It is getting more and more difficult to find suitable companies for my value & momentum portfolio - there are many stocks in the value area, only the momentum is pretty much lost. In my screening there were just 24! stocks WORLDWIDE that could still meet the criteria at all. As always, you can find pretty much everything here - the clear tables for it can be found here in my latest post:
https://www.valueinvestments.ch/vermoegensverwaltung-estoppey-value-investments-value-und-momentum-rebalancing-september-2022
Over the past few days, the topic of inflation data has dominated the stock markets - especially in the US, but also in Europe. Share prices were dragged down by this, because it is expected that the central banks will fight high inflation with interest rate increases. The higher interest rates rise on the capital market, the more attractive other investment opportunities become, such as bonds, because interest rates there also rise. This in turn weighs on demand for equities. In addition, not all companies will be able to pass on the higher costs resulting from higher prices. This leads to lower profits and, in extreme cases, even to the bankruptcy of a company - for example, if the margins of a company are already low and there is too little liquidity.
Now, one might be tempted to rely only on bonds - but this is only worthwhile to a limited extent in times of rising interest rates and usually leads inevitably to a loss of purchasing power in the event of high inflation.
𝐅𝐨𝐥𝐠𝐞𝐧𝐝𝐞𝐬 𝐦𝐮𝐬𝐬 𝐦𝐚𝐧 𝐣𝐞𝐭𝐳𝐭 𝐛𝐞𝐢 𝐝𝐞𝐫 𝐈𝐧𝐯𝐞𝐬𝐭𝐢𝐭𝐢𝐨𝐧 𝐢𝐧 𝐎𝐛𝐥𝐢𝐠𝐚𝐭𝐢𝐨𝐧𝐞𝐧 𝐛𝐞𝐚𝐜𝐡𝐭𝐞𝐧:
-> Current bonds - which pay lower interest rates than newly issued bonds - are at risk of price loss. This is a question of supply and demand: who still wants the old bonds with low interest rates when there is more interest on the new ones for the same risk?
-> The repayment amount for bonds usually remains the same - i.e. if I lend someone EUR 100 today, the maximum amount I will get back at the end of the term is this amount. No more and no less. In case of high inflation this leads to a loss of purchasing power: Because I can no longer buy the same amount of goods and services for the same 100.- EUR after I get them back.
𝐖𝐢𝐞 𝐬𝐨𝐥𝐥 𝐦𝐚𝐧 𝐚𝐦 𝐛𝐞𝐬𝐭𝐞𝐧 𝐢𝐧𝐯𝐞𝐬𝐭𝐢𝐞𝐫𝐞𝐧 𝐢𝐧 𝐙𝐞𝐢𝐭𝐞𝐧 𝐡𝐨𝐡𝐞𝐫 𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧?
Tangible assets in particular can provide protection. First you might think of real estate, and rightly so. The problem is that real estate prices can also fall when interest rates rise sharply. That's because many can't afford or don't want to pay the higher mortgage rates. This is exactly what is happening in Australia and New Zealand right now: house prices in Wellington, the capital of New Zealand, have already fallen by over 20% in some cases. The last time we saw anything like this in Switzerland was during the real estate crisis at the end of the 1980s and beginning of the 1990s - in other words, more than 30 years ago. I can't predict when the next real estate crisis will hit Switzerland. The only thing I can see is that real estate prices in Switzerland are so high that not many people can afford a property anymore. If normal citizens used to be able to buy a house, today this is no longer possible everywhere, even with a high income. So the question arises as to who can or should still pay the high prices in the future?
Companies with high tangible assets and the ability to pass on price increases can provide a remedy: The tangible assets, such as investments, can protect against inflation. In addition, the ability to pass on price increases ensures that a company and its shareholders do not have to pay for the price increase themselves. It therefore pays to carefully weigh up the advantages and disadvantages of real estate vs. shares.
𝐖𝐞𝐥𝐜𝐡𝐞 𝐔𝐧𝐭𝐞𝐫𝐧𝐞𝐡𝐦𝐞𝐧 𝐬𝐜𝐡ü𝐭𝐳𝐞𝐧 𝐡𝐞𝐮𝐭𝐞 𝐧𝐨𝐜𝐡 𝐯𝐨𝐫 𝐝𝐞𝐦 𝐊𝐚𝐮𝐟𝐤𝐫𝐚𝐟𝐭𝐯𝐞𝐫𝐥𝐮𝐬𝐭?
In the current environment, it is mainly energy prices that are a big contributor to inflation. I am not surprised that companies that can hardly reduce their energy costs and can poorly adjust prices for goods or services have a problem. We read and hear about the first such problems, for example, from the restaurant industry or even the stationary retail trade in Germany and the USA - but also in Switzerland.
Companies in the energy and raw materials sector, which produce or supply the energy sources and raw materials, can pass on the price increases and have infrastructure, facilities and production rights that maintain or even increase value. This also explains why the shares of such companies in particular have outperformed the market as a whole in recent months.
𝐌𝐞𝐢𝐧 𝐏𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 - 𝐕𝐚𝐥𝐮𝐞 & 𝐌𝐨𝐦𝐞𝐧𝐭𝐮𝐦 𝐰𝐞𝐥𝐭𝐰𝐞𝐢𝐭
The return in the Value and Momentum Portfolio has dropped a bit in the last few days to an average of +15.3% (from +17.1%) per year. Even we could not completely escape the negative stock market trend - although a sideways movement is already very good this year. In recent months, it feels as if we are not getting off the ground. There is always new news of crises such as the war between Russia and Ukraine and the conflict between Taiwan and China. In addition, China's zero COVID strategy is still weighing on supply chains. On top of that, high energy prices and supply shortages are driving inflation. In a recent conversation, I heard that it feels like the 1970s - those were tough economically, too. Part of investing is sitting out such times and remaining patient. Often crises offer optimal opportunities to buy stocks cheaply and profit all the more when they recover.
In asset management, I sorted out two companies, Signet Jewelers (-24.3%) and Ternium (-33.1%): Signet Jewelers is active in specialized retail. While the luxury segment is not susceptible to inflation to the same extent as the normal retail or retail trade, I still see the challenge of rising costs and falling demand in the short and medium term. While Ternium is active in the commodity sector, it has two key disadvantages as a steel processor: Steel processing requires a lot of energy, and due to supply shortages, prices for the raw material have risen sharply. So it is not surprising that the company has lost its momentum.
𝐖𝐚𝐬 𝐭𝐮𝐧, 𝐰𝐞𝐧𝐧 𝐝𝐢𝐞 𝐀𝐤𝐭𝐢𝐞𝐧𝐦ä𝐫𝐤𝐭𝐞 𝐟𝐚𝐥𝐥𝐞𝐧?
When markets correct, the nature of selling is to realize a loss.
One has three options:
1. sell and hold cash.
2. sit it out and wait for stock prices to recover.
3. replace weak candidates with companies that have a better risk/reward ratio, better fundamentals and better momentum.
Selling and holding cash can make sense if there really aren't any better options - the danger here is that you miss the recovery, leaving you sitting on a loss. Sitting out doesn't always work either - here you only have to remember the shares of UBS, which were bought "cheap" by many at 30.- or even still 50.- Swiss Francs during the financial crisis. To this day, these shares are still far from having recovered - the last price was 16.21 Swiss francs - a whole 14 years after the crash.
𝐕𝐚𝐥𝐮𝐞 𝐮𝐧𝐝 𝐌𝐨𝐦𝐞𝐧𝐭𝐮𝐦 𝐡𝐞𝐮𝐭𝐞
I don't rule out not buying stocks for a while when momentum is completely down and there are simply no more stocks to be found that have good fundamentals and high momentum. Today, we are not there yet - but the list of potential candidates has shrunk to less than 25 companies worldwide. If this continues, I may well have to weed out companies after review in an upcoming rebalancing, but wait to add new companies - currently, however, we are fortunately not there yet. I was able to add Genie Energy from the USA and Whitehaven Coal from Australia to the securities portfolio.
𝐃𝐢𝐞 𝐛𝐞𝐢𝐝𝐞𝐧 𝐍𝐞𝐮𝐞𝐧 𝐢𝐦 𝐏𝐨𝐫𝐭𝐟𝐨𝐥𝐢𝐨 𝐬𝐢𝐧𝐝:
𝐆𝐞𝐧𝐢𝐞 𝐄𝐧𝐞𝐫𝐠𝐲 (𝐈𝐒𝐈𝐍 𝐔𝐒𝟑𝟕𝟐𝟐𝟖𝟒𝟐𝟎𝟖𝟏)
Genie Energy is headquartered in Newark, New Jersey and was founded in 2011.
The company supplies electricity and natural gas to residential customers and small businesses. It operates primarily in the United States, Finland, Sweden, and Japan. Broken down, Genie Energy operates in three segments:
- Genie Retail Energy
- Genie International
- Genie Renewables
Genie Energy also offers energy consulting services as well as the manufacture and sale of solar modules and the design of solar installations. This is a very interesting business area, especially in today's world - due to the energy crisis, the demand for sustainable energy sources has increased exponentially.
𝐖𝐡𝐢𝐭𝐞𝐡𝐚𝐯𝐞𝐧 𝐂𝐨𝐚𝐥 (𝐈𝐒𝐈𝐍 𝐀𝐔𝟎𝟎𝟎𝟎𝟎𝟎𝐖𝐇𝐂𝟖)
Whitehaven Coal was founded in 1999 and is based in Sydney, Australia.
The company develops and operates coal mines in the Australian states of New South Wales and Queensland. Whitehaven Coal operates in three segments: Open pit mining, underground mining, and coal trading. Metallurgical and thermal coal is produced and mined. A total of four mines are operated in the Gunnedah Coal Basin in northwestern New South Wales, including three open pit mines and one underground mine. The customers are to be found in Asia in particular: These include Japan, Taiwan, Korea, India, Malaysia, Thailand, New Caledonia, Indonesia, Vietnam, and the Philippines.
𝐀𝐧𝐥𝐚𝐠𝐞𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐞
In numerous studies, as well as in practice, it has been shown that the combination of value and momentum has resulted in an excess return over the overall market. This is especially true for a diversified portfolio. I consistently apply these findings in asset management: Client portfolios are carefully constructed using value and momentum metrics. For portfolio construction, a three-stage analysis is applied to a strategy with individual stocks in order to invest in the companies with the best risk-return ratio. The analysis and selection process is as follows:
- Value factors: Finding the 10% most undervalued companies using carefully selected value metrics.
- Quality factors: Filtering the companies with very good fundamentals.
- Momentum Factor: Selecting the stocks with the highest price momentum.
This approach was developed along the lines of James O'Shaughnessy's "Trending Value Strategy" and additionally refined with the quality factor (Piotroski F-Score) and the Adjusted Slope Momentum (Andreas Clenow) in order to smooth out strong price movements caused by exceptional situations and to counteract the classic value trap.
The approach provides for a predominantly long-term investment horizon with a diversified securities portfolio. There is a monthly rebalancing, which I regularly share with you here.
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