Category Archives: Anlage Philosophie

Why on earth is Seth Klarman investing 1,7 bn USD in Cheniere Energy (LNG) at 7x P/B ?

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In my book review “The Frackers”, I mentioned one of the stories in the book was about Cheniere Energy:

Finally, there is a fascinating side story about the guy who is running Cheniere Energy, Charif Souki. His great idea was to import natural gas into the US and he raised several billion USD to build a huge gasification plant on the gulf coast. He clearly did not see fracking coming and his investment was worthless. Nevertheless, he was able to raise another few billion bucks and retool the facility in order to export natural gas.

This “double or nothing” gamble seems to have paid off. Seth Klarmann by the way, has just doubled its stake in Cheniere, making it their biggest public listed position at around 1,7 bn USD.

Seth Klarman

Seth Klarman is a famous value investor running Baupost Group a 25bn USD hedge fund. In contrast to Buffett, Klarman very seldom gives interviews and his fund commentaries are hard to get. Hi is considered to be the “heir” of Benjamin Graham and still sticking to the “cigar butt” approach of deep value investing. Two years ago in a Charlie Rose interview, Klarman made the following comment:

Baupost’s leading man says that he buys “cigar butts” at cheap prices. Warren Buffett used to also do this. The difference between the two legends is that Klarman stayed focused on cigar butts while Buffett’s process morphed into buying great companies at great prices and then into paying so-so prices for great companies.

Klarman does many things ordinary investors can’t do, like buying defaulted Lehman stuff etc. Not many of his investments are public and not all of his public investments are successes. Nevertheless it is clearly interesting to look more deeply into his biggest public position, Cheniere Energy.

Cheniere Energy

Cheniere’s stock chart shows the “unusual” history of the company:

Just as a side remark, somehow this chart reminds me of this funny animal:

Looking at Cheniere’s latest quarterly report, we can clearly see that Seth Klarman’s days as Graham style “net-net” investor seem to be over. Cheniere has currently around 7,5 bn net debt and 2,3 bn equity. Based on a market cap of around 17 bn USD, this is a P/B of roughly 7 times so hardly a bargain investment based on this metrics.

On top of that, the company never made a profit in its life as this table with EPS since 2004 clearly shows:

      EPS
02/21/2014 FY 13 12/13   -2,2
02/22/2013 FY 12 12/12   -1,6
02/24/2012 FY 11 12/11   -2,6
03/03/2011 FY 10 12/10   -2,3
02/26/2010 FY 09 12/09   -3,8
02/27/2009 FY 08 12/08   -6,0
02/27/2008 FY 07 12/07   -3,6
02/27/2007 FY 06 12/06   -1,5
03/13/2006 FY 05 12/05   -0,9
03/10/2005 FY 04 12/04   -0,6
N.A. FY 03 12/03   -0,4

So the question is clearly: What does Seth Klarman see to make this his biggest publicly disclosed investment ?

The best analysis I found was the one at Value Investor’s Club (accessible with guest login) from 2013, where the stock was trading at a third of the current price (Klarman bought between 60-70 USD). There is also a good article in Forbes from 2013 about the story behind Cheniere from 2013.

I try to summarize the case in a few bullet points:

– natural gas is very cheap in the US due to fracking and multiple times more expensive especially in Asia
– despite high costs, it is a pretty good business to liquify natural gas in the US and ship it to Asia in order to earn the spread
– Cheniere is in the process of finishing its first gasification plant by the end of the year 2015 and will then start to produce reliable cash flows as it has already contracted out its full production capacity for 20 years to major energy companies

The most important point is however the following quote from Forbes:

Cheniere’s Sabine Pass facility got its approval from the Department of Energy to export to any country in the world two years ago. It is so far the only facility to be cleared to export to countries that do not have a Free Trade Agreement with the U.S. And getting a non-FTA permit is a make-it-or-break-it approval for these projects, because there’s only one big gas-importing country (South Korea) with a free trade deal with the U.S. Unless a facility can export to the likes of Japan, China and India, the economics likely won’t support a multibillion-dollar build-out.

Cheniere had the luck to be the first to get this license. Later on, mostly due to the pressure of US based energy users, the US Government declined to issue further LNG “non FTA” export licenses for some time. According to Cheniere’s latest investor relation presentation, in 2014 two more “non FTA” licenses have been granted but Cheniere clearly has a head start.

Many more export facilities in the US would lead to higher prices in the US and to lower spreads compared to Asia, but for the time being, Cheniere’s primary LNG facility could be viewed as the typical “toll bridge” for US natural gas on its way to off shore destination as the other two licensed projects are still to be completed in several years time.

Cheniere itself is trying to further expand its current facility by 50% and they are projecting another site, but both projects have not yet received their license.

Valuation:

Replacement value

Despite buying at 7 times book, the question is: Could it be that Klarman is buying below replacement value ? I think it is unlikely. EV is around 25bn, stated book value of the assets is around 8 bn. Liquification facilities are not that hard to construct. all you have to do is to call someone like Bechtel and sign a turn-key project. Ok, you need the land and the permission, but overall this seems to be manageable in the US. So without going into more detail, we can assume that the current valuation of Cheniere is clearly above replacement value.

Valuation based on future cash flows

The VIC author estimates around 4-6 USD per share distributions for Cheniere’s shareholders going forward based on the first 4 trains of the initial liquification project. I have not double checked this but I will assume this number of being correct.

Reading through the roughly 15 pages of risk factors in Cheniere’s 2013 report, I would not call this a risk free business.There are still a lot of moving parts and operational risks even if the whole facility is up and running. Cheniere’s public bonds in the operational subsidiary trade at around 5,5% yield p.a. So discounting equity cash flows at the HoldCo level should be higher than that.

A) Existing facility and licence & contracted cash flows only

Cheniere has fixed contracts for 20 years. In the following table I have calculated NPS for the above mentioned EPS range and different discount rates, based on the assumption that one gets those earnings for 20 years and after that nothing (for instance any future earnings have to be applied to retire the debt):

eps/discount rate 4 5 6
6,50% 44,07 55,09 66,11
7,50% 40,78 50,69 60,83
8,50% 37,85 46,73 56,08
9,50% 35,25 43,17 51,81
10,50% 32,92 39,96 47,95
11,50% 30,84 37,05 44,46

We can clearly see, that the contracted amounts at the existing facility will not be enough to justify the current valuation of around 70 USD.

B) Existing facility, indefinite cashflows

This is the table with an indefinite stream of earnings at various discount rates:

eps 4 5 6
6,50% 61,54 76,92 92,31
7,50% 53,33 66,67 80,00
8,50% 47,06 58,82 70,59
9,50% 42,11 52,63 63,16
10,50% 38,10 47,62 57,14
11,50% 34,78 43,48 52,17

Even with an indefinite time horizon, Cheniere does not look like a “bargain stock”.

C) Existing facility + 50% capacity increase, contracted cash flows only

eps/discount rate 4 5 6
6,50% 66,11 82,64 99,17
7,50% 61,17 76,03 91,24
8,50% 56,78 70,10 84,12
9,50% 52,87 64,76 77,71
10,50% 49,39 59,93 71,92
11,50% 46,26 55,57 66,69

D) Existing facility +50% capacity increase, indefinite cash flows

eps 6 7,5 9
6,50% 92,31 115,38 138,46
7,50% 80,00 100,00 120,00
8,50% 70,59 88,24 105,88
9,50% 63,16 78,95 94,74
10,50% 57,14 71,43 85,71
11,50% 52,17 65,22 78,26

The 4 scenarios show relatively clearly that only with including future non-contracted cashflows and additional, not yet approved capacity, the stock looks interesting. In order to satisfy the return expectations of Klarman, which should be 15-20% p.a.based on his track record, he must assume further cash flows for instance from the second site Cheniere wants to contruct at some point in the future in Corpus Christi. Plus, there should be no dilution etc. from raising the rquired gigantic amounts of capital.

Maybe he is betting that the stock will trade like a bond if the company starts paing dividends ? Or is he leveraging the investment with addtional debt ?

In any case, he seems to be paying a lot for future, uncertain cash flows, which contradicts his “we still do cigar butts” statement. This is not that different from what Buffett is doing when he is paying rather expensive prices for great companies. At least for a guy with a portfolio size like Seth Klarman, the time of “cigar butt” investing seems to be over. Even he must feel th pressure that you cannot charge 2/20 for holding cash.

So to answer the question from the beginning:

Why on earth is Seth Klarman investing 1,7 bn USD in Cheniere Energy (LNG) at 7x P/B ?

I have no real idea but it might be the case that Klarman somehow need to put money at work and he expects this investment to be uncorrelated to general market as he has been quite pessimistic on equities for some time.

Summary:

For me, Cheniere at current prices is clearly one for the “too hard” pile. Klarman of course can spend a lot of money and time to fully analyze the energy markets etc. although as we know now, most energy experts have a hard time to make meaningful forcasts. But still it doesn’t look like a bargain and clearly no “cigar butt” or “net-net” kind of investment.

Funnily enough, analyzing Cheniere makes me much more confident in my Electrica investment. At least to me, the risk/return relationship there is some magnitudes better than for Cheniere. I think I will upgrade this to a full position over the next few days.

P.S.

Some other stories I found about Cheniere
http://www.alternet.org/fracking/how-powerful-friends-and-cozy-relationships-helped-cheniere-energy-cash-natural-gas-exports
http://www.octafinance.com/baupost-group-doubled-stake-cheniere-energy-still-bullish-us-lng/
http://www.mailtribune.com/article/20150125/Opinion/150129835

“Quick and dirty” portfolio risk management

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In my January performance review, I made the following comment:

Overall, if you don’t have an active opinion on interest rates (which in my opinion you shouldn’t), one should make sure that the overall exposure of the portfolio is as neutral as possible with regard to interest rates. This sounds easier than it actually is. For some companies (insurers) it is relatively easy to see how their exposure is to interest rates. For others, it is much harder. But in my opinion, just checking business models against the influence of interest rates is a very worthwhile and value creating exercise.

Checking a portfolio against interest exposure (or any other exposure) involves 2 basic steps:

1) You have to make a judgement how businesses are effected by the exposure (positive, negative, neutral)
2) You have to aggregate those exposures over your portfolio

Complex or keep it simple ?

In institutional environments, risk management departments are usually staffed by legions of math or physics Phd’s which employ very complex modelling tools in order to both, come up with exposures and aggregate them. There are a myriad sophisticated risk management techniques available. Monte Carlo analysis, correlation modelling etc. etc. can be combined to come up with great looking distribution charts showing portfolio exposures against a multitude of factors.

The problem with such sophisticated models is that the outcomes are often not stable and outcomes change a lot if some inputs are changed only slightly. In many cases those models develop into your typical “black box” where people do not understand any more of what is going on and how the results are actually creates and no one dares to ask.

This is the reason why I personally think that one should prefer simple and easy to understand models even if they lack most sophisticated tools. Maybe the results are not 100% accurate but at least one can understand them.

A very simple way to analyze and aggregate interest rate exposure

For step 1), I use a very simple heuristic based on capital intensity and sector:

– banks and insurance companies a clearly negatively effected, the more traditional the business model, the more negative the impact
– capital-intensive business or real estate related stuff usually profits most from low-interest rates
– capital light businesses are relatively neutral
– any longer term fixed income investments will do very well

For step 2), I then attach a score ranging from +1 (low-interest rates are very positive) to -1 (very negative) to each position and multiply it with the percentage of the portfolio.

This is how this would look for my current portfolio:

Name Weight Impact low interest rates Weigt
CORE VALUE      
Hornbach Baumarkt 4.3% 0.5 0.02
Miko 4.3% 0 0.00
Tonnellerie Frere Paris 6.1% 0.5 0.03
Installux 3.6% 0 0.00
Cranswick 3.0% 0 0.00
Gronlandsbanken 2.5% -0.75 -0.02
G. Perrier 4.5% 0 0.00
IGE & XAO 2.1% 0 0.00
Thermador 2.6% 0 0.00
Trilogiq 1.5% 0 0.00
Van Lanschot 2.4% -1 -0.02
TGS Nopec 4.7% 0 0.00
Admiral 4.6% -0.5 -0.02
Bouvet 2.4% 0 0.00
KAS Bank NV 4.5% -0.75 -0.03
       
       
Emerging Market     0.00
Koc Holding 1.2% 0.5 0.01
Ashmore 4.2% -0.25 -0.01
Depfa 0% 2022 TRY 3.0% 1 0.03
Romgaz 2.5% 0.5 0.01
Electrica 2.6% 0.5 0.01
       
OPPORTUNITY      
       
Drägerwerk Genüsse D 4.9% 0.5 0.02
DEPFA LT2 2015 5.1% 0 0.00
HT1 Funding 4.2% 0.5 0.02
MAN AG 2.4% 0.5 0.01
NN Group 2.8% -1 -0.03
Citizen Financial 2.8% -0.75 -0.02
       
Cash 11.3% 0 0.00
       
Overall IR exposure     1.2%

The resulting score will be between -1 (totally negative) to +1 (in aggregate positive).

Overall, based on my initial judgements, my portfolio looks pretty neutral vs. low interest rates. Clearly this is no scientific approach and I would not get any academic grades for this, but still, just doing the exercise in my opinion makes a lot of sense and makes you think about your overall portfolio exposures.

Once you have created this spreadsheet, it can be used with additional columns also to look at exposures like Oil prices or EUR crisis scenarios.

Performance review January 2015 – Comment: “Life in zero gravity”

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Performance:

In January, the portfolio gained +3,38%. That looks good stand-alone but pretty weak against the +8,1% of my Benchmark (Eurostoxx50 (25%), Eurostoxx small 200 (25%), DAX (30%),MDAX (20%)) for January.

[EDIT: the first version of the post stated +4,14%, that was a mistake as well as the 3,54% from the second version. Somehow my spreadsheet got screwed up]

Looking at all 5 Januaries since I run the portfolio, one can see that a 4% performance difference in January rather seems the rule than the exception:
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When dividends matter (Hint: Mostly not at all)

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Today I read an article in one of the major German Newspapers, Frankfurter Allgemeine, about the merits of investing in stocks.

I know that the year is still young, but this article (in German) might be easily the worst article of the year on stock investing.

They offer 3 “compelling” reasons why stocks are attractive:

– dividends are increasing
– stocks are still below all time high if you look at a pure price index (the old FAZ index)
– the dividend yield according to them is 2,9% and higher than 10 year Bunds (0,5%) or BBB bonds (1,5%)

They even recommend to buy stocks just before the dividend payment to collect the dividend and then sell. They finally show a calendar with all dividend dates of the major German stocks in order for the readers to be prepared.


Technicalities:

For some reason, the author doesn’t seem to know the existence of an “Ex-dividend” adjustment for stocks. I guess this guy also buys bonds the day before they pay the coupon or so. Including taxes and execution costs, I am pretty sure this kind of “dividend hopping” has negative expected value.

Anchoring bias

Secondly, it is interesting that you see such a nice example of an “anchoring bias” in a major newspaper. For investing in stocks it doesn’t matter if the stocks trade at an all time high or all time low. All that matters is if stocks are valued adequately in relation to their intrinsic value which in turn is determined by future profits and cash flows. With a “strategy” like that one mentioned, you will miss most bull markets and happily buy into bear markets. Congratulations !!!

Where is the problem with dividend yields ?

Well, before I further insult the writer of this article, the problem is that many people seem starting to think that somehow dividends are like “coupons”. This is clearly the side effect of the current low-interest rate environment.

There are also many statistics which point out that over a very long period of time, dividends have been a significant part of stock market returns.

However just buying stocks with high dividend yields is actually a loosing strategy as Dreman, O’Shaugnessey and others have shown. For me, the problem is two fold:

1. High current dividend yield stocks are often value traps

When companies get in fundamental trouble, they often try to preserve their “sacred” dividend until the bitter end. For some reason, canceling a dividend is been seen as the ultimate ratio before the real troubles begin. So it is quite common, especially in capital-intensive industries that struggling companies keep up their dividend despite an eroding business, as it could be seen with E.on, RWE or the banks. Sometimes you even see companies paying dividends and issuing dilutive shares at the same time just to keep up the illusion of a constant, “coupon like” dividend like Santander just recently.

Those long term returns mentioned above are actually much more the result of high growth, low dividend yield stocks which over a long-term grow so much that after 20 years or more, the dividend in relation to the original purchase price is then huge.

Especially these days, dividend yield is a very imperfect measure for shareholder returns anyway. Including share buy backs and looking at total shareholder return is the much superior strategy as for instance Mebane Faber has shown in his book.

2. Psychology: Yield hogs get slaughtered

A “yield hog” is someone who only looks at coupons or yields and not on total returns. If you buy a bond and the issuer does not go bankrupt, you get the coupon and the principal back. If you buy a stock, you might get your dividends (or not), but you never get your principal back. In contrast to a bond, you have to sell the stock to someone else in order to get your principal back. However there is clearly no guarantee that you will your principal back as “mr. market” might disagree on the value he wants to give you.

Psychologically, “Yield hogs” often cannot stand draw downs on the stock price and then get “slaughtered” when the panic sell in a bear market (often after doubling up on the way down). In some areas like insurance or pension funds, where you need to show a current yield, this “yield hog mentality” is basically baked into the business model and can be observed cycle by cycle.

So when do dividends add or indicate value ?

In my opinion, the only case where dividend yields are important if you invest in “deep value” cheap non-growing companies with a lot of cash flow and questionable capital allocation skills or dangerous environments. In such cases, having a paybacks via high dividends lowers the “risk duration” of an investment significantly.

In my portfolio for instance, Installux, Romgaz and Electrica are such candidates where I would not invest if they would just accumulate earnings. but be careful: i ti snot the dividend which makes them good investment but the undervalued nature of the stock. Admiral for instance, a company I really admire, would do much better fo its shareholders if they would buy back stock instead of paying 6-7% dividends. The long term compounded return would be much better without the tax on the dividend income.

As always, Warren Buffett has summarized it nicely several times why dividends are actually stupid for good companies.

Quick summary:

Investing in stocks because of the dividend yield is an extremely stupid way to invest. Either you will end up holding a lot of value traps and/or you will lose your nerves in the inevitable downturns.

Dividends should only been considered in context with the underlying business model and in combination with the capital allocation (reinvestment, share buy backs, debt levels), but never ever as a stand-alone investment criteria.

Dividends ARE NOT COUPONS and stocks are not “yield replacements” for bonds !!

Updates: Energiedienst (CH0039651184) & Vossloh (DE0007667107) voluntary tender offer

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Energiedienst

My first transaction this year was to sell my shares in Energiedienst.

Looking at the Swiss Francs chart, where Energiedienst has its primary listing, this looks like genius timing:

However in Euro, it looks pretty stupid:

In Euro, the shares jumped from around 25,20 EUR to around 27 EUR at the time of writing, a upmove of around 7% against a loss in Swiss Francs of around -10%.

So what happened ? Well in case you were not on a Moon mission last week you might have heard about that Swiss Franc “thing”. The Swiss Franc increased around 17% against the Euro within a very short time frame. What we can see above is relatively easy: The stock price in Swiss Franc fell, but not enough to off set the CHF/EUR movement. This is very strange, especially in the case of Energiedienst.

Energiedienst operates (based on sales) around 85% of its business in Germany and only 15% in Switzerland. So even if we assume that the business in Switzerland is not negatively affected, the increase in EUR should have been theoretically only 0,15*17%= 2,6% in EUR and not +7%.

If we look at Swiss Power prices however, we see something interesting: With the exception of the one day, they directly adjusted in EUR terms as we can see here for instance in the Swiss 1 year forward electricity prices:

swiss power EUR

So in this case, electricity prices seem to be more efficient than stock prices, as there seems to be a very quick and liquid market to arbitrage away those currency differences quickly. Nevertheless I lost money by selling to early but in this case it was not my fault.

Vossloh

Back in September, I presented Vossloh as a potential fallen angel with activist involvement. This is what I wrote back then:

Based on today’s price of ~49 EUR this would mean a potential upside of 35-68%. However one should assume that this turn-around needs at least 3 years. For a turn around, I personally would require a higher return than for a normal “boring” value stock as there is clearly a risk that the turnaround does not work out as planned.

If I assume a target return of 20% p.a., i would need to be sure that the price of Vossloh is in 3 years at around 85 EUR. This is clearly at the very upper end of my target range. So I would either need to have more aggressive assumptions or I would need a lower entry price. As a value investor, I would not want to bet on growth or on a shorter time frame for the turn around, so the only alternative is to wait for a lower entry price.

Taking the midpoint of my range from above at 74, I would be a buyer at ~42 EUR per share but not before.

On November 7th, Vossloh actually hit the 42 EUR threshold but somehow I was not quick enough and passed to buy some shares. Since then the shares recovered nicely to around 54 EUR when yesterday, the following news hit the wires:

On 20 January 2015, KB Holding GmbH decided to make a voluntary public takeover offer to the shareholders of Vossloh Aktiengesellschaft, Vosslohstraße 4, 58791 Werdohl, Germany, for the acquisition of all ordinary bearer shares with no par value, each share representing a proportionate amount of EUR 2.84 in the share capital (the ‘Vossloh-Shares’).

KB Holding GmbH intends to offer the payment of a cash consideration per Vossloh-Share in the amount of the weighted average domestic stock exchange price during the last three months before the publication of this
announcement according to Sec. 10 para. 1 sent. 1 WpÜG pursuant to Sec. 5 para. 1 and 3 of the Regulation on the Content of the Offer Document, Consideration for Takeover Offers and Mandatory Offers and the Release from
the Obligation to Publish and Issue an Offer (WpÜG-Angebotsverordnung), as determined by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). This consideration is expected to be in a range between EUR 48 and 49 per Vossloh-Share and will be published immediately after being notified by BaFin.

KB Holding GmbH currently holds 29.99 percent of the shares in Vossloh Aktiengesellschaft.

The stock managed to gain some more and closed at around 56 EUR per share:

So the first question is: Why does he offer 49 EUR per share if the shares are trading already at 55 EUR ?

This one is pretty easy: Thiele was already owning 29,99%. In Germany, once you cross 30%, you have to make a mandatory offer at the trailing 90 “VWAP” stock price. My guess is that Thiele clearly wants to take control, but maybe not now and not at 55 EUR. So he used the occasion to come out with this lowball offer, because this releases him from any further mandatory offers and he is not forced to take more shares than he actually wants.

After the offer has expired and Thiele has crossed 30%, he only needs to disclose purchase once he crosses 50% and even then he does not need to make a mandatory offer as the voluntary offer releases him from making any subsequent offers.

Is the stock still attractive at that level ?

Well, we know now that Thiele clearly wants to take control. But we also know that he is a very shrewed operator with little interest in minority share holders. He controls the management of the company already (he actually hired the new CEO) as he ist already the strongest shareholder.

For anyone who followed the blog and the German Corporate law discussion, the biggest issue is the following: Under current law, Thiele could decide (or his CEO) to delist from the stock exchange. This is now possible in Germany without even getting any kind of shareholder approval. This would force many funds out of the stock as normally unlisted stocks are not permitted under most fund regulations. Even for hardcore hold outs this would mean low or no transparency etc. etc.

I have seen a recent study (Solventis, “Endspiele”) that since the change in law (or the change in interpretation), on average stocks lost around -25% following the announcement of a delisting.

Overall, at the current price the risk/reward ratio is in my opinion neutral. There is some room left with regard to a fair value and mean reversion, on the other hand one should be careful with regard to any minority unfriendly actions from Thiele & Co.

As a learning experience, I should maybe watch my watchlist a little bit closer in order not to miss such opportunities as in November.

Why buy and hold is great – if you are already an investment genius

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When I did my 2014 review a few days ago I observed the following:

Interesting for me is the fact that 4 of the 5 top losers were new positions whereas only 2 of the 5 best stocks (Koc, Citizens) were bought in 2014.

This leads of course to the question if any of what I have done here over the past 4 years has added any value. The good thing is: It is relatively easy to test the hypothesis. I just took the old starting portfolio and calculated roughly what the return would have been with a simple buy and hold. Let’s have a look at the numbers:

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FBD Holdings (ISIN IE0003290289) – A local Irish Insurance champion for sale ?

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Again this turned out to be a quite long post as I am digging a little bit deeper into the balance sheet. Therefore a quick summary:

Although FBD Holdings, the Irish P&C company looks interesting, I will not invest. The company has a very impressive track record, but in my opinion the business model is not scalable as it doesn’t have any structural competitive advantages besides a loyal client base. Additionally, the company severely screwed up their asset allocation and will be faced with ultra low investment returns going forward unless they are increasing their investment risk significantly.

At current stock prices, the company is in my opinion pretty well priced, with only a relatively small upside in a good case and equally large downside in a more negative case.

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And then there were 26 – Sold Energiedienst

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A few days ago, I published my 28 stocks for 2015. Pretty soon after that, I already sold Sberbank.

Now I sold another stock, Energiedienst, the German/Swiss Hydro Power generator which I bought only last year.

The investment case for Energiedienst was pretty simple: Energiedienst as a hydro power generator is an “electricity price pure play” with a solid balance sheet. My expectation was that Energiedienst could profit in the mid-term if the conventional utility companies take capacity off the market, as running gas and coal powered power plants were loss making for E.On and RWE.

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My 28 investments for 2015 (and maybe a few too many….)

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As every year, I will do a short summary of my portfolio for 2015 with comments on each positions. One thing that I recognized is the fact that my portfolio now has 28 positions which is on the high-end of what is manageable. So I have to put a few of them on the watch list to do a deeper review in the coming weeks. New ideas have to replace an “old stock” in 2015.

1. Hornbach Baumarkt

One of my initial positions, family owned Hornbach is a slow and steady grower, their market share in Germany for instance increased from 8,7% in 2009 to 13% in 2013. The stock performance in the last year lacked a little bit as the market did not allow multiple expansion. Very limited downside in my opinion despite hard business. Hornbach could additionally profit from the end of the Baumax chain in Austria, similar to the boost in sales in Germany after Praktiker went bankrupt.

2. Miko

Belgian, family owned company providing Coffee workplace services and plastic packaging. Plastics division could profit from low oil prices. Slow and steady grower, doing small acquisitions along the way.

3. TFF Group

Another initial investment from 4 year ago. Family owned oak barrel manufacturer. Has grown well over the past year due to Asian demand for oak aged french wines and opportunistic acquisitions. Demand for French wine in China seems to hae stopped growing, but long term I think the company is attractive. Next year will be rather unspectacular.

4. Installux

Small French company specialized in aluminium appliances. surprisingly resilient. Despite the nice stock price appreciation in 2014 (+30%) still one of the cheapest quality stocks in Europe. Downside well protected via large net cash position.

5. Cranswick

Uk based “butcher”, producing pork and sausages with a dominant market position. Despite the problems of its biggest clients, Cranswick is still doing well although the stocks are a little bit on the expensive side. This is a stock I will have to review soon.

6. Gronlandsbanken

Gronlandsbanken is the only bank in Greenland and a long bet (or hedge against) Global warming. The ice is melting in Greenland which should contribute to ecominic activity, however a lot of that is commodity related. Stock pay an attractive dividend which looks very safe.

7. G. Perrier

French small cap, specialist for electric installations with a strong position in Nuclear maintenance. Good growth despite economic headwinds. Cheap (ex cash) depite attractive, capital light business model.

8. IGE & XAO

Small french software company, controlling the French market for electrical CAD software. Steady growth, highly attractive margins and still reasonably priced.

9. Thermador

Thermador is a French based construction supply distribution company. Distinct “outsider style” corporate culture. Despite headwinds in French economy still doing well. Reasonably priced.

10. Trilogiq

A French supplier mostly to the automobile industry. Capital light business model including some consulting. However issues in 2014 due to complete change of product offering and resulting disruptions. Despite lower profits still oK priced but I will need to thoroughly review the position next year.

11. Van Lanschot

Dutch base private bank, turn around story with new management. Some progress in 2014. Still well below book value but it needs to be seen if capital will produce adequate returns.

12. TGS Nopec

“Outsider style” seismic data company. Clearly influenced by the oil price but with strong competitive advantages against competitors due to “capital light” business model.

13. Admiral

“Outsider style” direct internet insurance. Uk base, large cost advantages but difficult part of the insurance cycle. Several growth projects on the way.

14. Bouvet

IT consulting company from Norway. Stock price hit hard by oil decline, Statoil is the largest client. Will need to check if investment case still valid as a 50% drop in oil prices and the potential impact on Norway’s economy was not part of my analysis.

15. KAS Bank NV

Specialist bank from the Netherlands. Cheap but good and safe dividend yield. Would profit significantly if interest rates would go up again.

16. Energiedienst

Swiss/German Hydroelectric utility. Still suffers from renewable energy driven chaos in German electricity market. Solid cash generation, defensive position. Could profit from restructuring of the large German utility groups, although electricity prices will stay low if oil and other fossil fuel stays as cheap as currently.

17. Koc Holding

Family owned conglomerate, dominating Turkey’s economy. Low oil price should benefit Koc in several ways.

18. Ashmore

Specialist Emerging Markets asset management company. 2014 was difficult year due to EM volatility. I am still positive as EM is basically the only part of the market where there is any yield left. CEO owns significant part of the company.

19. Sberbank

Biggest Russian bank. When I bought it, I did not expect that the conflict in Ukraine would escalate as much and of course I didn’t expect the oil price go down so fast. Will need to review the case asap.

20. Depfa 0% 2022 TRY

Combined Emerging market investment (Turkish Lira) and bet on Spread tightening for DEPFA.

21. Romgaz

First part of my bet on a Romanian recovery supported by the election if the new, ethnic German president. Extremely cheap producer and distributor of natural gas. Could profit from recent privatisation and efficiency gains, pays solid dividend.

22. Electrica

Part 2 of Romanian “bet”. Extremely cheap electric grid company. Guaranteed profit increase via investment program at guaranteed returns plus extra upside if efficiency gains could be achieved. On of my favourite long-term bets.

23. Drägerwerk Genüsse

Capital structure “arbitrage”. Price of Genußscheine still far below the fundamental value which should be 10x the Draeger Pref shares

24. DEPFA LT2 2015

Tier 2 bond with good yield and low risk. Will mature in 2015.

25. HT1 Funding

Still a “safe spread” subordinated bond with 5% yield until 2017 where it will be most likely called by Commerzbank.

26. MAN AG

“Squeeze out speculation” with guaranteed dividend.

27. NN Group

“Forced IPO” from ING Group. Still relatively cheap.

28. Citizen Financial

“Forced IPO” from RBS. Valuation below US peer group, could profit from higher interest rates.

My oil price forecast and a few (random) thoughts on oil and oil related stocks

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My oil price forecast

To be honest, I have no fxxxing clue where oil will be tomorrow, in 1 month, 1 year or 10 year. The good news is: Absolutely nobody has a clue, too !! Yes, you can read now a lot of comments, interviews etc. of people who have suddenly turned into oil experts and predicting either a jump back to 100 USD/barrel or oil for free for the next 100 years.

I did some research and one of the very few analysts who was actually bearish on oil prices was a guy called Ed Morse from Citibank. I found comments from him in 2012, 2013 and beginning of 2014. But even he only predicted prices down to 75 USD/barrel.

So it is pretty fair to say that no one saw this coming. Therefore one should be extra careful on listening to people try to tell you what is happening next. They are all just guessing. And no, I am not interested in any Saudi/US/Russia conspiracy theories.

My personal opinion is that the current fall in prices could be a combination of additional supplies (indebted oil companies and governments have to pump more oil as prices fall to meet obligations) and momentum riding traders (hedge funds. But this is just an opinion, I have no prove for this.

Is a low oil price good for the economy ?

Although I have no clue where oil is going, I think it is still important trying to understand what this could potentially mean if oil prices remain low. Oil, in contrast to gold, silver or even iron ore is such an important factor in the global economy that it would be naive to believe that this has no impact.

Conventional wisdom is that low oil prices are good for the American consumer as he has more to spend on “stuff” and as a consequence for the US economy. But wait a minute ….wasn’t deflation the biggest “Enemy” of the recovery ? Then why should now deflation via the oil price suddenly be great news ? Is ther good deflation vs. bad deflation ?

I am not a macro guy, but I would say there are doubts if low oil prices are really good for indebted economies struggling with deflation. In the UK for instance, inflation already was at a 12 year low for November. Oil and gasoline taxes are important revenue bases in southern Europe as it is not easy to dodge those taxes.

One other thought: A lot of Oil money got recycled into the stock market. Norway is the biggest shareholder in most European stocks and increasing their stakes continuously. If the oil price stays that way, they clearly have less money to invest.

On oil (and related) companies

Clearly, most oil related companies are negatively effected by lower oil prices. There are business models with more exposure (e.g. oil rigs) and less (oil storage), but in general, the whole oil industry is not happy about a -50% drop in oil prices.

However they do look extremely cheap on a historical basis. But be very careful here. If you look at trailing P/Es or trailing EV/EBIT like the Alpha Architect blog did, be aware that those cheap trailing multiples are based on 110 USD/Barrel and not 55 USD.

Nevertheless, a stock which has just fallen 50% or more often looks irresistible for value investors. This is buying at a huge discount, right ? But just buying on a recent drop in prices is in my opinion “fast thinking”, the typical “catch a falling knife” reaction.

The “slow thinking” and real value investing would be to make sure that the VALUE (not the price !!) of such a company has remained constant.

The problem with this is the following: In order to justify an investment into oil related stocks based on historical profitability you have to assume 2 things at the same time:


1. the oil price has to go back up
2. oil related companies have to be able to earn their old margins again.

Those are basically two bets in one. Especially for capital-intensive companies, the second point does not automatically follow the first. If the oil cycle has actually turned for a longer period, than we will see a lot fewer investments going forward and anything related to Oil capex might be in trouble (and yes Siemens, you might think of directly writing of all of your nice Dresser Rand goodwill purchased at a PE of 32). A good example for instance for this effect are the Steel and shipping industry. All that capacity is not going away quickly and the companies are willing to operate at a loss as long as variable costs are lower than the price.

As a trader, you can clearly speculate on a rebound, as we are just seeing on a daily basis. As an investor, you should make sure that your chosen investments will experience “mean reversion”. For companies with a high capital intensity and lots of debt there a big risk that someone else will reap the benefits of the recovery after shareholders have been wiped out. I am pretty sure, Oaktree is already hiring energy experts by the dozen.

“Collateral damage”

Apart from oil related companies, one should be aware that problems could surface elsewhere. Banks who lend to oil companies are an obvious example. Oil traders or hedge funds who are long oil are another example, an early casualty was OW Bunker, a shipping fuel supplier from Denmark.

Less obvious issues could come up for instance at airlines. Yes, long-term they might benefit, but short-term they could run into a cash crunch due to their hedges. If an airline uses forwards they have to put up a lot of collateral to banking partner at the moment as their forwards are deeply underwater. If then competitors with less hedges then start reducing ticket prices early, this could get interesting.

In Germany, gasoline tax is around 40 bn per year or 4-5% of total tax revenues. In countries like Italy, that percentage is much higher (gasoline is much more expensive in Italy than Germany due to higher taxes…). Especially for those countries, the drop in tax revenues will hurt. I didn’t find hard numbers on that but my guess is that budgets in countries like Italy will not surprise to the upside if oil and gasoline prices stay low.

Potential opportunities

However there is also the chance of what I would call “positive collateral damage”. For instance companies in the oil sector or in oil economies which are not directly hit by the oil price like distributors etc.

Norway could be interesting too. I am suffering at the moment with Bouvet, but I do think that med term this could be interesting. The Norwegian Government has enough fire power to jump-start some supporting initiatives and Bouvet could profit as the Government is one of their biggest clients (Statoil too, I know….).

Turkey and the Lira have been hit badly by the Ruble crisis. I do not fully understand why. Turkey is a big oil importer and lower oil prices will most likely lower inflationary pressures. I guess this has to do with investors selling out local currency EM funds.

Other examples could be oil related distribution companies or infrastructure companies (oil storage, natural gas grids) who earn money based on volume independent of underlying prices. Or Oil tankers, but that is again another story.

Summary:

If oil remains at current levels, this would be clearly significant, both for the world economy and the stock market. I have no clue what oil will be doing, but it makes a lot of sense to think about potential impacts.

My advice at the moment would be:

– ignore oil price forecasts from people who didn’t see this coming (basically everyone)
– avoid anything which has a lot of leverage and is oil related unless you want to trade short-term
– make sure you understand what parts of your portfolio have direct/indirect oil exposure and in which direction and ask yourself if you are comfortable
– better look for “collateral damage” kind of investments (non oil companies in oil countries etc.)
– don’t rush, let your “slow thinking” part of the brain gain control

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