The conclusion of the US Presidential Election, potential Secretary of the Treasury Yellen and positive news on vaccines have propelled November to be one of the best month in recent history. The broad global equity indices grew by 20% over the month!
While the rotation into cyclicals and value is expected to continue, the question of further stimulus and when the vaccine will be available to the public remains uncertain.
There are no new additions to our portfolio this month.
We definitely felt that with equity markets trading where it is today, it definitely has resulted in reduced investment opportunities. Nevertheless, we continue to seek for new, yet to be discovered and attractive investment opportunities, going forward.
As usual, we start by providing an update to our portfolio holdings and update our view on what could play out going forward.
In case you’ve missed, here’s a list of articles we’ve published in October.
Our investment philosophy
We aim to own around 10 names and adopt a buy-and-hold bottom-up investing strategy, with a 3-5 years’ time-horizon (earlier if fair value is achieved).
Our current exposure to both US and UK stocks means our goal is to outperform the average total return of S&P 500 and FTSE 100.
Our investment philosophy reflects our view of the global economy. We adopt a style-agnostic approach, which means we are solely focused in investing in the best companies, whatever the “style” of investing. We employ a bottom-up fundamental investing complemented with a macro overlay.
We continue to avoid sectors with high dependence on interest rates, such as banks, especially those with a significant exposure to retail and commercial lending.
Our view on the airline industry has not to change. As discussed in our article written in early June, we expect further furlough and capital infusion in to the industry given the balance sheet weakness. We continue to think that the current valuation for airlines is unsustainable and consolidation would be inevitable.
The portfolio delivered +16.3% in November (+3.9% in October), relative to S&P’s +10.8% and FTSE 100’s +12.4%. In alpha terms, we delivered +4.5% this month, with an above average annualized vol of ~16% and a portfolio beta of ~1.02.
The key driver in November was Disney (finally) and S4 Capital (the gift that never stop giving), delivering +22.1% and +19.5% respectively. Unsurprisingly, the recent stock rotation to cyclicals meant that Peloton’s performance underperformed the wider market, delivering +5.6% (gains are gains!).
Additionally, TSM delivered a strong performance with +15.7%, possibly driven by its continued success in its collaboration with Apple and the increasing investment into the latest 5nm processes in coming years.
Direct Line Group staged a relatively strong rebound of +12.3% after the FCA setback news. Finally, our latest addition ATSG did not disappoint as well as it delivers a respectable +9.6%.
This is our 7th consecutive month of beating our benchmark. A clean record so far and we aim to keep that. Since inception, we delivered a total return of +75.5%. This compares with our benchmark of +14.9%, equivalent to an alpha generation of ~60%.
- Next earnings date: March 1, 2021
- Investment case
Another spotlight of the portfolio for November, a strong performance from our latest investment, delivering +9.6%. Specifically, we have not seen a huge amount of news flow from the company.
While that’s the case, the underlying e-commerce trend remains intact, with the added boost from Thanksgiving and other festive holidays. As a read-across from the industry logistics peers, UPS and FedEx continue to feel the challenge to keep up with the already insurmountable volume of delivery.
With demand still vastly outweigh supply capacity, we expect further room for price increments in the industry as customers compete for space.
- Next earnings date: TBC
- Investment case
Direct Line reported what we thought a satisfactory Q3 results despite the challenging business climate. Overall, motor gross written premiums (revenue) dipped 2.3% on a quarterly basis relative to prior year.
Positively, its car breakdown business saw a growth of 9.6%, gaining market share in the traditional duopoly UK breakdown insurance market (AA and RAC). Albeit this is still a small contributor, it is the highest RoE business within the Group.
The main equity story for the stock remains the FCA report into pricing practices, which we covered in here. While negative, we think the market is overlooking Direct Line’s earnings power in the medium term as a stable, consistent and growing dividend payer.
- Next earnings date: February 2, 2021
- Virtual Investor Day: December 10, 2020
- Investment case
We hate to say this, but, we told you so! Disney had its best month since we invested in the name, returning a whopping +22.1% for month. Here are the key drivers for this month’s outperformance.
First, its results. Disney reported >73 million paid subscribers to Disney+ streaming. Not only did Disney reported strong growth in its streaming service subscribers, it also exceeded expectations on revenue, while losses were also less than expected.
Unsurprisingly, Disney has announced that they will forgo its semi-annual dividend in January. While there were no clear indication as to what they will do with the extra liquidity, we suspect with high probability that this will be diverted to Disney+. If this is the case, we think Disney is worth at least $250 per share in the medium term.
Secondly, a relief rally for value stocks as a result of the US presidential election. The conclusion of the US presidential election has caused a significant shift in investment styles in the market. Specifically, we saw rotation from momentum (tech, growth and defensive names) to value stocks (airlines, real estate, retail). While we view Disney as a growth stock, the market is still clearly not seeing the potential of Disney+.
Finally, the positive vaccine news. With the market still fixated with Disney’s Parks and Cruises business as the key part of its investment thesis, these news has naturally caused stock price to rally strongly during the month.
Looking forward to the Virtual Investor Day on Dec 10!
- Next earnings date: February 3, 2021
- Investment case
The latest earnings release suggest Peloton’s quarterly sales surged of 232%, as consumers turned to home gym equipment during the pandemic. In numbers, Peloton expects to generate >$3.9b in revenue in 2021. This is an upgrade from the previous range of $3.5b - $3.65b.
Despite the good results, the stock has been trading within range. However, as we mentioned in the previous newsletter, we expect its near term upside to be capped given how the stock traded since we’ve entered the position. Also, there were ~500k of insider selling throughout the month of November, although we would not be too worried here.
While the resurgence of cases globally has been countered by the excellent vaccine news, we believe like e-commerce, the trend is here to stay. Cautiously, we would avoid extrapolating its revenue growth going forward, but rather, we would focus on the international expansion.
- Next earnings date: March 23, 2021
- Investment case
S4 Capital reported in Q3 results on November 9. Notably, gross profit is up 79%, driven by the 53% increase in revenue. Of course, keen investors are aware that these figures are driven by its strings of acquisitions year-to-date. However, on a like-for-like basis, gross profit and revenue grew 23% and 13%, respectively, despite the challenging environment. Positively, EBITDA margin is up strongly as momentum builds in the second half.
We continue to see the confidence in the board as it reiterates its three-year plan for 2021-2023 to double top and bottom line organically. Despite more than doubling our money since we entered to position, we expect the stock to re-rate further.
- Next earnings date: Jan 21, 2021
- Investment case
November has been a great month for TSMC, delivering +15.7%. Interestingly, TSMC outperformed the market despite the strong performance from the market driven by the conclusion of the US election.
Following the quarterly results in October, we continue to see positive news flows for TSMC, reiterating our view on the name.
First, the release of Apple’s A14 Bionic chip in iPhone 12 was the first chip in the smartphone industry to be manufactured based on a 5nm process.
This spurred Apple’s key partner, TSMC, in advancing its chip manufacturing process with its A15 and A16 chips in the coming years. Currently, it is developing its 3nm process, which is expected to start commercial production in 2022.
More importantly, the reliability of TSMC’s pure foundry model is once again highlighted during this difficult time where competitors has not lived up to expectations.
Secondly, TSMC is also reportedly working with Google and other US tech groups to develop a new way of making semiconductors more powerful. Traditionally, the process approach has been to squeeze as many transistors on to a single chip. This is not the case today. The group is currently exploring methods in the chip packaging segment, which if proven viable, could lead to TSMC gaining the first mover advantage.
In our view, this remain a long shot. Nevertheless, these are incremental options that will only serve to validate our investment decision on TSMC.
Macro: A paradigm shift?
With the political noises beginning to settle with the conclusion of the US presidential election, we expect the market to return to focusing on the key existing issues.
First, with the vaccine progress remaining on the top of government’s priority list – the big question is when. We think, while this offers relief to the environment we’re in, let’s not forget what damage the pandemic has brought to the global economy.
On the surface, the economy may be showing signs of recovery, but it is the underlying composition of the numbers that we think is worth thinking about. For example, there is a permanent shift away from retailers who have been slow to embrace the importance of digitalizaiton. As showed earlier, US e-commerce has achieved its 10 years’ projected growth in the course of 3 months.
Second, with Janet Yellen now being poised to be appointed as the next Secretary of Treasury, expectations for a sizeable stimulus package has definitely heightened. We expect this will further drive the global equity markets to continue to break new highs.
Finally, US vs China’s bilateral relationship. We think that a Biden administration will hold on to its leverage on China, thanks to the existing tariffs in place. We see further concessions from China, especially on the US's growing trade deficit with the world's most populous country. A blind spot, nonetheless, but a space to keep an eye on.
Chart of the Month: Even the Queens wants to know about blockchain
This month’s CotM features none other than everyone’s favorite cryptocurrency – Bitcoin. A significant rally in cryptos leading to Bitcoin briefly testing all-time high, last achieved during the FOMO of 2018.
With the world increasingly buying into the idea of DeFi, short for “decentralized finance”, we remain bullish on applications within the blockchain ecosystem. Here are few examples of increasing believers/conviction among leading investors today.
- Legendary investor Paul Tudor Jones said bitcoin’s rally is just in the “first inning” and the cryptocurrency is the best inflation hedge.
- Nasdaq-listed Microstrategy raises bitcoin holdings to $425 million
- Paypal now allows Bitcoin and crypto spending
- Square buys $50 million in bitcoin, says cryptocurrency ‘aligns with company’s purpose’
Then comes to the news about the “crypto Queen”, literally. In fact, FT reported that the Queen, 94 years old, expressed an interest in blockchain recently. Somewhat surprising and hilarious, but it also shed some light on the market at the moment. Here’s the letter sent by the Private Secretary’s office.
Despite the run on cryptocurrencies and its potential applications challenging traditional financial intermediaries, we find larger institutions are still dragging their feet to embrace what could be a multi-year growth trend.
Jamie Dimon, JP Morgan’s CEO and Chairman, called bitcoin a fraud in 2017, only to subtlety make a U-turn in 2020, setting up a dedicated crypto unit, Onyx, and its own cryptocurrency, the JPM coin. 🤔🤔🤔
The jury may still be out. But, so far so good.
Bit by bit.