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UP 26.6% Year-To-Date 2011

13 Jun

I made a clear decision to get out of the market on the 5 April 2011 and the market is down almost 5% since:

This is my current position: oil and silver. The only other position that I added was to short Monster Worldwide (currently up 21%) which I detailed here:

Overall my market position is very defensive. The below holdings in silver and oil are long term holdings which I would be comfortable owning for at least the next 18 – 24 months at least.  I believe the market will continue to weaken and remain subdued until the debt ceiling issue is resolved. To the extent that this is resolved, this will give market participants a false confidence to re-enter the market with vigour. Of course the US debt position remains precarious regardless of whether the debt ceiling is raised or not. Eventually the debt ceiling will be raised and that will be the greenlight to position yourself back into the market.

However, volatility is still likely to continue even after the debt ceiling raise passes. Remember back to when the Euro crisis was in full swing, concern permeated the Street. The ECB announced a $1.0 trillion Euro-wide bailout package to calm the market and investors. Initially it was received positively, but that reaction slowly reversed to one of concern and economic fragility.

Similarly, US debt ceiling dynamics are likely to be similar so getting into the markets immediately after the debt ceiling upsize would be unwise. It would be better placed to wait a couple of weeks at least to allow the market to stabilise and then to establish positions which have a highly disproportionate possibility of upside relative to the risk profile.

Current portfolio holdings:

I have detailed exactly my investment thesis and the justifications for my stock selections across the website. Here is a summary:

Summary of winners: (This has essentially been the core holdings of my portfolio >80%)

BIDU – UP 40% – Growing Chinese consumer base, and at a purchase point valuing the business at $34 billion the bottom line was that this was low relative to existing revenues and growth metrics. BIDU is the premier web franchise in China, it has high barriers of entry, a wide moat, and the company is able to leverage existing ideas into services that generate strong and consistent earnings. BIDU has a high growth trajectory and seemingly has central government support and assistance.

CLNE – UP 34% – T Boone Pickens is the largest shareholder and the US is the Saudi Arabia of natural gas. I have personally used natural gas-powered vehicles so it has passed the tried and tested element. CLNE was attractive on a value metric basis combined with growth and product uptake by AT&T, UPS and Wal-Mart. Reasonable correlations to high oil prices also made it attractive.

AGQ – UP 33% – Silver as an inflation hedge, an inverse of confidence in central bank policy and a high correlation to the performance of gold (gold being a store of value in a highly inflationary environment). Precious metals have been seen as a store of value for more than 3000 years, that perception will not change in our lifetime.

NDN – UP 31% – Another value play, food discounters intrinsically linked to the state of the economy both in prosperity and difficulty. High inclusion of premier brands and even organic. High growth, good management and growing within a bullish sector.

2498UP 27% – HTC is the Taiwan-based manufacturer of Android driven smartphones. The thesis was based on the global secular growth of information and its dissemination. Valuations were also attractive and growth metrics were phenomenal. Product margins were healthy and HTC innovations were technically superior to most competitors. Their choice to fully embrace the Google Android platform enhanced their focus on devices unlike other competitors who were muddled in competing and offsetting strategies. I recall observing two ladies on a train journey in their late 40s, early 50s in deep conversation about their HTC Android devices and apps. That one conversation crystallised my thoughts and highlighted the broad reach that new mobile technologies had now penetrated. This basically reinforced my thesis.

DO – UP 25% – Headwinds over the Gulf of Mexico were overdone and misplaced, clear misprice and one of the biggest market laggards in 2010. Purchased in January 2011 at a heavy discount to core value and future growth prospects. Highly correlated to the price of oil which I had a bullish stance on. Goldman Sachs gave DO a double upgrade, a rare occurrence. Not that GS ratings matter, but it was just a validation of the increasing acknowledgement of the misprice crossing Wall Street.

SLV – UP 25% – Silver as an inflation hedge, an inverse of confidence in central bank policy and a high correlation to the performance of gold (gold being a store of value in a highly inflationary environment). Precious metals have been seen as a store of value for more than 3000 years, that perception will not change in our lifetime.

PLCE – UP 23% – Strong value play,  a very strong balance sheet with little debt and strong recurring revenues.  PLCE is a premier franchise in children’s apparel/clothing; children’s clothing is price elastic and better able to weather price increases; parents seeing their child in adorable clothing are less likely to be as price sensitive relative to other apparel markets. PLCE therefore can better able manage margin compression with rising cotton and input prices. Children’s clothing is less sensitive to market trends.   At that valuation takeover/private equity etc. would also seem to be a viable possibility with an appropriate premium.

BRCD – UP 14% – Strong recurring revenue flows, value + growth within a secular bull market, good cost control and management.

GENZ – UP 9% – Merger-arbitrage position with an expectation of a takeover. The risk-reward skew was disproportionately high, essentially there was a high probability of a successful takeover. Overall there was a high degree of consolidation within the biopharmaceutical sector aiding the possibility of a takeover.

SHORT MWW – UP 21% – Horrible fundamentals, legacy financial reporting issues and option settlement charges. Strong competition from and Poor search functionality and weak integration into the social cloud. Heavy and continuous discounting lowering margins and more advertising dollars chasing a diminishing market share. Misunderstood correlation on the Street that an improved job outlook translated into a better performance by MWW. This link was arbitrary and the transmission mechanism was weak. 

Summary of losers:

CCJ – DOWN 19% – Was up fairly significantly, events in Japan hammered nuclear power stocks indiscriminately. I still believe the long-term profile of nuclear remains positive and that it still needs to represent part of the total energy mix. Exited the investment as part of a broader concern with the market.

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