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Poor financial operator

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Poor financial operator (1)

Investing is a profession that may not keep you young, but certainly, as has been said many times, it keeps you humble. With the exception of a few cases of mild autism (a phenomenon that is not negligible), investors tend not to be arrogant and respect and fear the market. Generally, the more experience you have, the more objective you tend to be in your answers, not taking clear positions. When you can’t, however, a common tendency among traders in our industry is to form their own opinion with technical analysis and then communicate it as a position based on fundamentals (trend is your friend). There is always some fundamental element with which to cloak your technical position to make it more institutional. It’s a matter of survival in a world where you are asked questions you can’t answer.

Picture from 1983 John Landis film “Trading Places”

Since we are suckers at technical analysis, we tend to bring every opinion (and therefore choice) back to its risk/benefit profile. By analysing and inviting analysis of the opportunities and repercussions for the market and the portfolio in different scenarios. And we have learned that scenarios and repercussions can be the most extreme. This is why our portfolios are generally well diversified in terms of sectors and securities. In pure theme funds, as opposed to multi-theme funds, the concentration may be higher, but it is still limited.  It is true that in the Electric Mobility fund, for example, we have 9% of Panasonic, but it should not escape the reader’s notice that the company is nevertheless active in 11 separate businesses (business risk) and has virtually no debt (financial risk). On the residual market risk, and thus market fluctuations, an equity fund can do little. One of the 11 businesses in which Panasonic is active is lithium cell production, a business that in our view is worth twice as much as Panasonic as a whole. So 100% upside with the other 10 businesses given away (Christmas is coming ). If we were to value this division at zero, the company would still maintain a substantial upside in the medium term. The risk/benefit profile is therefore very attractive.

Poor financial operator (2)

We would like to double the comment on the poor financial operator, be he a manager or a banker, a species to be defended and pampered. If, unlike the panda, the emperor penguin or the monk seal, he does not run the risk of extinction, and, unlike other professional categories, it cannot be said that he is on average underpaid, the financial operator (like the most popular CT of the national team) is often subjected to more or less veiled criticism from the client, ready to acknowledge his mistakes more than his merits, and to humiliation from the market that often contradicts his forecasts and choices. Then, there are cases where the client is happy, so you did well, although things turned out very differently from what you predicted. And cases where the client is unhappy, so you did badly, but you predicted everything perfectly. That happens to us.

Slide from the presentation of Maple Leaf’s third quarter report

On Thursday, Maple Leaf reported, a large Canadian food company. We hold the company in the NEF Ethical Global Trends SDG fund, in the TrendSDG New Lifestyles portfolio. We could also have included the company in the TrendSDG Ethical Livestock. In fact, the company has two divisions, one focused on chicken, cattle and pig farms. However, these are not intensive farms. The level of animal welfare, and therefore also of meat quality, is very high. This is a sector (Ethical Farming) that we expect to do well even in the context of a gradual decrease in meat consumption in Western countries. The other division focuses on alternatives to animal protein. Maple Leaf is a major player in North America. It has made big investments that should gradually pay off. Here we see a huge growth in demand with still limited supply. A few weeks ago we devoted part of our weekly comment to this sector (click here). On Thursday the company reported and was up almost 15% in 2 days. Happy? Not too happy… the alternative protein division made a significant profit warning, while the division that raises and slaughters animals (ethically) to make their flab saw sales and margins explode. If the investor only knew that we held the stock he would congratulate us. If he got to the bottom of it, he would realise that we have got it wrong (for now) and the trend is a bit stuck (Beyond Meat has also reported disappointing results). Not pleasant, but we’re used to it.

When the opposite happens (what you were expecting happens and the stock/sector goes down) it is perhaps even worse…

Value and Growth (again? so boring…)

Let’s go back to value and growth. Here the schools of thought are the most diverse and we read the most disparate things. We limit ourselves to defining what it means to us. We refer to Graham’s theory and the difference between intrinsic value and market value. From an analytical point of view, however, value and growth indices are usually constructed on the basis of P/E and P/BV ratios, an awkward but inevitable approximation for analysis. However, what we think is important to emphasise, and where there is much confusion, is that both growth and value investors like growth. Very much so. The former, however, invests where growth already exists, paying a premium, nowadays a particularly significant one, for that certainty. Value investors invest where growth is not yet there. For this reason, they get a discount that in this historical period is absolutely important. In the first case, the opportunity lies in the possibility that growth continues and therefore the premium paid is quickly reabsorbed. The risk is that growth begins to lose strength for various reasons (competition, technology, regulation, consumer preferences, etc.) and the stock goes from boasting a premium linked to the economic results generated to a discount, through a dramatic fall in its stock market price. In value, on the other hand, the risk is that the unseen growth will continue to be unseen or that the decline will accelerate. This is why it is not wise to have too many indebted companies in a value portfolio, because debt often makes it impossible to survive difficult phases. It’s like a desert you have to cross, so you have to be strong and equipped. If you start out weak and without water, you risk drying out.  On the contrary, the opportunity is represented by the possibility that profits stop falling and start rising. When you make a few pence, competition is reduced and so is supply, and the survivors start doing well again. Add to that macroeconomic and regulatory cycles, and what is value can turn to growth and then be exposed to a spectacular rerating, from which we benefit the first and violent part. Once companies start trading at significant premiums on today’s visible earnings, we sell them. So where we make a lot of money is at the inflection point of the company’s and/or the sector’s earnings.

It is a process that repeats itself.  What is value today may become growth tomorrow, and vice versa. For example, the composites sector was booming in 2009 and is now depressed. The telephone sector was super-growth in 2000 and is now down. Staying closer in time, the commodities sector was super value a year ago and is now growth. In a value portfolio there will be stocks or sectors that are in different positions: a) earnings and stock/sector are still falling and the manager is accumulating. Here you lose money (mark to market) in the short term with the aim of making money in the long term; b) earnings are stabilising and the stock is starting to rise. This can be a trend or a false signal that the business is stabilising. Depending on how confident we are that things have really improved and the weight we already have on the stock, we either stay put or keep buying during the first part of this phase; c) earnings are clearly in an upward phase and the stock is flying. We do our calculations and when valuations discount positive scenarios that are too far away in time we gradually sell.  Today, for example, we have telcos whose earnings continue to fall (although there are some signs of change) and we accumulate. We have utilities linked to client solution businesses or publishers that have stabilised profits and are now timidly and selectively starting to rise. Then we have banks that are well into the trend and that when they get (depending on the bank) into a range between 1x and 2x tangible equity (depending on the structure of the business and the geography in which it operates) we will sell. Finally, we have commodities which, as mentioned, have quickly moved from value to growth and we have largely sold. So our portfolio has within it a combination of sectors/securities that are in one of the three stages, partly offsetting each other and sometimes helping to reduce portfolio volatility.

When we talk about rotation from growth to value, we are talking about reducing the premium that the growth sector now commands on short-term corporate results and/or reducing the discount on these by the value sector. In a transition phase from digital to physical infrastructure, it is normal that growth gradually shifts from some sectors to others, stimulating this rotation. As mentioned, the rotation has already begun with some sectors such as commodities, industrials and financials appreciating significantly in recent months. Among growth stocks we see that those that confirm growth continue to do well but a large group of stocks that have not been able to confirm growth have accumulated corrections of between 30% and 50% in recent months. The market is therefore much tougher and more demanding. A friend of mine who is an experienced SPAC manager was just pointing out to me today that investors’ behaviour towards these instruments is much less enthusiastic and that they are waiting to see and read the proposed deal thoroughly before buying.

We believe the rotation will still be long and powerful. Better prepare yourself.

Logbook

Another  full week of results ahead, mostly concentrated in Asia and some in Europe.

Among the stocks we have in the different niches and trendSDGs reporting next week, we have in Germany, Siemens Energy, E.ON, Allianz, Bayer and Deutsche Telecom. In the Netherlands, life insurer Aegon. In Belgium, postal operator Bpost. In France, Credit Agricole.

In the US, laggard, reports generics leader Viatris.

In Korea, many companies are holding and reporting: telephone operators SK Telecom and KT, electric utility KEPCO, life insurer Samsung Life, construction equipment manufacturer Hyundai Construction Equipmennt.

In Japan, we hold many companies: cement manufacturers Taiheiyo Cement and Sumitomo Osaka Cement, financial and postal operator Japan Post Holdings, composites and fibres players Toray and Teijin, cable manufacturer Fujikura, conglomerates Toshiba and IHI, electrolyte producer Stella Chemifa, recycler Dowa Holding, pharmaceutical holding company Kissei, papermaker Toppan and industrial machinery manufacturer Toyo Engineering.