Investing into the Second Wave

19th Sep '20 by timarr

37 comments 6865 reads

Back in April I mused on investment trends in a time of CV19 in Themes for a Long-Term Lockdowned Investor – and as we edgily approach a second set of restrictions before the winter has even started it seems like a good time to review how those musings have panned out.

On the whole, the approach has worked, I’m comfortably up YTD. Based on the expert consensus view from April onwards my working assumption has been that we’ll see restrictions of various kinds until at least next spring. That timeframe is important because it’s long enough to see permanent changes both in business and individual behaviour – in fact, I suspect we’re already at the point where we will never see a full return to the old normal. But if we're only half way through it's far too early to claim success.

Anyway, let’s look at the previously discussed investment themes and see how they've panned out. And add a couple of new ones.

Volatility

This covered mainly the spreadbetters - Ig Group (LON:IGG) , Cmc Markets (LON:CMCX) and Plus500 (LON:PLUS) (I hold the former two). These have, obviously, done well – CMC is particular is close to tripling from April’s lows. I still don’t like Plus500 – the hedging policy leads to really erratic returns. I also included Tp Icap (LON:TCAP) in this area which has gone nowhere much since its immediate post April crash recovery. It’s generally pretty cheap anyway and still looks a bit undervalued to me, but it usually does.

I can’t see any reason to move out of this area – with the US election, Brexit and more CV19 measures to come it’s highly likely we’ll see plenty of volatility in the coming months. I've also got a bunch of online brokerage stocks which sort of fit in this area. To cherrypick - Jarvis Securities (LON:JIM) has done exceptionally well and Finecobank has done OK. The others have been pretty flat, though, probably because deposits are earning the square root of b-all.

Cybersecurity

Well, d’oh.

Ncc (LON:NCC), L&G ISE CYBER SECURITY GO UCITS ETF (LON:ISPY) and Avast (LON:AVST) have all provided excellent returns of between…

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arfournier

28th Sep '20

In some cases China has surpassed the US in tech. Tiktok being a notable example. The algorithms used by that product are second to none. Agora which produces video API's is years ahead of it's closest US competitor. Ant Group which is going public in Hong Kong in certain aspects is very much ahead of the curve of US payment providers. Although the likes of PayPal has no compunction about copying some of Ants products and to be fair Ant does the same.

Thanks for bringing my attention to the Schiehallion Fund (LON:MNTN). I wasn't aware of them. I'll be having a look. I bought shares in April of Schroder Uk Public Private Trust (LON:SUPP) the much malign fund formerly known as the Woodford Patient Capital Trust. It's a very small position but I think Oxford Nanpore one of the position in the fund could be a massive winner.

There is a lot of nonsense on Seeking Alpha so getting to the diamonds isn't always easy. The best tech commentator there is Bert Hochfeld. Also very good are Stone Fox Capital, Sramana Mitra, and Gary Alexander.

Jamin Ball is a must read on cloud stocks his blog Clouded Judgement . Beth Kindig is a silicon valley insider and although she has a subscription service she post tons of free and incisive content on her site.

Julie Young is also worth a read her blog covers growth stocks in general.

I am forgetting a few I am sure but I'll post them when they inevitable pop into my brain once I hit the add reply button.

timarr

1. There is further to go in areas of technology you didn't cover. Robotics, AI and Cloud would be examples.

2. The world will continue to shift to clean energy.

3. The biggest of my themes now is the rise of Asia.

Although I don't see those as instantaneous beneficiaries of the CV19 crisis, which is really the point of the thread, I agree that the probability is that they will be drivers of growth in the medium term. What I was particularly looking for here were areas which would immediately benefit from the pivot to home working due to increased demand and a curtailment in supply from their face-to-face competition (where applicable).

If we look more broadly then I agree that automation, clean energy and the demographic shift East are probably the biggest future drivers of change.

john2

'In some cases China has surpassed the US in tech'

5G internet technology is probably the greatest example of this. Huawei have the resources to throw enormous numbers of people into the area.

I suspect the growth of IT champions is critically dependent on the scale of the immediate market. A company can grow rich and fat off business in the US or China alone and that then provides the platform for international expansion. In theory in the EU too, but it's harder because the internal market is far from perfect - but companies like Klarna, Spotify and Adyen show it can be done. The UK simply doesn't have the market size to build businesses of that scale very often.

For that reason alone investors should look outside the UK - but my problem is that once I do so I lose context. Rightly or wrongly I feel I have a reasonable grasp of relative valuation in the UK market, but I completely lose that when I start looking overseas. Given that I've made very acceptable returns from the UK since the turn of the century then pushing heavily outside of my sphere of knowledge doesn't seem especially wise. But I keep looking, and occasionally adding. I bought Finecobank earlier this year and Vestas Wind Systems a couple of years ago - arguably at cheap entry points, but I tracked them for a long time before I felt confident about pulling the trigger.

I'd add, however, that with some of the great tech companies being late to the party isn't really a hindrance to outsize returns. Apple and Alphabet were, by some measures, fully valued when I bought them yet they've returned my investment sevenfold since purchase. Buying these companies on pullbacks has been a get rich reasonably quick policy for a decade.

Schiehallion Fund (LON:MNTN) is interesting - it was launched by Ballie Gifford - who are behind Scottish Mortgage Investment Trust (LON:SMT) among others - initially as an institutional fund and has only recently been opened up to retail investors. I'm not sure the premium tells us much one way or another given the nature of the investments. I've been mulling a purchase for a few weeks but if you believe that the tech revolution is only just starting it's probably not a bad decision to tuck a few way for the long term.

timarr

Indeed engineers whether hardware or software cost a fraction of what they do in Western countries. They seem to have an unlimited supply as well.

I had a look at the portfolio Schiehallion Fund (LON:MNTN) and I already see companies that I am interested in the foremost being Stripe. I could swear just saw metrics for Stripe this morning but I can't seem to find them. Maybe I imagined the whole thing. It may be a moot point as it isn't available for sale on the platform I use.

Harry Hindsight

Home Working.

Team of 8 work through the country and used to go to a Midlands hotel for training, catch-up, 'team building' etc. Just did a 2hr MS Teams session, got the job done (training mandatory requirement), not perfect but saved maybe 8 x £350 for say a MS Teams fee (not on our overheads). No hangovers, no traffic jams or polluting the planet.

Not good sitting in front of a screen all day but then neither is sitting in a car for 6 hrs.

No Pret for lunch or coffee. Shares in good coffee machines? Nespresso ok but get bored after a while.

And working till all hours if feel the need. If can get out of Stocko that is.

Wilbraham

Thanks very much for the suggested info sources, asfourier - I'll start researching!

For Oxford Nanpore, I thought a popular way in through public markets was IPO - see https://investegate.co.uk/ip-g... Initially I got quite excited by this but there's a lot of new rapid C19 tests coming online and the problem with Ip (LON:IPO) is there's an awful lot of dogs in the portfolio, as one might expect from what seems to be a scatter-gun targeting of university spin-outs.

Actually, my biggest single position is in a hyperscale data centre developer in China. It's a private company, with funding from Actis, operating in the City of Tianjin which has plans for massive investment in AI - see https://www.scmp.com/tech/inno... Arguably this is one field where the East may soon overtake the West.

Another company with potential in the AI sphere is Graphcore, a significant holding of Draper Esprit (LON:GROW)

Incidentally, there were a couple of TechStuff podcasts last week on the spectacular history of ARM Holdings (which served me well in the dotcom days!). Much of it seems down to pure good luck (serendipity perhaps), eg they went down the IP licencing route as they lacked the funding to do much else. fwiw, I came close to taking a small position in Softbank a couple of years ago - with hindsight I'm glad I didn't as their strategy seems to lack focus. Will be interesting to see how things develop under Nvidia's ownership.

Finally, here's Ray Dalio's thinking on East v. West conflict (in Chapter 7), but it's a heavy read https://www.principles.com/the...

29th Sep '20

Just did a 2hr MS Teams session, got the job done (training mandatory requirement), not perfect but saved maybe 8 x £350 for say a MS Teams fee (not on our overheads). No hangovers, no traffic jams or polluting the planet.

Similar - have spent 6 months at home working (with a single, surreal and immensely enjoyable trip to Copenhagen in the middle) - with no discernable impact on productivity or customers. It's a bit soul destroying after a while but in terms of work it ... well ... works.

What doesn't work is sales lead generation. The casual ways of doing this have gone and the online conferences that have sprung up to replace the face to face ones simply don't work. It reminds me of the early days of the internet when everyone just tried to replicate the phsyical experience - it took time to figure out how to do retail well online.

If anyone has investment suggestions for replacements for that whole sales lead / conference stuff I'd be very interested. At the moment it seems to come down to better SEO and hard work prospecting on LinkedIn, neither of which are adequate substitutes.

Oxford Nanopore is the company that initially raised my interest in Schroder Uk Public Private Trust (LON:SUPP) it's not the only company that I find promising in the portfolio. I don't invest in Oxford Nanopore based on a COVID-19 thesis but as play on disrupting the genomic sequencing market. I also like the liquid biopsy market and Inivta. Grail a competitor was due to IPO but was bought by Illumina before it became public. I recognized it is a bit of a risky play but given that the fund trades at a 57% discount to NAV and that it is just a 1% of the capital in my investment portfolio I am fairly comfortable with the position. I learned in my investing career it sometimes doesn't take a lot of position for it to have a positive impact on your performance.

Thanks for the link to Ray Dalio I will read this weekend and I'll check out Draper Esprit (LON:GROW)

I agree with you about the state of AI I keep on top of the China news with this great blog by Jeffrey Ding

Arm definitely has an interesting history if it were in Silicon Valley it would have been applauded for pivoting toward new business opportunities. It was a great British success story in Tech shame that Softbank got a hold of them. I don't want to diminish Masayoshi Son to much since he is a great operator and if not for I think a lucky investment in Ali Baba he would not have been seen as more than that. Quite a few of his subsequent investments hinged on his massively successful investment in Ali Baba. It opened the door to investing as a VC and for other tech investments. The abysmal performance of the Vision Fund showed that Softbank had no special sauce when it came to investing in tech.

ZoomInfo and Hubspot attempt to help with lead generation and marketing but don't really address the face to problem.

simoan

They have no compunction in stealing other peoples Intellectual Property either, which helps quite a lot. One of the few things that Trump is right about.

All the best, Si

That's just not a fair assessment - luck had nothing to do with it. ARM invented the semiconductor intellectual property market and became a world leader. That's properly entrepeneurial which is uncommon ( to say the least) for a UK Company.

What happened to the company subsequent to the Brexit vote whence it became a political football to show the UK was "open for business" was disgusting, frankly. The UK's only world class technology company sold off to a foreign investment fund. What pillocks our politicians are.

Indeed they did and do still. As a Canadian I very well remember the attack on Nortel by Chinese state hackers stealing IP for the benefit of Huawei . Killing Nortel in the process although management deserves some blame for their inaction. There is a Bloomberg and Financial Post articles for anyone interested.

I would argue and this is just based on my observations that is slowly coming to and end although selectively. There is enough new and home grown IP being produced that the China is starting to enforce these patents and copyrights. Like anything else that is largely at the discretion of the state. Any chip designer better have good security since it's currently one of China's goal to longer have to rely on US chip design. It's also why I don't think the Nvidia purchase of Arm is a done deal. I seem to be in the minority here so I guess we shall see.

The Phoenix

30th Sep '20

Morning Timarr

Just seen Paypoint down due to Ofcom getting involved seems for once holding fire has proved the correct decision.

We all invest through a glass darkly - sometimes we make right decisions and get wrong results and vice versa. It's one of the investing challenges - it's very easy to convince yourself you're good (or bad) when you're just lucky (or unlucky). One of the few benefits of experience is being able to tell the difference, it helps ameliorate overconfidence.

With Paypoint (LON:PAY) the main thing is that there aren't any obvious drivers to generate growth. You'd have had to be prescient - or unusually close to the company - to have foreseen the Ofcom issue. Personally I haven't got much better at avoiding these kinds of bearpits over the last 30 plus years, I've just got better at ditching poorly performing stocks and moving on. Otherwise I remain remarkably average.

But these are odd times. Normally if I have shares that go up a lot I keep on holding, even through drops, because companies that are good tend to keep on being good. Right now I'm holding Loopup (LON:LOOP) and Novacyt Sa (LON:NCYT) - which is obviously nice, but I have no idea whether this is a CV19 induced blip upwards or indicative of a longer-term trend. I'm inclined to the latter, but it's a lot of guesswork and a bit of knowledge.

Novacyt Sa (LON:NCYT) is an interesting example of why buying stocks that have soared is often a good idea. I bought afer the stock had appreciated over 10 times this year - and it's doubled since. Wish I'd been on board earlier, but these are gains that aren't to be sniffed at. Momentum often indicates some real underlying trend. Not always though - sometimes it's just investors getting carried away: although that can be a different sort of opportunity ...

Tricky, this investing lark :-)

19th Oct '20

I keep meaning to mention Thinksmart (LON:TSL) as well, but have just been prompted again by the share price jump today occasioned by Simon Thompson's IC tip which gives them a sum of the parts valuation of 94p a share (currently trading at 54p).

The main value is in their 10% stake in Clearpay. The other 90% is owned by Afterpay - an Australian payments company whose share price has exploded this year. That matters because Thinksmart have a call option on their stake in Clearpay that's dependent on Afterpay's share price. Convoluted it is, but valuable it is too.

Well worth reading up on Afterpay - https://www.afterpay.com/how-i... For those who follow these things it's a bit like Klarna - instant credit at the online point of sale. So this is a play on the growth of ecommerce and payments.

Price is up nearly 20% today, but still worthy of a look.

abtan

Hi Timarr

Thanks for the prompt on Thinksmart (LON:TSL)

I looked into this company last month and off the top of mu head, I was put off by a couple of things:

1 - Afterpay's financials

I can't remember exactly what it was, though I have a niggling thought that whilst revenues were growing fast it wasn't actually making any money and burning through all the cash that it had - if Afterpay (or its share price) collapses, then that 10% won't be worth very much.

2- Underlying Business

Thinksmart (LON:TSL) 's underlying business showed declining revenues. I could be completely missing any golden opportunity, but it was enough to make me think that this wasn't one for the long run, at least not until that trend reversed.

Sorry for being so vague on the above!

And in response to your thanks on Purplebricks (LON:PURP) below, it's still early days and there has been a significant pullback but hopefully you've profited so far and fingers crossed for the long run.

Cheers

EDIT - it's also <10% stake after accounting for staff bonuses (or something of a similar nature)

Hi abtan

Yes, still holding Purplebricks (LON:PURP) - I'd expect to see quite a lot of volatility, partly because of the wider situation and partly because it's not easy to analyse. In any case I don't ever really trade - I either buy and hold until I think the stock is overvalued and that the momentum is fading or I sell if I think my bull case no longer holds or I lose faith in the management.

I think the next six months or so will be very painful for estate agents and Purplebricks could easily drop in the general malaise, but I still see this as a likely long term survivor in a market with a lot of competition wiped out. Beyond that it's about management execution and that's not something I have much of a view on - they seem to be doing the right things, hopefully that will turn into a richer valuation on a two to three year view.

For Thinksmart (LON:TSL) I don't think the underlying business is at all relevant, it's all about being a cheap way into Afterpay. As you point out, Afterpay, like a lot of fintechs, is looking overvalued but it's one of the few sectors where I think the companies in question could eventually be worth their valuations.

In a lot of cases the heady valuations of tech stocks don't make any sense - they're just new ways of doing old things, they don't grow the underlying market, they just take market share away from the existing players and do it a bit more efficiently (i.e. the business case for Purplebricks (LON:PURP)). But payments is different - the world is still heavily dependent on cash and is moving online towards ecommerce, so online payments companies have a lot of opportunity - it's a $2 trillion market, you don't need a lot of market share to create a decent sized business. For instance, a company like Shopify - on a stratospheric valuation - might just turn out to be worth it. Afterpay, via Thinksmart, is just a cheaper way of playing that trend.

Don't get me wrong, I wouldn't back up the truck on this, but the asymmetric risk/reward looks OK. The biggest risk is competition - there are a bunch of other Buy Now, Pay Later companies and PayPal has just launched their own product. But the more the Afterpay share price goes up the more they have to pay to buy out Thinksmart. And I don't see the growth trend in online payment companies ending any time soon.

On the topic of payments I was browsing through the Ballie Gifford IT magazine today - it covers Shopify, Affirm (an Afterpay competitor), Stripe and TransferWise. As the article says:

"These payment companies share some key characteristic: online-enabled businesses that are rapidly growing their share of the market and with modest capital requirements".

Ciao!

timarr

20th Oct '20

RE: Thinksmart (LON:TSL)

Yep, it's about 7% once you've made the adjustments. The underlying valuation at Afterpay's current market cap is about £80 million compared to Thinksmart's market cap of £57 million, which includes about £8 million in cash pre the dividend and capital return.

Investing into the Second Wave

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Timarr

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