Sunday 31 December 2023

2023 Portfolio review

I’ve had some good ideas this year and plenty of good luck. My taxable account ended the year +53.96% while my self-managed super fund (Australian retirement account) ended +41.8%. These sorts of results are unlikely to be repeated. They are also much less impressive when you take into account the poor results of 2022 (-15.5% for the taxable account and +0.65% for the SMSF).

As I’m based in Australia, I calculate my returns in AUD and I use the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) as a long-term benchmark. This index was up 14.19% for the year.

Since inception, my taxable portfolio's CAGR is 17.09% while my SMSF's is 16.71%. While the results are pleasing, I'm a much better investor than I was a few years ago and I've set myself a goal of pushing the CAGR up to at least 20% for both accounts.

My PA's track record

My SMSF's track record

A few quick notes on the numbers: I do not account for cash in my PA, but I do in my SMSF. Historically, I have nearly always been fully invested in the PA. My SMSF is audited each year, but the numbers here are unaudited and are calculated net of all expenses and realised taxes (but not unrealised taxes).

The year of the busted biotech

After a poor 2022, I focused on special situations in 2023 as I had short-term tax losses. In particular, I focused on biotech net-nets.

My biggest winner was Cyteir Therapeutics (NASDAQ:CYT). I bought Cyteir as it was trading at a big discount to cash and winding down its research activity. In March, when I published my write up on Substack, the stock was trading around $1.62. On June 30, Cyteir announced it would discontinue development and liquidate to return cash to shareholders. I bought more shares following the announcement in the $2.40-$2.50 range. In October, Cyteir released a proxy showing a $2.92-$3.31 range of projected liquidation proceeds. Cyteir currently trades at $3.04, which is below the midpoint and also doesn’t take into account any potential proceeds from the possible sale of Cyteir’s IP (which seems unlikely but not impossible). I sold out of my Cyteir position in my SMSF, which has a low tax rate, to redeploy into THRX. I still hold my shares in my taxable account. It seems likely to me that the liquidation proceeds will land in the higher end of the range; I’m also hoping to sell my shares after a one-year holding period to reduce my tax bill.

Another big winner was Jounce Therapeutics (NASDAQ:JNCE). I first started purchasing Jounce shares in March. Shortly after my purchases, activist investor Kevin Tang offered to buy the company at $1.85 per share plus a CVR. I bought a reasonable stake at around $1 prior to the announcement, and added much more after Tang disclosed his interest in a 13D filing. I didn't expect Tang to make an offer, however I did realise that Jounce's deal with RedX Pharma was unlikely to close. My thinking was that shareholders would vote against the RedX deal and that could lead to a potential liquidation. The Tang deal ended up closing and I made good money.

Theseus Pharmaceuticals (NASDAQ:THRX) was a similar story. After the company announced it would search for strategic alternatives, I (and others) bought shares while the company was still trading at a significant discount to liquidation value. I wrote up THRX in November when it was trading around $3.25. Shortly before the end of the year, Kevin Tang entered an agreement to purchase all shares for up to $4.05 in cash plus a CVR, which also includes a pay-out for potential cost savings. I had a large position in THRX, but I trimmed it by about a third prior to Tang + Orbimed/Foresite expressing interest in taking the company private. I bought some more shares at $3.70 shortly before the Tang deal was announced. I recently sold my entire position for $4.05. I made 40-50% returns on my initial purchases in around 40 days, so the idea worked out very well.

I also had a large position in Aptinyx, which was another biotech in liquidation. I traded APTX poorly. However, the liquidation proceeds were at the top of the company’s estimated range, which meant that my position ended up in a decent profit. I don’t like to rely on luck though, so I don’t feel great about this one regardless of the outcome.

My other large position during the year was CEL Corporation (5078.T). I wrote up CEL last December when the stock was trading at ¥2,109 per share. CEL started 2023 at ¥2,420 and closed at ¥3,210 (+32.64%). The company also paid a ¥80 dividend during the year. The gains were offset somewhat by the yen, which weakened during the year against the AUD. Despite CEL’s run up, it’s still incredibly cheap, however there has been no improvement in capital allocation. It remains one of my largest positions.

I did not have any major losers in 2023. I had some small losses on special situations and a couple of my Hong Kong stocks, which have very small weightings in the portfolio.

I don’t have a many great ideas going into 2024, and between THRX, CYT and APTX I have about 50% of the portfolio coming back shortly in cash. Thankfully, I have some time off work in the new year, so I’m hoping I can find some new ideas. But the outlook is not looking great. I’m hoping to stay patient until I find good ideas rather than rushing quickly to put the money to work.

Finally, I want to say thanks to everyone who has left comments on the Substack, interacted with me on Twitter or shared their ideas. I’ve also benefitted a lot from talking with my good friend Chris, who is a better investor than me, and has helped a lot on some of the most profitable trades this year. If you don’t have an investment buddy, I can’t recommend it highly enough.

Happy new year and good luck in 2024.

Thursday 2 November 2023

September portfolio update

It's time for a very belated portfolio update. I'm hoping to continue posting these updates quarterly, as I find the exercise useful, but it's harder to find time lately.

My stocks performed well during the three months to the end of September. My PA was up 9.62% for the quarter, while my SMSF was up 6.33%. Over the same period, the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) was up 0.79%.

The two portfolios remained heavily concentrated in three stocks: Cyteir Therapeutics, Aptinyx Inc and CEL Corporation. The first two are biotech companies which are liquidating; CEL is a construction company in Japan that is currently trading well below the value of its cash less total liabilities. 

Cyteir finished the quarter at $2.84 per share. It's now trading about $3.00, which is close to fair value. The company has disclosed a liquidation estimate range of $2.92-$3.31. That number does not include any value from the potential sale of the company's IP, which may or may not be valuable to another company. I see little downside in Cyteir at current prices, but the upside is nearly extinguished, so I may look to take some money off the the table to redeploy into other ideas.

Aptinyx, as I've mentioned in my last update, has not worked out as I imagined. However, I believe there is still some upside. It closed Q3 at 6.74 cents per share versus a disclosed liquidation estimate range of 7-10 cents per share. As Aptinyx is a very small company, the margin for error is small. I underestimated this risk when I put the position on. 

CEL meanwhile continues to perform well. The company recently reported results for the September quarter and upgraded full-year earnings guidance by 24%, which puts it on a P/E of about 12.5x. Importantly, about half of the earnings come from the recurring property management business, which requires little capital and has shown steady growth. The other two parts of the business are lumpy, however, they too have been growing lately. Meanwhile, CEL has cash less liabilities of about ¥4,261 per share versus its current price of  ¥2,874 per share. 

Portfolio changes

During the September quarter, I closed out my position in Arca Biopharma (NASDAQ:ABIO). Arca has been reviewing strategic alternatives, and trades slightly under its cash value. However, there's been no update in months now and the cash is slowly eroding. Meanwhile, it seems like the company could be headed towards a proxy battle, which could further erode the company's cash balance. I sold my shares for roughly the same price as my cost base.

I made a mistake by buying Pasithea Therapeutics on the back of a news release announcing a takeover offer. If I spent five minutes researching the buyer, I wouldn't have bought the shares. Luckily, I was able to sell my shares for about the same price I bought them. I won't always be so lucky with my mistakes. There was an interesting twist to the Pasithea story: when the takeover offer failed, as I expected, the company announced a tender offer for 70 cents per share, which was well above the market price. I had a quick look, but moved on, thinking that the offer would be heavily prorated (if not amended or withdrawn). In the end, the tender went through without any proration, which was a big surprise.

I participated in the Johnson & Johnson/Kenvue split off, but I didn't make any money, as I was greedy. After I received my KVUE shares, I waited for the price to recover, but instead it fell after concerns about KVUE's pending paracetamol litigation. I exited the position at a small loss. This had a negative impact on performance during the quarter, but I would have been worse off if I had held on as Kenvue has continued to fall.

Finally, I made some money on another biotech special situation, Pardes (PRDS). This seemed like a layup, so I probably should have bet a bit more. Besides all that, I added one new position to the portfolio. I'm considering buying more of this stock, so I won't disclose the name just yet.

Notes to self

It helps to learn from mistakes, so here are a few lessons from recent experience:

  • When reacting to news about a company you are not familiar with, make sure to do the basic checks first before getting ahead of yourself (see the experience with KTTA);
  • Be more prepared to sell out of something like CYT when it is close to fair value if there is something better available. While I know that the returns from here are unlikely to be spectacular, I've been a bit stubborn to sell because there is still a little bit of upside on offer. If I were starting the portfolio from scratch, I wouldn't put the position on in anywhere near the same size as it is today, so that suggests I should be more willing to sell at current prices.
  • At times, I've been too quick to dismiss the ideas of others. From a process point of view, when someone else suggests an apparently attractive investment, I should do my own work to find out a) whether the situation is something I can assess with any confidence; b) whether the investment is attractive. I shouldn't dismiss the idea without doing that work.

The benchmark I use for both portfolios is the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt), which is pre-tax. I do not account for cash in my PA, but I do in my SMSF. Historically, I have nearly always been fully invested in the PA.


August 3, 2017
September 30, 2023
Since July 1, 2023
Since Inception
Annualised
G&W Portfolio
1.0000
2.4550
9.63%
145.50%
15.69%
Benchmark (SPAX2F0)
61,250.80
105,123.33

0.79%
71.63%
9.16%

N.B. The returns for my SMSF are unaudited and are calculated net of all expenses and realised taxes (but not unrealised taxes). 


August 4, 2021
September 30, 2023
Since July 1, 2023
Since Inception
Annualised
G&W SMSF
1.0000
1.2203
6.34%
22.03%
9.67%
Benchmark (SPAX2F0)
98,123.18
105,123.33

0.79%
7.14%
3.25%

Sunday 30 July 2023

June portfolio update

Hello again, it's time for another portfolio update. Again, this one's a little bit late: I haven't had as much time to update the blog lately.

The good news is that my portfolio has done very well since the start of the year. My PA was up about 25.3% for the six months to June 30, while my SMSF was up 12.15%. For the June 2023 financial year, my PA was up 40.76% while my SMSF was up 32.09%. I am happy with the good performance, but it's important to note that my FY22 was poor. Importantly, both my PA and SMSF are now well ahead of my benchmark, the ASX 200, which is how I measure my long-term stock picking performance.

The gains have largely come from stocks recently added to the portfolio. My biggest winner was Cyteir Therapeutics, a biotech company that I purchased below net cash. On June 30, Cyteir announced it would liquidate its assets and return capital to shareholders, which led to a substantial increase in the price of the company's shares. Cyteir was a very large position for me, which was handy, and my investment thesis proved correct. (If only investing was always so easy…) I also made a lot of money on another biotech situation, Jounce Therapeutics, which I mentioned in my previous post. Finally, CEL, a Japanese real estate net-net, also performed well during the first half. I also had a small tailwind from forex movements.

My biggest loser was Aptinyx, another biotech liquidation. I was overly optimistic in my initial assessment of APTX's liquidation value, and I traded it poorly. APTX last traded at 7.22 cents versus an estimated 7-10 cents of proceeds from the liquidation, so I continue to hold the position. There was another instructive lesson from the APTX investment: I didn't consider that the company could face difficulties in getting the liquidation approved by shareholders. In the end, APTX was just able to reach a quorum; if not, who knows what would have happened. It is interesting to me that people could leave money on the table by not voting their shares, but the recent example of Calithera Biosciences shows that this can indeed happen. Another significant loser was Naked Wines, which has been my worst investment by far. I sold all of my Naked Wines position in May.

My focus now is on finding new investment opportunities; I have a lot of cash coming back from the biotech liquidations and other special situations. Unfortunately, the portfolio's discount to intrinsic value has narrowed significantly since the start of the year, and I don't have ideas of the quality of CYT or JNCE at the moment. I am confident that I will find good places to put the money to work in the future. In the meantime, I will be keeping myself busy with shorter term special situations, which I have found to be a good alternative to holding cash.

The benchmark I use for both portfolios is the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt), which is pre-tax. I do not account for cash in my PA, but I do in my SMSF. Historically, I have nearly always been fully invested in the PA.


August 3, 2017
June 30, 2023
Since July 1, 2022
Since Inception
Annualised
G&W Portfolio
1.0000
2.2395
40.76%
123.95%
14.61%
Benchmark (SPAX2F0)
61,250.80
104,296.22

16.61%
70.28%
9.42%

N.B. The returns for my SMSF are pre-tax and unaudited.


August 4, 2021
June 30, 2023
Since July 1, 2022
Since Inception
Annualised
G&W SMSF
1.0000
1.1475
32.09%
14.75%
7.48%
Benchmark (SPAX2F0)
98,123.18
104,296.22

16.61%
6.29%
3.25%

Thursday 27 April 2023

March portfolio update

Hello again,

It's been a while between posts as I've been sharing my stock writeups on Substack rather than on the blog. I do want to keep in the habit of writing quarterly reviews on the portfolio, and that's what I'm going to do again today.

In the first quarter of 2023, I've had a very good run. In his book, Ed Thorp describes a random pattern of favourable bets as being characterised by moderate losses followed by dazzling winning streaks. While the jury is still out on whether I have an edge over the market, it feels like I've been on one of streaks Thorp is talking about.

My PA was up 17.6% in the first three months of the year. My SMSF was up roughly 12% over the same period. My biggest winner was Jounce Therapeutics, a new position I started purchasing in March. Shortly after my purchases, a vehicle owned by activist investor Kevin Tang offered to buy the company at $1.85 per share plus a CVR. I bought a reasonable stake at around $1 prior to the announcement, and added much more after Tang disclosed his interest in a 13D filing. I didn't expect Tang to make an offer, however I did realise that Jounce's deal with RedX Pharma was unlikely to close. My thinking was that shareholders would vote against the RedX deal and that could lead to a potential liquidation. 

Jounce has now entered a merger agreement and it seems that the deal is likely to close. I initially sold my stake when Jounce traded up to $1.90, as the value of the CVR was uncertain. However, I ended up buying my whole stake back, plus more, after reading the transaction documents more carefully. JNCE has now disclosed that the CVR is likely to pay out 13.77 cents in the event that the company can successfully exit its lease obligations. (The company has signed a non-binding letter of principle with its landlord to cancel its leases, but hasn't signed a binding contract.) CVR holders are also entitled to 80% of the proceeds of any sale, licence or other disposition of Jounce's biotech assets. While the value of these assets is uncertain, they could be worth something. JNCE recently disclosed positive data from its phase 2 trial of JTX-8064, for example, and Tang has certain obligations under the agreement to seek to dispose of these assets.

I purchased my stake back at $1.86, which implied a value for the CVR of 1 cent. I still hold my shares today. Interestingly, JNCE is now trading at around $1.92, which could be due to the fact that there are some civil lawsuits filed against the company regarding its disclosures around the transaction. I don't see this being a huge problem, as JNCE has since filed additional information. These additional filings also highlight that the value of JNCE in a liquidation scenario is between $2.00-2.08, assuming they are able to break the lease and the company is liquidated by May 31, 2024. Considering all of this, I think JNCE remains very attractive at current prices.

My other big winner during the first quarter was another biotech position trading below liquidation value, Cyteir, which I wrote up on Substack. While the price has moved up substantially, I still think the stock is attractive, as it is trading well below cash value. I also made money in MTCR, another biotech which announced a liquidation, and OIIM, a special situation which I participated in.

I exited my position in US Masters Residential Property Fund (ASX:URF) while buying JNCE. I also exited a small position in YMIRLINK, a Japanese software business, for a small loss. I think YMIRLINK is attractive but I felt the company lacked a strong catalyst to close the valuation gap.

My portfolio is far more concentrated than it has been historically. This has worked out well in recent months, and I am happy with my largest positions. However, I'm hoping I can find equally attractive investment candidates to reduce the risks of overconcentration in the portfolio.

My PA was up 1.7% in January, 2.6% in February and 12.8% in March. 


August 3, 2017
March 31, 2023
Since July 1, 2022
Since Inception
Annualised
G&W Portfolio
1.0000
2.1022
32.13%
110.22%
14.03%
Benchmark (SPAX2F0)
61,250.80
103,249.15

15.44%
68.57%
9.66%

My SMSF was up 3.7% in January, 1.5% in February and 6.5% in March. Note that my SMSF returns are unaudited and include fees and realised taxes (but not unrealised taxes). This is a rather messy approach so in future I may stick to reporting audited yearly results for my SMSF, which are a better indication of performance. 

The benchmark I use for both portfolios is the S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt), which is pre-tax.


August 4, 2021
March 31, 2023
Since July 1, 2022
Since Inception
Annualised
G&W SMSF
1.0000
1.1457
31.88%
14.57%
8.57%
Benchmark (SPAX2F0)
98,123.18
103,249.15

15.44%
5.22%
3.13%

Monday 2 January 2023

2022 Review

It's hard to believe that another year has come and gone, but here we are at the start of 2023.  

My portfolio ended 2022 down 15.5%. It's the first year I've lost money — and it's been painful. I made a number of mistakes and it's important to reflect on what went wrong. 

Mistake #1: Naked Wines

Naked was one of my largest positions heading into 2022. The key mistake I made was misunderstanding Naked's success during the pandemic. As Naked is a subscription-based business, my thinking was that Naked would be better at retaining customers than typical pandemic beneficiaries. In 2022, Naked's economics declined rapidly and auditors called into question Naked's ability to continue to operate as a going concern. While the situation has since improved, I had a number of opportunities to update my priors and avoid a huge loss. To make things worse, I significantly added to my Naked position on the way down which compounded the mistake. 

So what happened? I think there were a number of factors at play. For starters, Naked was a different type of stock than I usually invest in. I was attracted by the presence on the register of Norbert Lou, a famous investor. And, while the markets were running hot, Naked was a huge winner for me. (I initially bought Naked at around 200 pence, it rose over 800 pence in 2021, and now trades at 126 pence.) I was affected by endowment and confirmation bias. In fact, at one point, another smart investor told me he was shorting Naked — but I waved away his concerns. 

As my thesis fell apart, I realised I knew a lot less about the business model than I thought. On top of that, there was a failure in risk management. If I simply held my original position in Naked, which was bought prior to the pandemic, the loss would have been much less impactful. I had other good investment candidates available at the time, which I could have added to rather than Naked. Finally, my position in Naked was far too large. I didn't trim it, despite huge share price appreciation in 2021. Considering the riskier nature of Naked's business, the position was far too large. I still hold Naked shares, however they now only account for only a very small part of the portfolio.  

To avoid a similar mistake in future, I will be more cautious of extrapolating windfall gains into the future. I will be more cautious in position sizing, especially for riskier business models. I will be less swayed by actions of other investors, regardless of how successful they have been in the past. I will be more sceptical of non-GAAP measures, such as Naked's standstill EBIT calculation. I will be more cautious in doubling down on a stock. I will be more disciplined around identifying businesses truly in my circle of competence.

Mistake #2: Destination XL

Destination XL was a much smaller position for me. The big mistake, as I see it, is that I shouldn't have invested in Destination XL in the first place. US fashion retailers are not in my circle of competence and my initial research on Destination XL was poor. As a result, I traded Destination XL terribly. DXLG started the year at 5.68 and then fell precipitously amid fears of recession and rising inflation in the US. While DXLG appeared optically cheap, I became sceptical of the business and I ended up selling my position at 3.59. DXLG has since rallied and finished the year at 6.75. When currency changes are included, the stock trades 87% above where I sold it. Ouch.

Mistake #3: Imara Inc

Imara was a busted biotech trading below cash value. I bought shares after reading a good writeup on Clark Street Value. It became quite clear that IMRA was pursuing a reverse merger transaction. I felt that IMRA had a decent margin of safety thanks to a hefty discount to cash, but I was worried about the potential for value destruction from a poor reverse merger. I purchased my shares in September when IMRA was trading around $2.05. In October, IMRA announced a reverse merger. I woke up in the morning and saw IMRA was up close to 40%. I skimmed the announcement and quickly put in a sell order in the after market trading. I sold my shares for $2.80, a gain of around 40% including currency translation, in 17 days. This works out to an IRR of 845%. You might be wondering at this point why I've included this in the mistakes. Well, if I actually read the proxy properly, I would have seen the stock purchase agreement, which showed that the transaction was being co-financed by share purchases at $3.84 per share. IMRA last traded at 4.09. If I held my shares today, they would be worth roughly 60% more than the price I sold them. This is an embarrassing and easily avoidable mistake. If I printed out the proxy and read it properly, as I should have, IMRA would have been a much bigger winner.

Missed opportunity: Evergreen Gaming

It was not the only time I sold early. I also held some shares in Evergreen Gaming Corp, which trades on the Toronto Venture Exchange. Evergreen had a very solid merger agreement with a strategic buyer, Maverick. The agreement was not subject to financing and the shareholder approval seemed almost certain. On top that, it seemed Maverick was getting a good price. I purchased some shares and made about 3.6% from the spread in about two months, which worked out to an IRR of 23.8%. Shortly after I sold my shares, Evergreen received a second bid valuing the company at $0.605 USD, which was above Maverick's offer of $0.55 USD. In the end, Maverick ended up buying the company for $0.65 USD, equivalent to roughly 88 cents Canadian. I sold my shares at 71 cents, missing out on the 24% bump. I don't classify this as a straightforward mistake. There was a chance the deal could fall apart, for example, and there were no indications that a bump was coming. That said, I'm still kicking myself for missing out on the real money in this situation.

What went well

Thankfully, I had some wins in 2022 as well. My best position was CEL Corp, which is now my largest position by far. I have written about CEL on Substack. I began purchasing CEL in July and most recently purchased shares in November. My position is up roughly 30% including the benefit of the decline of the yen in recent months. I'm slightly uncomfortable about the size of the position, but I'm reluctant to sell at current prices. Even using extremely pessimistic assumptions, it's hard to come up with a value for CEL that's not above today's prices.

TTJ Holdings was a strong contributor to returns earlier in the year, however I'm not celebrating. Shareholders received a terrible price in the management buyout, and while I made money, it's made me far more cautious about investing in Singapore. 

My Hong Kong stocks performed poorly, as did Haier's D share. I said last year I thought Hong Kong's market was cheap. Well, it has become even cheaper. There are of course risks related to the geopolitics and the mainland, which I did not properly recognise earlier on. I am comfortable with my positions for the time being, but I may change my mind in future.

In general, I'm looking to have more special situations and event-driven ideas in the portfolio. I have made money from these sorts of ideas over time, and it's nice to have capital coming back to recycle into new ideas. These ideas also are generally uncorrelated with the market, which is helpful at the portfolio level. Also, I find these ideas quite fun and it keeps me busy. I find I only have a few really good general long ideas each year, and that's if I'm lucky, so it's good to have shorter-term ideas to work on in the meantime.

My friend has introduced me to a useful exercise which is to look at the portfolio at the start of the year and see how it would have performed if you didn't trade at all. Last year, the results were confronting: I realised I would have been far better off doing nothing at all. Thankfully, this year, despite my numerous blunders, I did add some value. My portfolio would have been down 21.5%, so I am about six percentage points better off for the activity. It doesn't quite make up for last year's deficit, but it's an improvement. In a difficult year, I'll chalk that up as a win.

A quick update on the blog

While 2022 hasn't been the best year for my investing, it has been good to me in other ways. I've become a dad, which is wonderful, but it also means I have less time on my hands. As a result, I may not be as quick to update the blog as usual, however I do plan to keep writing quarterly reflections, as it's helpful for my investing process. Going forward, I will use my Substack for investment write-ups. I plan to only write-up good ideas, so I imagine posts will be very infrequent. 

I am also currently looking for an investing job in Australia. If you are looking for an analyst, or if you know someone who is, I'd love to hear about it. You can reach my via the email form on the blog.

Now for the numbers. My PA has compounded at 11.32% since inception compared to 9.44% for the benchmark.

DatePortfolioReturnBenchmarkReturn
August 3, 20171.0061,250.80
December 31, 20171.06756.75%66,215.658.11%
December 31, 20181.176010.16%69,053.504.29%
December 31, 20191.426821.33%81,712.7218.33%
December 31, 20201.900833.22%83,917.902.70%
December 31, 20212.115211.28%99,298.2118.33%
December 31, 20221.7872-15.51%99,793.530.50%
     CAGR11.32%
9.44%

My SMSF has returned 1.64% annually since inception on August 4, 2021. The benchmark has returned 1.21% over that period.

DatePortfolioReturnBenchmarkReturn
August 4, 20211.0098,123.18
December 31, 20211.0171.66%99,298.211.20%
December 31, 20221.02320.65%99,793.530.50%
CAGR1.64%1.21%

Here's to hoping 2023 will be better than 2022. Good luck and happy new year!

Thursday 25 August 2022

June portfolio update

For the three months to June, my portfolio continued to fall, albeit less than the broader market. Unfortunately my stocks were not significant beneficiaries of the recent rebound in equity markets. Since June 30, my portfolio is down 1.79%, while the ASX200 index has gained 8.69%. There is little to no correlation between my stocks and the ASX index, so I don't spent too much time worrying about fluctuations like this. However, my recent performance has been disappointing, and I've made a number of regrettable mistakes. That said, I'm confident that, over the long term, the stocks in my portfolio will perform well.

Portfolio activity

I added two new positions in the June quarter, Countryside Partnerships (LSE:CSP) and US Masters Residential Property Fund units (ASX:URF). Shortly after I purchased Countryside, Inclusive Capital made a hostile takeover bid for 2.95 GBP per share. Countryside rejected the advance and instead put the company up for sale under a formal sales process. I sold my CSP shares recently for 2.94 GBP, which resulted in a small profit. While there is a chance CSP gets an improved takeover offer, there is no firm bid, and economic conditions in the UK have deteriorated. I was happy to take the money and move on. 

The URF situation has been well documented by CSK Capital and others. I bought the ordinary units in early May and then sold them in late June to purchase some more TTJ Holdings shares, which was under a takeover offer. I have since rebought URF's convertible step-up preference units, which trade as URFPA on the ASX. The URFPAs will almost certainly be converted to URF units on January 1 on a 1:205 basis. The conversion price is based on the 10-day VWAP of the ordinary units prior to the conversion date. If you adjust for the remaining $3.15 coupon payment, by buying URFPA at $59 (today's close), you are effectively buying URF units at 27.24 cents. Considering URF units closed at 28.5 cents today, URFPA seems an attractive bet. Besides this arbitrage on offer, each URF unit has an estimated unaudited net asset value (post tax) of 57 cents. While the near-term outlook for US property is poor, it's important to note that US house prices are up 9.79% YTD, according to the Case-Shiller National Home Price Index. This should add in a further buffer on top of the >50% discount to NAV. Finally, both URF's responsible entity and major shareholders appear to want a speedy resolution to this situation, which is good for unitholders.. I have a roughly 9% position in URFPA units across my PA and SMSF.

I sold my small position in Fenix Outdoor International (STO:FOI-B) for a small loss when it was trading around 1,070 SEK. While I am optimistic about the Fenix's long-term prospects, I felt the money was better deployed elsewhere. I also sold my position in Destination XL (NASDAQ:DXLG). 

Naked Wines

In late June, Naked Wines released its full year results, which showed that the business has significantly deteriorated. Naked is now guiding to basically no growth for the coming year. Unfortunately, that wasn't the worst of the news. Firstly, Naked's auditors highlighted a "material uncertainty" about Naked's ability to continue as a going concern. Naked also revealed that it had taken out a loan secured by inventory with the Silicon Valley Bank, and it was at risk of breaching covenants. Understandably, the market did not take this news well, and the stock ended the quarter at 1.713 GBP — down 52% for the quarter. Naked has continued to fall since the report, and is now trading around 1.30 GBP. 

Clearly, I have been very wrong on Naked. In hindsight, it's clear I did not pay enough attention to the downside risks. In the frothy market of 2021, I think it was fair to say I was caught up in the euphoria and was worried about selling (what was at that time) a big winner too early. While I have clearly made big mistakes on Naked, at current prices, if it simply survives, shareholders should do well. While the auditor's concerns are clearly worrying, it seems to me that the only plausible way for Naked to go bust would be for customers to withdraw their deposits en masse. (Customers deposit money each month which goes into a "piggy bank" that is used for future wine purchases. Naked uses this money to fund its operations.) I think this scenario is unlikely. I'm taking the time to look at Naked with a fresh set of eyes, and trying not to let my previous poor decisions influence my thinking. I have neither added to my position or sold my shares as yet.

TTJ Holdings

The other significant event in the quarter was the takeover of TTJ Holdings, a Singaporean structural steel business that was one of my largest holdings. Mr Teo, TTJ's founder and executive chairman, made a lowball bid for 23 cents per share. This opportunistic offer was made at a huge discount to TTJ's unaudited NAV as of January 31 of 36.79 cents per share. In other words, shareholders would have received 60% more if the offer was made at the most recent reported NAV. To make things worse, TTJ's true asset value was even higher. The IFA report found TTJ's true asset value was 46 cents per share, double Mr Teo's offer. 

I was very upset about the situation, and I tried my best to seek a better offer from Mr Teo. In the case of TTJ, there was only one major shareholder, Samarang. Despite my efforts, I was not able to reach anyone at Samarang. As TTJ's remaining shareholder base was fragmented, I figured the best approach was to make my case in the media. While I may have succeeded in raising awareness about the unfair offer, I may have had more luck using a less confrontational approach. We will never really know if that would have changed things. The truth of the matter is that I had zero leverage in the situation, so I wasn't in a position to negotiate myself. And while I did my best to coordinate efforts with other shareholders, it did not change the outcome. Mr Teo eventually made his offer final, ruling out the prospect of a price increase. In the end, I decided to tender my shares, as I did not want to risk hanging around with a hostile majority shareholder.

While the exit offer was egregiously low, I still made good money on TTJ, except for a small purchase above the offer price after the release of the IFA report. (I figured a bump was highly likely, but I was wrong.) On an annualised basis, most of my purchases were in the range of 30-40%, which is an excellent result. Considering the asset value backing, the risk was very low too. That said, I was very lucky in the timing of my purchases and the timing of the takeover. It's a good reminder of the importance of the margin of safety, especially when investing in companies such as TTJ with a controlling shareholder. Overall, I've learned some good lessons and made a bit of money as well. It could have been much worse.

New position: CEL Corp (5078.T)

After the TTJ situation resolved, I was left with a large cash balance. Thankfully, I found one new idea which I consider very attractive, CEL Corp (5078.T), a Japanese company that develops, builds and sells steel-framed apartments in the Tokyo metropolitan area and manages apartments for landlords.

The thesis for CEL is straightforward. CEL only listed in Japan this March. Shortly prior to listing, CEL recorded a huge gain on sale of a subsidiary in China. As a result, CEL has cash well in excess of its market cap. Management have said this cash will be used for acquisitions, and it may take some time to play out. I also asked if they had considered paying a special dividend, and the answer was no, so I think there is next to no chance the cash will be paid out soon.

On top of the huge cash balance, CEL has a decent operating business. In particular, the apartment management business creates recurring revenue and CEL should be able to add additional services to landlords over time. CEL currently trades around 1,950 yen, and has forecast earnings of roughly 192 yen, so the P/E is roughly 10. Management is investing significantly in the business, so I expect CEL will be able to grow earnings at a moderate rate, maybe 5-10 per cent over time. CEL has a policy of paying out at least 30% of earnings as a dividend, and the yield is currently over 4%. 

All that is not that exciting, especially in Japan, when there are plenty of cheap stocks. However, CEL's asset value is simply staggering. If you take CEL's cash less all liabilities, you are left with 2,932 yen of cash per share — 51% upside from the current price. CEL's NTA is 5,176 yen per share, meaning you are buying the assets (mostly cash) at a 62.44% discount. Even if you apply zero value to the excess cash, the operating business alone supports the current valuation. Finally, CEL's founder and president, Masatsugu Shinno, still owns 60% of the company after the float, which aligns our interests.

The results of my private investment account and SMSF are summarised in the table below. The portfolios are constructed differently and performance will vary. 

My PA was up 3.50% in April, up 3.18% in May and down 11.27% in June. The cumulative return for the period was -5.24%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) fell 11.90% over the same period.


August 3, 2017
June 30, 2022
Since July 1, 2021
Since Inception
Annualised
G&W Portfolio
1.0000
1.5910
-28.96%
59.10%
9.92%
Benchmark (SPAX2F0)
61,250.80
89,440.67

-5.59%
46.02%
8.02%

My SMSF was up 1.74% in April, up 3.85% in May and down 10.23% in June. The cumulative return for the period was -5.15%. The S&P/ASX 200 Franking Credit Adjusted Annual Total Return Index (Tax-Exempt) fell 11.90% over the same period.


August 4, 2021
June 30, 2022
Since July 1, 2021
Since Inception
Annualised
G&W SMSF
1.0000
0.8687
-13.13%
-13.13%
-14.42%
Benchmark (SPAX2F0)
98,123.18
89,440.67
-8.85%
-8.85%
-9.74%

Wednesday 25 May 2022

TTJ Holdings (SGX:K1Q) — Media reporting on privatisation offer

For those following the TTJ situation, here is a round-up of reporting in Singapore's business press in recent days.