Real Money Portfolio – December 2016

Happy new year to all our readers, it’s been an interesting investment journey this year to say the least. After the China meltdown fears in January, the Brexit vote in June, the uncanny election of Donald Trump in November and the fed raising interest rates in December, this year we’ve seen the market… go up? Well, in the US at least.

Our Real Money Portfolio has delivered sound returns this year, but since the election has taken a bit of a breather, mainly driven by the strength of the USD (as half the holdings are in ASX listed companies and the portfolio returns are in USD) which has rallied post the US elections on the reflation story driven by increasing US infrastructure spend as well as more hawkish sentiment on rate hikes in the medium term.

Overall, we see fairly lofty valuations, but not at alarming levels and we continue to hold quality businesses are fair to reasonable prices as we believe this is a winning strategy in the long-term.

Returns since Inception (May 2016): 13.5%

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Mobile Embrace Limited runs into trouble, is it time to run for the hills?

After Mobile Embrace Limited’s (ASX: MBE) update yesterday we saw a sell off of around 50% since Tuesday. While the share price reaction is disappointing, we’ve digested the information and spoken to company management to gain clarity around the somewhat vague commentary around the operational change required to address telco compliance issues. Simply put, for compliance purposes the checkout process for payments now require a two-step acknowledgement before a customer can commit to making a mobile payment, vs. one-step.

What this means is that customer conversion rates have come down, and MBE will require adjustments in how they market to these customers as well as assess the cost of acquiring a customer. From what I understand, this is not an unfamiliar challenge for MBE, which faces compliance changes from time to time, and currently have found ways to adjust their operations and rebuild their ability to acquire customers at attractive returns.

Furthermore, due to a range of supplier system issues, MBE have seen weaker leads in their customer acquisitions, coincidentally occurring at the same time as the aforementioned compliance changes, which has accentuated the financial impact over the first half of 2017. From what I can gather, these issues do appear to be temporary in nature, however the company will need to grow their earnings from a lower guided base ($8M EBITDA for FY17 vs. our estimates of ~$10.5M).

While this is disappointing, the market reaction of a 50%+ share price decline for a 25% decline in EBTIDA is what we would consider to be irrational (the enterprise value is now only $50M and the business remains cash flow positive). With the prospects of international expansion (diversification away from idiosyncratic issues with regulators/suppliers) remaining bright, and we expect this to become an increasingly important part of the thesis, the current sell off makes the valuation look ripe for an opportunistic buy.

Disclaimer: Note that the content contained on this website is for strictly for entertainment purposes ONLY and reflects the Author’s own views. The Author makes no warranties on the accuracy of the information presented. None of the information presented on this website should ever be considered as financial advice. 

 

Real Money Portfolio – Oct 2016 Update

The Real Money Portfolio October 2016 update has been tardy, for which I must apologise to our readers – It’s been a crazy week leading up to the US Election which as we all know is almost an uncanny outcome. Perhaps almost as uncanny has been the fact that the S&P500 is actually up. Expectations are that Trump’s victory (and Republican control of congress) will be accomodating for business and companies. However, various foreign markets (particularly those focussed on exporting to the US) have been impacted negatively. Having said that, this does allow the potential for certain companies to be unfairly sold off (but still as of yet I don’t see many bargains). As such, the Portfolio is holding 29% cash.

While the near-term outlook is uncertain, I think in the long-run Trump’s appointment in and of itself is unlikely to be more than a blip on the radar. Only time will tell.

On a side note, we’ve seen one of our High Potential Picks, Nearmap Limited, provide an update indicating that traction in the US is picking up. Again, we’ll be hanging around to see how this story unfolds.

And without further adieu:

Portfolio Returns

Returns in October 2016: -1.9%

Returns since Inception (May 2016): +16.8%

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Real Money Portfolio – September 2016 Update

We’ve witnessed a prolonged period of calm in the months after the Brexit vote in July 2016, but September finally showed that the markets still had a pulse. The VIX index (Volatility Index – also known as the fear indicator) finally took off from the prolonged low levels of 11 to reach highs of around 18 mid-month but closed the month back down.

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Despite this,  there was no meaningful change in the index levels, with the S&P500 and ASX All Ordinaries index remaining largely flat (-0.1% and +0.3% respectively). Having said that, it has been another pleasing month for the Real Money Portfolio which experienced an increase of +4.9% through the month of September 2016.

Some of the key contributors were Apple (Nasdaq: AAPL)  with the successful (but not so highly anticipated) launch of the iPhone 7, which co-incidentally had Nintendo (OTC: NTDOY) announce the first mobile Super Mario game exclusive to iOS which lead to nice share price gains on both counters. Match Group (Nasdaq: MTCH) and JD.com (OTC: JD) have continued to be strong performers for the portfolio, both of which have long run-ways of growth and (I believe) have business models that can deliver and sustain attractive economics.

On the ASX, we’ve seen positive action on a few holdings, including recent portfolio addition Elders (ASX: ELD) which announced it would divest their livestock businesses to focus on higher ROE businesses. We’ve also had nice returns on one of our High Potential Picks, Nearmap Limited (ASX: NEA) which continues to plug away at cracking the massive US market opportunity.

The investment stance remains cautious – market valuations remain on the high side but market momentum remains steady. As such around 24% of the portfolio is being held in cash. We see a number of potential volatility events in the near term horizon including the US election, renewed Brexit/EU concerns or unexpected changes in the US Federal Reserve’s outlook for interest rates which would may allow for quality businesses to be added to the portfolio at more favourable prices.

 

Portfolio Returns

Returns in Septmeber 2016: +4.9%

Returns since Inception (May 2016): +19.1%

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iPhone 7 and… AAPL is booming?

So today marks the eve of the iPhone 7 launch, but we’ve already seen numerous reports of strong pre-orders with T-Mobile and Sprint in the US noting that pre-orders are up 375% against the iPhone 6S. One other interesting fact is that the demand for the iPhone 7 Plus model is outstripping supply – could this drive a shift towards higher ASPs?

My sense is that Apple did a great job in managing expectations for the iPhone 7 release, given that the form factor has largely remained the same. Still, this hasn’t stopped a wave of initial outrage at removal of the headphone jack, the disappointment in the “lack” of design innovation or the repeated proclamation that Apple is dead now that the Steve Jobs era is long over.

Despite all this, Apple has a track record of successfully implementing existing technologies by only doing so when the user experience can be executed well. This gives me comfort that the removal of the headphone jack (mind you, an adapter is included for compatibility) is a careful and calculated move by Apple that will push users towards greater convenience (tangled wires are a thing of the past) and marks a fully fledged push into the wearables spaces.

Here’s some context for you: Apple is the second largest watch marker in 2015 (second to Rolex), shipping a total of 15million units since launch, Apple built a $10billion business in 18 months.

However, I can’t sum up Apple’s push towards wearables better than Neil Cybart from Above Avalon, who I consider to be one of the best sources of coverage on Apple.

In the past week, AAPL has reached new heights, and despite trimming my position last month (rebalancing purposes, rationalising my decision in hindsight), Apple still remains the largest holding in the Real Money Portfolio.

 

Real Money Portfolio Update – August 2016

Despite the low volatility observed in the US markets throughout August, there was no shortage of market movers on the ASX from the Australian reporting season. Starting with the bad news, we saw a heavy wipe-out of surf apparel e-retailer SurfStich Group (ASX: SRF) which was marked down a whopping 54% on the day the company reported the disastrous net loss (but has since rebounded ~60% from its lows in September). We also had fairly disappointing results from G8 Education (ASX:GEM), with question marks about occupancy rates (and we will be keeping an eye on the under-employment rate in Australia). The good news, however, is that we saw very positive results across our portfolio including Altium (ASX: ALU) up +31% in August, Retail Food Group (ASX: RFG) up +18% in August and iSentia (ASX: ISD) up +26% in August which have contributed to an overall increase in the portfolio value.

The cash balance has increased to 26% of the portfolio with the trimming of our position in Apple (Nasdaq: AAPL) and Facebook (Nasdaq: FB) – both of which are businesses we want to own for the long term but at attractive prices. Our strategy is to generally remain largely invested but experience also tells us that there are always opportunities to build positions in great businesses and holding some level of cash will allow us to capitalize on the mood of the market.

Portfolio returns vs. indices since inception (1 May 2016)

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Note: “MB Investments” is the name of the portfolio with “MB” standing for Multi-Bagger!

Another Wipeout from Surfstitch

I first wrote about Surfstitch Group (ASX: SRF) just two weeks ago but I would be lying if I said the full year result wasn’t a surprise. While, the net loss figure was less concerning given that this was driven by almost $100m of non-cash impairments, the cash burn rate was higher than what I (and the market) had expected and hence the share price reaction. The implication of this is that the margin of safety has been eroded and my conviction in the stock has certainly faded. However, at the lows of around 10.5c-13c seen last week, I mentioned in my comment here that I didn’t think there was much point in selling given that all the bad news had already been factored in. It is my view that given that Mr. Sonand (CEO) has just taken over the reins since May 2016, he has likely taken this reporting period as an opportunity to clear out all the skeletons in the closet, setting himself up for an easy hurdle after a full year.

Experience tells us that markets often overreact and by maintaining composure, so our Real Money Portfolio held on to the stock, only to see it recover 60% from its lows over the past 3 days. Only time will tell as to what extent this business can be turned around but we’ll continue to monitor developments closely – particularly around the legal issues the business is dealing with.

For disclosure, I won’t be buying more but I won’t be selling unless the price is compelling.

Share price chart:

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Disclaimer: Note that the content contained on this website is for strictly for entertainment purposes ONLY and reflects the Author’s own views. The Author makes no warranties on the accuracy of the information presented. None of the information presented on this website should ever be considered as financial advice. 

 

Real Money Portfolio – July 2016

We’d like to introduce a new change going forward to include monthly updates from our Real Money Portfolio managed by ar1gold. The Real Money Portfolio invests in ASX listed as well as US listed stocks (including international companies with listed ADRs on the US exchanges).Without further adieu, the July 2016 update:

Commentary

It has been a pleasing month with markets recovering well from the Brexit blues of June. We saw markets such as the S&P500 rise to all-time highs as well as the ASX All Ordinaries index hit 5644 after rallying 6.2% in July. As a result, we’ve seen some spectacular positive movements in the fund this month amid the market rallies.

We’ve had particularly good results this month and of course there’s no escaping talk about the latest phenomenon that is Pokemon Go! which drove Nintendo’s (ADR: NTDOY) share price (one of the top 5 positions of the fund) up over 100% during July before pulling back a fair bit. Admittedly, at the peak of the euphoria (NTODY reached a high of $37.99 – a multi bagger!) it was very getting difficult to justify the share price. While I am adamant that long-term investing is the core of our strategy, it would have been prudent to have trimmed the position given the valuation but the combination of getting caught up in the hype and the difficulty in projecting near term price movements resulted in the fund not being able to capitalise on the near term overreaction on the upside. Despite this, I am of the view that Nintendo has a bright future, and now notably brighter than when I initially entered the position in early 2015 so will continue to hold at the current prices.

Some other interesting events include stellar results from Facebook (Nasdaq:FB) which saw advertising revenues continuing to grow strongly and Apple (Nasdaq: AAPL) which bounced nicely after earnings where iPhone revenues despite being down YoY, exceeding the overly pessimistic (in my view) expectations of the street. What’s promising is that services revenues remain strong and there is now some focus on how big this segment can become in one and five years (Tim Cook on the earnings release stated that revenues from the services segment would place it among the Fortune 100). There’s a real good chance Pokemon Go is the first out of the gate to pave the way for huge killer Augmented Reality apps with massive amounts of revenue potential – keeping in mind that Apple takes a juicy 30% cut. Netflix (Nasdaq: NFLX) disappointed after earnings due to subscriber adds being lower than expected but I don’t get to hung up on the quarter to quarter numbers when the long term prospects for this company remain positive. This allowed an increase in position on the dip at $85.35/share which has since seen a nice bounce.

In Australia, I’ve added Mantra Group (ASX: MTR) as I think that this is a company that will greatly benefit from the Chinese tourism theme – Australia has been the biggest beneficiary of increased Chinese tourism (due to the lower AUD and proximity among other factors). I’ve also taken the opportunity to exit REA Group (ASX: REA) but consider this business more than fully valued although is one of the highest quality businesses available in Australia so will definitely look to own this asset again at attractive prices.

Lastly, I would like to note that the fund is holding a significant amount of cash at around 20% of the fund’s net asset value. Overall the market is not cheap and opportunities are few and far between in the universe that we operate in. Unlike baseball, investing is a game where there are no strikes for not swinging, but I do intend to remain largely invested and deploy prudently.

Fund Returns vs. Indices since inception:

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We call our Real Money Portfolio “MB investments” in which the “MB” stands for Multi-Bagger!

Surfstitch Group Limited (ASX:SRF)

Situation:

  • poorly managed business with string of bad news has led to a 89% share price decline in 2016 ($54m market cap as at time of writing)
  • business is of average quality with limited competitive advantages
  • not yet profitable

What we like:

  • essentially buying this business almost for free at current market prices given cash balance
  • new CEO committed to focusing on bringing the retail business into profitability and positive cash flow
  • sells over $200m of merchandise annually so it has some level of scale
  • cash hoard of $61m as at 31 Dec 15 (will monitor 30 June 2016 accounts results for cash burn rate)

Online retailer of surf apparel and accessories, Surfstitch Group Limited (ASX:SRF) has been severely beat down over the past 6 months due to a continuous string of bad news after bad news. Two profit downgrades (May 2016, June 2016) and departure of CEO and Co-Founder Justin Cameron has sent this once small-cap darling out of favor, with its share price falling from its highs of $2.09 last November to around just 20c per share today.

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Nearmap Limited added to High Potential Picks list

Nearmap Limited (ASX:NEA)

Website: www.nearmap.com

This is one company that we’ve been keeping a close eye on for over a year, and given the recently price decline, it is our view that the current price represents a highly attractive accumulation point.

Many at first glance believe that this is a competitor to Google Maps/Earth, however, Nearmap offers a unique value proposition into a rapidly growing geospatial imagery market and the potential is much larger than many may initially realize..

Recent Stats (as at 02 November 2015)

Share Price: $0.380

Market Cap: $142m

Total Revenues (LTM June 2015): $23.6m

Forward Price/Sales: 4.1x

Forward Price/Earnings: N/M

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