Performance May 2012 comments & outlook

“Sell in May and go away” is the famous rule which would have been good for many market participants this year.

The benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) lost -6,8% in May, however the portfolio gained +0.8%, making this the best month in relative terms since inception. Performance YTD for the portfolio is now 13.5% against 4.4% of the benchmark, a relative outperformance of +9.1%..

Bench Portfolio Perf BM Perf. Portf. Portf-BM
2010 6,394 100      
2011 5,510 95.95 -13.8% -4.1% 9.8%
Jan 12 5,972 99.27 8.4% 3.5% -4.9%
Feb 12 6,275 105.90 5.1% 6.7% 1.6%
Mrz 12 6,330 107.22 0.9% 1.2% 0.4%
Apr 12 6,168 108.02 0.8% -2.6% -3.3%
Mai 12 5,750 108.90 -6.8% 0.8% 7.5%
YTD 12 5,750 108.90 4.4% 13.50% 9.1%
Since inception 5,750 108.90 -10.1% 8.9% 19.0%

Also within each month on a day by day basis, the portfolio is very stable with a low amount of volatility. I am really happy that the portfolio really works as I have wanted it to (so far….), despite some significant “PIIGS” bets.

Portfolio activity in May was relatively limited. I sold Wal Mart, increased SIAS to a full position.

Ongoing are the build up of positions in Installux and Poujoulat (Poujoulat goes really really slow…) and the ongoing sale of the DJE Real estate fund.

This results in the following portfolio composition as of May 31st:

Name Weight Perf. Incl. Div
Hornbach Baumarkt 5.1% 5.04%
Fortum OYJ 3.9% -22.13%
AS Creation Tapeten 3.8% -6.14%
EVN 2.8% -13.15%
WMF VZ 4.1% 41.26%
Tonnellerie Frere Paris 4.8% 6.41%
Vetropack 4.5% -1.57%
Total Produce 5.0% 19.91%
OMV AG 1.9% -22.81%
Piquadro 1.5% 4.73%
SIAS 5.4% 3.24%
Installux 0.5% 1.71%
Poujoulat 0.0% 0.11%
Drägerwerk Genüsse D 8.7% 43.93%
IVG Wandler 2.1% 3.88%
WESTLB 6.9% 5.6% 36.25%
DEPFA LT2 2015 2.9% 21.93%
AIRE 5.1% 111.40%
HT1 Funding 4.4% 0.76%
EMAK SPA 5.0% 6.97%
DJE Real Estate 3.3% -4.58%
Praktiker 2016 2.5% 0.54%
Short: Kabel Deutschland -2.1% -20.17%
0 0.0% 0.00%
Short Ishares FTSE MIB -2.1% 16.63%
Terminverkauf CHF EUR 0.2% 4.41%
Tagesgeldkonto 2% 16.7%  
Summe 100.0%  
Value 47.5%  
Opportunity 39.7%  
Short -4.0%  
Cash 16.7%

With a current quash quota of 16.7%, I am at the upper bound of what I would normally like to have. As the WestLB Genußscheine are actually maturing today, June 1st, cash will increase to 22%. As the build up of Poujoulat and Installux need a lot of time, I will have to come up with some ideas pretty soon.

Outlook and market comment

As expected, we are still in “rough waters” and in my opinion this will persist for many months to come. Despite the head line Euro mess, the BRICs finally start to crumble. Brazil and India show massive slow downs in growth rates, in China despite the official numbers everything points to the end of the real estate and infrastructure boom. If history is any guide, after an epic real estate boom one nromally gets an epic bust.

At the moment, this is one of the strangest investment environments I have ever seen. On the one hand record profites of multinational companies (esp. US), on the other hand large parts of the world economy are in deep sh… ah problems.

Interest rates are so low that it is hard to understand who invests voluntarily into a 0% two year Bund.

For the value investor however this opens up a lot of opportunities. Whole sectors and countries are getting cheaper by the day. Of course this does not mean that a stock is “cheap” just because it has fallen dramatically in value. For many companies, the actual business prospects have worsened significantly. The trick will be to sort out the “good value” companies against the “terminal decliners”.

Many so called “value investors” prefer “stable” companies which perform well at the moment but are realtively expensive. In my opinion, this “trend” will turn not so far in the future, as even the best company cannot compensate a real global donwturn forever. Already in late 2008 and 2009 we have seen, how quickly this can turn, especially for the more cyclical companies.

For the portfolio I will continue to look for interesting special situations as well as “boring” off the map companies which trade at depressed prices. I will try to avoid all “great” companies, this is somthing for people who buy lunch with Warren Buffet for a million Dollars. I will also try to avoid any “hot potatos” however there is always the tmeptation to buy into those.


  • memyselfandi007 :
    What if something goes wrong with the company ? Will I get my money back ?

    Price / book value is usually a poor metric in determining downside risk. Liabilities such as rental leases, interest or inflation rate increases or future legal fees are kept off balance sheet yet constitute risks for the equity holder.

    A net cash position should be discounted if the operating business produces negative cash flows.The same is true for real estate. Any carried real estate is only valuable if it can produce cash flows. If not then the real estate is best treated as a liability with certain capex requirements per sq.m. If Hornbach were to liquidate for example, then I doubt that their real estate holdings will provide much downside protection. Their megastores are big shoes to fill so they will probably not represent any value to anyone but Hornbach-as-a-going-concern.

    Now Hornbach will very likely remain a going concern. They have a strong retail formula that manages to utilize the scale of those stores as a competitive advantage. They also pay their employees well so they manage to attract good and knowledgable salesmen, which is probably the single most important thing in running a DIY store. These are all off balance sheet assets, but its those assets that make Hornbach valuable.

    If those off-balance sheet assets are what makes a business valuable then a a growth stock that trades at a P/B of 4, but has the same off-balance sheet assets in terms of “moat”, can have the same downside risk as Hornbach at P/B 1. It can even be cheaper then Hornbach if the probable future cash flows are discounted to a greater degree. If that’s the case then the growth stock is also more desirable then Hornbach.

    That said, I have to complement you on your investment performance. I admire your skill set and the quality of your research and I follow your blog in order to learn from you. I specialize in stocks that are able to achieve high operating leverage through organic growth, have good market positions and competitive advantages. I added Hornbach to my investable universe.

    • Hi Ferdinand,

      you are definitely right, book value alone says nothing. Only in compbination with other measures of financial solidity one can assess if the downside is protected.

      I think at the end of the day, every investor has to decide him/herself with which kind of stocks one feels comfortable. I Haven’t found any P/B 4 stock yet which I liked

      My Boss Score model shows some stocks which would be worth 3 or 4 times book, but unfortunately they trade at 6 or 8 times book….


  • memyselfandi007 :
    Future cash flows can come from many sources, not only future earnings. The most obvious soure
    ce would be current assets (e.g. cash, real estate ect) on the balance sheet of a company. A company with own real estate could produce nice cashflow in a liquidation even if it makes no earnings at all in the future. This would be the “Graham” approach.

    Concerning the liquidation scenario: Wouldn’t it be better to have cash being recognized a 100% instead of real estate (recognized as a long term asset for maybe 10 or 20%)?
    Well, it probably depends how quickly a company can sell its real estate.

    • #chiru,

      it depends on many factors. Of course a net net below cahs with no corporate governance issues is also a good bet. Howver, real estate for instance is more difficult to spot but maybe even more undervalued. I am not a net net investor per se, but one should consider all “sources” of value. Especially with regard to the downside.


  • Deine Performance ist respektabel. Vllt. solltest du aber die Monatsperformance deiner einzelnen Investments aufzeigen, damit man sehen kann woher die Outperformance kam. So kann man schlecht abschätzen, ob du gute Aktien hast oder ob dein Shortselling die Verluste der Aktien kompensiert hat.

    Wieso hast du denn eigentlch 50% ES50, 30% DAX und 20% MDAX als Benchmark gewählt? Der finanzlastige ES50 und der Bluechip-Index DAX haben ja mit deinem Aktien-Investmentstil (+der Möglichkeit von Shortselling, Immofonds und Anleihen) eigentlich kaum was zu tun.

    • Hallo Benny,

      ich selber lege auf monatliche Performance der Einelwerte nicht soviel wert, besondere Sachen kommentiere ich ja eigentlich auch. im Mai war der Hauptgrund für die Outperformance das eigentlich nichts passiert ist.

      Zur BM: Das Blog ist ja etwas anders gestartet, ursprünglich waren mehr large caps dabei. Gegen irgendwas wollte ich das Portfolio laufen lassen und immer die Benchmark ändern ist auch doof.

      AmEnde des Tages will ich ja trotz shortsolling, Anleihen etc. eine “equity ähnliche” rendite schaffen mit weniger risiko, also messe ich mich an so einer BM.


      Edit:Ober Guru Warren vergleicht sich ja auch gg. S&P 500 obwohl er ja doch einige andere sachen am laufen hat…

  • I’m talking about developed markets, these are the dynamcs in the United States, Britain and the Euro Zone. This means that I’m talking about a generalized economic trend that’s visible in all of those countries.

    Regarding the PIGS:

    In Spain there is indeed a problem with commercial debt, which currently has an 8% default rate. Those are assets backed by the empty airports and idle real estate developments that we’ve been hearing about on the news. Spanish banks have been succesful in making provisions for those loans however. Spanish household mortgages still have quite low default rates, while an international operating base has allowed banks such as Santander and BBVA to diversify away from Spain. Shareholders of smaller banks will probably become fully diluted in order to make the tier 1 capital ratio mandated by Basel III. This will happen either voluntarily through share emissions or involuntarily through the type of government intervention we’ve seen with Bankia. Of course all of this is financed using short term funding from the ECB.

    In Portugal we can see a similar trend. Banco Espirito Santo recently did an emission to raise €1bn at 1/3rd of their non-diluted share price. Mean while their branches in Angola and Mozambique are very profitable and probably comprise all of the remaining equity value. Portugese grocery retailer Jeronimo Martins is expanding in Poland and has been very succesful at it. As long as the Portugese government is able to maintain its deficits through short term funding there is a floor beneath Portugese consumptions levels. This allows Portugese business to utilize their domestic asset base to sustainably expand into growth markets.

    In Ireland banks have issued debt to each other in order to use this with the ECB as collateral. The ECB financing was then used to purchase government debt. Mean while corporate tax rates in Ireland remain amongst the lowest in Europe.

    The only Eurozone country where the banking system and government deficits will probably not be suported by short term funding is Greece. The ECB has already pulled short term funding from Greek banks on several occasions, which indeed caused liquidity sqeezes. I suspect that those sqeezes are deliberately caused in order to gain political leverage as they represent policy changes and not capital constraints of the ECB.

    The real crisis in the PIGS countries is not financial but humanitarian.The high unemployment levels in the PIGS countries will permanently stunt income levels compared to the rest of Europe. Skills are lost during long periods of unemployment which makes it a structural problem. Unemployment amongst the young is 50%, which might permanently harm the prospects of an entire generation.

  • @Ferdinand: Are you talking about Germany?
    For instance in Poland much growth comes vom public spending. Poland is largest net receiver of eu money.
    In greek you can see rising interest rates for companys. More than 1% y-o-y. There is a liquidity squeeze, especially weaker companies will go bankrupt, I fear.
    In spain the crisis is not driven by the government but by corporate and private debt, resulting in net foreign debt for the whole country.

  • Although these are strange times, they’re nothing like 2008-09. There are no liquidity shocks like there were back then. The private sector has recovered well and now accounts for all of the employment growth we’re seeing. The crisis has shifted from the private sector to local and national governments that depend on the market for financing. This too is not a liquidity crisis as those governments seem to be able to muddle through on short term financing provided to them by central banks. The government deficits will continue to put a floor under private sector consumption levels, which make those record corporate profits sustainable. All in all this leaves me quite bullish on equities.

    The decline in the Euro will provide a great boost to German exporters. The labour market is getting tight and wages are rising. Mean while capital is concentrating in Germany which is causing record low interest rates. This already seems to have translated into a stealth bull market in real estate.

    My largest position is a German company named Hypoport AG. They operate a financial platform that automates credit checks, risk analysis and credit transactions for financial intermediaries. They also own Dr. Klein, which provides insurance and mortgage financing to retail and professional clients. All in all, they stand to benefit greatly from an increase in mortgage lending due to their highly scalable business model.

    So far, Hypoport has shown good revenue growth but earnings growth has been trailing. They’re hiring alot and reinvesting cashflows in order to expand their platform. This has supressed earnings. They seem to be able to finance their growth internally though, so I’m not counting on shareholder dilution. Especially since insiders own half of the company. This does mean however that most of the value exists on a go-forward basis.

    • ferdinand,

      thanksfor the post. Hypoportmaybe an interesting business, but as you know I am not really investing inot value on a go-forward basis.

      I prefer companies likeHornbach, were the downside at least in my opinion is lower.

      With regard to German exporters: if China slows down, I think Germany will not reamin the happy island for very long.


      • Isn’t value on a go-forward basis the only value there is?

        The value of any investment is equal to the total value of its future cash flows. The past should be completely discounted from a financial perspective. The past has, strictly speaking, no ‘value’.

        Ofcourse we must use the past in order to determine the right premium to pay for the future. But given that there is no a priori reason to prefer a P/E 5 stock over a P/E 50 stock unless we can work out a reasonable case about what its future earnings yield is going to be. Being able to work that out is what determines downside, nothing else.

        • ferdinand,

          value has many sources. I would recommend to read Bruce Greenwalds “Value Investing – Froma Graham to Buffet and beyond”.

          Future cash flows can come from many sources, not only future earnings. The most obvious soure
          ce would be current assets (e.g. cash, real estate ect) on the balance sheet of a company. A company with own real estate could produce nice cashflow in a liquidation even if it makes no earnings at all in the future. This would be the “Graham” approach. Underthis aporach you moreor leass ignorefuture earnings and concnetrate on the balance sheet only. AIRE KGaA, my most succesful blog investment was such an example.

          Looking into the past alone is of course no guarantee for success. However it alows in my opinion to make more informed opinions about the future of a company.It is a little bit like hiring people and looking into their CVs.

          Finally,looking into the future one should distinguish between a “constant scanario i.e. no grwoth and growth. Future grwoth should be heavily discounted if it is not created thorugh a moat.

          I typically prefer investments where even without future growth, I am getting a good deal. But there are of course many other successful investment styles.

          One thing which in my opinion defines a value investor is the following: You should always ask: What if something goes wrong with the company ? Will I still get my money back ? This is called “margin of safety”. For a grwoth stock trading at 4 times book this answer will almost always be “no”.


  • Also die letzten beiden Absätze lassen Dich wirklich sympathisch erscheinen, jetzt rein in puncto Investment natürlich. 😉 Das ist nämlich so etwa das, was ich mir von diesem Blog erhoffe. Und Gratulation zu den bisher doch erfolgreichen Spekulationen.

  • congratulations! Your decisions are comprehensible and it’s nice to see them work.

    By the way my best performers 2012 were those expensive companies: coca cola, nestle, kraft, wal-mart, general electric. Although I think us markets compared to european markets have reached high premiums, I have not sold them yet.

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