value and opportunity

In the first 6 months of 2019, the Value & Opportunity portfolio gained 12,4% (including dividends, no taxes) against 17.7% for the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%)).

Links to previous Performance reviews can be found on the Performance Page of the blog.

Some other funds that I follow have performed as follows for 6M 2019:

Partners Fund TGV: 6,8%
Profitlich/Schmidlin: +9,2%
Squad European Convictions +11,2%
Ennismore European Smaller Cos +6.09% (in EUR)
Frankfurter Aktienfonds für Stiftungen -0,5%
Evermore Global Value  +13,42% (USD)
Greiff Special Situation +2,6%
Squad Aguja Special Situation +8,5%

Q2 2019 transactions

Q2 was quite busy. I sold the Kanam Grundinvest fund, Van Lanschot and Kinnevik, added to Vostok New Ventures and bought Vostok Emerging Finance as a small new position. I also added Innogy tendered shares as special situation.

The current portfolio, as always can be seen on the portfolio page. The average holding period remains at 3.7 years which is inside my 3-5 year target.

Performance review:

Being behind the benchmark by now almost 6% is not great but as mentioned in Q1 part of my investment strategy. Interestingly most of my direct Peer Group is doing even worse. However this could be the first year in the almost 9 years that I run the blog that I underperform the Benchmark. Although they say: It ain’t over until it’s over….

Nothing really changed compared to Q1, notable in my opinion is that the generall small cap outerpormance for the time being has disappeared.

Comment/Outlook: Not enough Tech ?

I mentioned above that most of my “Value Peers” did relativley badly this year. The reason is clear either you own a lot of tech stocks or you will underperform. Although I don’t want to use the “bubble word”, I think that many of the valuations in the Tech sector are now extremely rich.

An example for instance is database company MongoDB. In February, I did a small presentation on the company (in German) which I embed here:

In short, my thesis was that MongoDB is a loss making but interesting company, however at then 4.7 bn USD it was much too expensive if one uses the 10x ARR (annual recurring revenue) as a yard stick that most VCs use for SaaS companies.

Well, what happened ? The stock gained a further 60% or so and now trades a 8,7 bn USD market cap. According to the latest quarterly report, they now have ~90 mn USD quarterly revenues (up a health +80% or so) but the company now trades at almost 20x annualized sales (not earnings).

Let’s look at the company that they want to disrup: Oracle. Oracle is currently trading at a P/E of ~18. Their latest net profit margin is around 28%, but let’s use as a proxy 25%.

So if we assume that MongoDB at some point in time can earn the same margins as Oracle, we can reverse engineer the required sales number to be on par with Oracle based on their current market cap which is:

USD (8.7 nm /18) /0,25 = 1.93 bn USD in sales.

Next question: How long will it take MongoDB to reach that sales number ? Let’s assume Mongo is growing at 80% p.a. for the future, Then it would only take them 2,5 years to reach that sales number. If at that time, profitablity would reach Oracle’s and the same P/E applied, then their current market cap would be justified. However, as an investor, then you would have earned nothing as you pay for that already now. Using ~25% as required return would increase the profit and sales requirement for MongoDB even more and translate into q reuired growth rate of more than 100% in this exapmle.

Yes, maybe one would use another P/E to value them of they grow at this pace but on the other side I haven’t even mentioned dilution (currently around 10% p.a. via stock options) and the issue that they are not even close to break even.

However I don’t want to turn this into a MongoDV post, but this example shows that expectations even for such a “quality Tech company” like MongoDB at the moment are super high. Yes, if they can continue to grow like now and actually become the next Oracle, they could actually grow into that valuation but at the current stage investors should potentially lower their return expectation for the next 3-5 years. And I haven’t even talked about all the low-quality companies that have the same or even higher valuations.

One other point to mention: MongoDB is one of these SaaS companies whose prodcut is used a lot by other startups (like Slack) who themselves are loss making and depending on continuous funding. If at some point, funding stops, a lot of Mongo’s clients will not be able to afford the Software anymore which make the stock riskier than for instance a company that sells to established companies.

So what’s the point of this comment ? No, I don’t predict a crash similar to the dotcom crash, however I do think that tech valuations are to rich and many late investors will be disappointed. I also think that many traditinionl sectors (Bnaks, insurance, cars etc.) will be continously disrupted and also not provide the returns that investors expect despite their low P/Es.

The point I want to make is that one needs to be very careful these days where to invest especially as a “value investor”. Just adding Google/Alphabet, Amazon and Facebook to the protfolio might provide the performance boost of the last few years and a lot of Cigar Butts don’t have a last “puff” in them. I have no answer what to do instead but I think it is really important now to reflect deeply which companies offer good value at current prices. And please don’t just add some tech to your portfolio with the expectation of beating your peers….