Performance review Q3 2021 – Comment “The End of the Easy Tech Money”
In the first 9 months of 2021, the Value & Opportunity portfolio gained +17,3% (including dividends, no taxes) against a gain of +13.9% for the Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).
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 in the first 9M 2021:
Partners Fund TGV: +22,5%
Profitlich/Schmidlin: 14,7 %
Squad European Convictions +24,3%
Ennismore European Smaller Cos +19,1% (in EUR)
Frankfurter Aktienfonds für Stiftungen 15,9%
Greiff Special Situation 3,9%
Squad Aguja Special Situation 8,6%
Paladin One 14,8%
For the first 9 months, the portfolio ended up slightly above the underlying Benchmark and somewhere in the middle of my “peer group”.
On a monthly basis, September was the first negative month for the Benchmark since January (-3,7%). For my portfolio which lost -4,2% in September, it was even the first losing month since September 2020. With the exception of “Covid March 2020”, I have to go back to December 2018 to find a bigger monthly loss for the portfolio. This shows a little bit how extraordinary the “post Covid” recovery has been so far. I do think that going forward, markets will get more normal and that months like this will happen more often.
Q2 was a quiet month. I added Meier-Tobler as a new “boring stock” position in July and so far the stock met my expectation by being very boring 😉
Another addition was ABB, which became part of my electrification basket also in July. I sold 3/10 of my BioNTech position end of July/beginning of August at around 287 EUR/share. The idea here was to realize my initial investment and let the rest (which is equal to my pretax profit) run for a long time. As I have mentioned before, this is some sort of mental accounting but helps me not to worry too much about volatility when I know that I can’t lose against my intitial investment.
The current portfolio as always can be seen on the portfolio page of the blog.
Comment: “The end of the Easy Tech Money”
In July 2019 I wrote a comment called “Not enough Tech” using MongoDB as an example that many Tech stocks have implied growth rates which are hard to fulfill in the long term. Well, more than 2 years later, it is pretty obvious that instead of complaining, I should have bought as much “tech stocks” as I could.
MongoDB for instance made another 4x since then as can be seen in the chart:
If we look at the last quarter, MongoDB has indeed significantly increased quarterly sales to around 200 mn USD from 75 mn USD in the quarter that was the basis for my “pitch”. So an increase by around 2,7x. But as I mentioned above, the share price went up 4x, meaning that the multiple increased. In addition, as for any respectable Tech company, share count increased significantly from around 55 mn shares to around 66 mn.
GAAP “profitability” was minus 77 mn USD, worse than a year before, operating cash flow was negative. But clearly investors don’t seem to care and value the company at 30 bn USD or around 37x revenue despite a declining growth rate.
I don’t have any aggregated numbers but I am convinced that since the end of 2018, the tech sector has seen a massive multiple inflation across all stages from early venture to IPOs listed equity. This multiple extension has been driven in my opinion by a currently virtuous cycle of increasing money inflows from outside plus “paper wealth” created inside the tech universe that flows back into early stage companies and Crypto. Crypto gains again fuel VC funding etc. etc,
The continuous inflow into the tech sector is a combination of momentum, performance chasing and what I would call “naive growth investing” ala Frank Thelen.
With naive growth investing, all you need is a high number for the Total addressable market (TAM), a target market share, a target margin and a target multiple. Everything else doesn’t matter. As long as top line increases, no matter how this is achieved, everyone is happy. Additional money is coming easily as so much money is looking for tech exposure.
The big question is : How long will this “flywheel” keep going ? I have no idea but my feeling is that we see already at least some sanity with the obviously stupid or overvalued “non-tech” tech companies feeling some gravity in their share price. Auto1, the German Used Car dealer masquerading as a Tech company for instance lost significantly against its IPO price and almost -50% from the top despite their continuous effort of marketing themselves as the “Carvana of Europe”. Or Lilium, the Frank Thelen backed “Electric Airplane Taxi” start-up that mostly has some fancy prototypes has lost -20% against the initial SPAC price.
My feeling is that the easy days of naive tech investing are over. I do believe that there are still many areas where a lot of break through innovation is happening and companies can grow fast and become very profitable, but from the current “tech darlings” many will not live up to their promises.
In the short term it seems that the Covid tailwinds for many mediocre digital business seem to be gone, such as the very recent news of German Software company Teamviewer or UK based E-Commerce darling ASOS. Many companies claim that supply chain disruptions are the main culprits but I do think that the problems go deeper.
To be clear, “Naive Value Investing” also exists in the form of “if a stock looks cheap based on historical fundamental (P/B or P/E) then it is a good investment”. It has worked for quite some while when most of these companies were mean reverting. However it really didn’t work anymore for the last couple of years when a lot of these companies were structurally challenged.
In my opinion, the most best long term strategy is to focus on stocks that are cheap with regard to long term future earnings.
Unfortunately this is a quite complicated approach because one needs to do a lot of analysis in order to find out if there are future earnings with a high certainty (which the “Frank Thelen Crowd” clearly does not care about), but one also cannot rely mostly on past earnings which typical “Value investors ” often do. Many traditional “value investors” are uncomfortable to give any value to future growth which in my opinion is clearly a mistake as it limits the opportunity set.
Of course a hyped up tech stock can still be a good investment as well as a super cheap value stock, in aggregate I do think that in the current environment one most be really careful with both of this types of stocks.
In other words, you were wrong 2 years ago but instead of learning the lesson and shifting towards growth you are certain that this time you are correct. Good luck.
Being constantly wrong is the secret of my success. I thought I could keep it from the public but now it is in the open. Damn !!!
Great update. What is the bear case on Zur Rose apart from a “full” valuation? 50x ebitda 2-3 years out is remarkable.
Well at least they have positive EBITDA. And 40-50x EBITDA is better than 37x Revenues 😉
But seriously: Zur Rose is clearly on the expensive end of my portfolio. I personally think that there is a high probability pathway to significant growth but I could be wrong of course.
Thanks for your thoughts. Does JET also categorize under “mediocre digital business” in your opinion?
Good point. Indeed it doesn’t look like a great digital business right now. It is not as expensive either but I’ll stay away.