared in screens and there’s a pop. We had the auction numbers long before. I believe half-year results too (?)
Stellar performance well done…! Also, can you post more often? 🙂
Thanks Michael – appreciated!
C’mon, how many years has the market been ‘inefficient’ about an incredible mega-cap like $GOOGL!?
So what hope is there for something like Saga Furs buried in the dregs of a value stock screen!? But as I said, FY EPS is finally out & Saga is definitely looking a lot more compelling now on those screens! And if/when $SAGCV.HE doubles, or even triples – and no reason, fundamentally, it can’t – you know that’s when the regular punters actually turn up & want to buy into the momentum! Such is the mystery of markets…
Sure, I’d love to post more…but I hate to repeat myself (go back & look, there’s lots of old posts on investing!), and ironically the reduced frequency could be a (big) contributor to better returns & more multi-baggers!? But don’t worry, I’m not going anywhere…I mean, how many other 10 year+ trackable/auditable portfolios/investment blogs are out there anyway?
Spectacular return, and great write up. Helps to put current market in perspective.
Clem Chambers on inflation / deflation, which I think you’d agree with and enjoy. “Deflation, what are they going to do, un-print money” https://youtu.be/ZEH2r7BD8X8?t=3409
Thanks, Michael – glad it helps! And pull up any long-term index chart, that def helps put things in perspective too…it’s mostly noise!
And thanks…I’m always up for a bit of the Clem Cambers Variety Show!
Cocaine’s a hell of a drug
I’m still not quite sure if this an illicit drug ad…or an accurate perspective on QE & the Fed!?
I read your Saga Furs thesis from back in 2013 and I really like the idea. I was planning on writing about the company and I hope you don’t mind me doing so. I just have a couple of questions and I would appreciate it if you were able to answer them.
1. What gives you confidence that the company will kick on after all the years of erratic? You’ve said before that low cost Chinese producers were undercutting prices, but is anything different to before?
2. How do you feel about the secular decline in the popularity of animal products and the potential long term fall in demand for fur? I’d argue young people in particular are becoming more averse to animal products and fur in favour of more sustainable alternatives. Would you agree with this and do you think it’s a threat to Saga’s business model?
Hi Calico – sure, go ahead!
i) Well, a decade ago, Saga Furs averaged €725M+ in auction sales & €4.70 EPS (& a peak €6 EPS). From a micro-economic perspective, it’s in a MUCH better position today – it’s completed successive rounds of restructuring & is now THE global fur auction house (rather than 1 of 3/4 auction houses) – while on a macro-level, the Danish mink cull permanently eliminated significant Euro supply. But yeah, Chinese producers are still the wild card – but now they have a much higher market share, they may be content to just sit back & enjoy this new supply/demand & pricing, and/or the industry could even be the next target for CCP regulation.
Or not…this obviously remains the $64,000 question!?
But bear in mind: Saga’s new micro/macro situation, pelt prices (at €39) are still HALF the level they were a decade ago, and even pre-COVID (& despite the Chinese) Saga still limited its bad years to an average €(0.43) EPS loss & still enjoyed €2.05+ in its good years in 2015-2019. So arguably, today’s share price is not unreasonable even if we end up stuck back in the same scenario.
ii) What secular decline…if the kids aren’t buying fur, how come $GOOS managed to IPO & then hit an $8B mkt cap just over 3 years ago!? Always believe what people actually do & buy…not that they say! And the fur industry’s now making a good argument it’s actually FAR MORE sustainable than the global apparel/fashion’s (water & fossil-fuel) environmental impact.
And I see NO decline in demand at Saga Furs – a decade ago, it sold an average 9.2M pelts a year, while today it sold 8M in 2020 & 10M in 2021, and is planning even higher sales volumes for 2022. And even if we do see an ultimate decline in Western demand, I’d expect it to be replaced by more Russian/Chinese/emerging market demand, plus an increasing share of global sales being won by Saga Furs.
So the real ‘fur risk’ for Saga Furs hasn’t actually changed – it’s the obvious lack of Western acquirers – though clearly this wouldn’t deter a potential Russian/Chinese acquirer, esp. now Saga Furs is now a global/niche monopoly!
G Evans said:
Hi, and well done! Re Donegal: the Circular says Q20. Are there any plans to redeem any more shares thereafter?
There are no plans to redeem any more shares after the proposed Redemption.
Is that just par for the course? Do you still expect windup this yr? Many thanks.
See Donegal commentary above.
Post redemption, they will have about €5M in net cash, which is obviously/prudently intended as operating cash…so they can’t plan another redemption/liquidation at this point, until they actually sell the last remaining seed potato biz, and/or collect the Nomadic deferred consideration.
Ray Pembroke said:
Congratulations on your 2021 performance👍
Can you advise how many Stocks you have in the Portfolio. I have 24 in my main Portfolio – 21 US Stocks and 3 UK Trusts. I have 1 other smaller Pension Fund Portfolio with 15 US and European Stocks. Think 24 Stocks is probably too many as there are too many variables to monitor
A 2.5% to 7.5% at-cost holding (which could obviously get larger over time) in a single stock is pretty normal/appropriate for most people. You could obviously be more concentrated, but most investors don’t necessarily have the knowledge, confidence & risk tolerance for that. So two dozen stocks is about right – the same is true of my portfolio – with your Top 10 holdings maybe being 50%+ of your portfolio.
If that seems like too many stocks to research/have conviction in/monitor, that would suggest you may be better off with some funds/ETFs in your portfolio to reduce your number of holdings – no reason a good fund couldn’t be 10% of your portfolio, because of the underlying diversification it offers.