Change of plans
Just a quick note to disclose that I’ve sold (almost) all of my stocks in the past few days to make an investment outside the stock market. (I won’t be writing about that one). I don’t think I’ve not had almost all my money in stocks since I was 17, so I feel a bit strange.
Here’s a list of pre-existing positions and approximate gains or losses, as well as some closing thoughts on two long held positions I’ve not addressed previously.
|Returns (not adjusted for position size):
|Oliver’s Real Foods
|Just Group plc
|British American Tobacco
The above returns exclude dividends and position size and just measure stock price. Xero and Nearmap returns correspond to the price at the time I added them to the portfolio (Jan 2019) not their actual price at purchase several years ago. Oliver’s and Experience Co returns are substantially higher due to bargain purchases at approximately 2 cents and 17 cents after their recent collapses. I think I’ll be proven right on Experience Co, and likely proven wrong on Oliver’s. As noted previously, position size is the largest contributor to the overall mediocre performance of the 10foot portfolio.
I still hold Scorpio Tankers (STNG) (up 33%) and Despegar (DESP) (down 3%) and have made no changes to those small positions. Here is a list of latest position sizes for context – although i’ve sold almost all of these positions except STNG and DESP, as noted.
I published my latest quarterly thoughts a month ago and not much has changed since then, so you can read that for updates on the other positions. I want to do a quick commentary on Xero and Nearmap, and below that I’ll publish the CAGR performance of the portfolio.
Xero and Nearmap:
Xero and Nearmap are very different businesses; my comfort is much greater with Xero than Nearmap due to valuation, the perceived quality of the executive team, and how far along the journey each company was at the time of purchase. However, the theses were very similar: A fast growing business with a genuinely valuable/new product that was sold off heavily/avoided (in my opinion) over fears relating to cash burn. I first bought a small “watching position” in Xero at $42 (a story for another time) then purchased it several times below $20 before loading the boat at $12. I bought Nearmap originally at 52 cents and doubled and then tripled the position at 39 and 38 cents respectively. These prices were only available because people were sceptical about whether the companies would ever make money, and you could have bought these companies for several years during which it was possible to see customer lifetime value improving and new customers being added.
With Xero it was very clear to me that the company would make a lot of money – the company was “underlying” profitable excluding growth marketing expense and a number of metrics (such as one I called “marketing ROI” – a measure of new revenue added by marketing spend) suggested the expenditure was generating a very high return especially if you believed the customer retention numbers were real. In my view most customer retention numbers are a bit of a false construct – MYOB’s customer lifespan was very long until it wasn’t – but with a new product taking share from incumbents the bet seems to be more that the new product is so good that it will take several years for competitors to catch up. In Xero’s case let me feel comfortable enough to bet on the growth story despite bad high level metrics like cashflow. I was also comforted by the fact that management ran the business towards cashflow break even instead of raising more money to scale the company further. There are some views that this strategy was suboptimal from a maximisation of value perspective, and I agree, but for my level of conservatism, managing the business towards break even gave me extra comfort with having a very large position in Xero. I would have struggled to hold if the company had raised more money and borrowed heavily in order to scale further.
It is a similar story with Nearmap and there what swayed me was a number of new problems that were being solved that previously could not be solved in a digital way. The “optionality” (I hate that word) in the business was very high and also the businesses where problems were being solved were not sexy – digitally measuring roof tops for solar panel installations – but clearly added a lot of value. One of my old colleagues, the fellow who once gave 10foot its name, sadly not with us anymore, once introduced Nearmap to local councils to help them establish whether residential pools were compliant with new fencing regulations.
Ironically despite its performance, Nearmap was extremely hard to hold, far more so than Xero. Nearmap has had a few executive upsets and told the occasional lie (in my view) such as the ol’ “we’re not gonna raise capital” a few days before a cap raise comes out. I sold some Nearmap a lot earlier than Xero due to these concerns, but overall NEA has been the bigger winner by a factor of 3.
For the 10foot portfolio, inception was on 30 March 2017 – 2 years and 3 weeks ago until last week when I sold all my stock. The portfolio generated a 6.8% CAGR over this time, including an average of around 33% in cash (year 1 was >50% cash) and effectively 3% brokerage. As I noted here it wasn’t going as well as I’d hoped but it’s also not a bad overall start. I feel that the learnings are likely to accelerate my progress in the future, which is not a bad outcome.
I’ll still write about stocks. I’d like to do more scuttlebutt-style posts, but I don’t do a lot of deep stock-specific research these days so that’s a bit challenging. What I definitely do is look at lots of stocks – probably well over a hundred a day – but only in passing. I currently maintain a paper long-short portfolio attempting to pick stocks by identifying a more high-level thesis without asking anything more than “can this type of business in this situation, at this enterprise value, generate outsized returns?”. I’d like to get say a hundred long ideas at tiny position sizes and see how it goes. It’s an open question as to whether that ever generates an above-market return.
Those wanting two interesting international ideas should have a squiz at TSX:TGO, a spectrum owner with a $200m mcap and most of the 24GHZ and 39GHZ spectrum licenses in Canada. Then there’s SWX:ABB, which looks like a high quality robotics company in Switzerland. No promises (in fact no idea) on whether either of them are any good but they are two interesting ideas that turned up lately. I guess I’m still trying to figure out how 3-5 minutes on a hundred stocks a day can be turned into useful information. Beyond that, I fully intend to return to buying stocks and writing portfolio updates once time and finances permit. There have been a couple of good opportunities recently that really hurt to miss.
I own shares in Scorpio Tankers and Despegar. This is a disclosure and not a recommendation.