Hello, In this letter I will focus on two things: quality investing, and the portfolio positions.
The portfolio is not moving much and up about 14% for the year.
Many value small caps are getting trashed and are down a lot since I mentioned them or wrote them up, especially in the UK with a difficult business environment, and the year is saved by Technology, Emerging markets, and dividends. Yes, dividends don’t create value, but they help me. I am not a genius on my UK dirt cheap value ideas. at least, not yet.
We will see if these UK companies ever go back to a normal environment. I think that the chance of that happening is high, and that costs should come down. a 5% profit margin and they are homeruns. Inflation is already going down a lot and it appears that it was just a temporary world price movement.
BUY AND HOLD
What influenced me lately is reading some excellent posts on twitter and substack about quality investing.
These posts prove that just quality works if you have a long term horizon. For example, an analysis proved that buying the non-technological quality companies during the nifty fifty bubble still provided decent returns over the long term.
Many articles also show the impact of not selling. A grandmother never selling her shares and buying only when stocks were recommended by her broker, did very well in one of these stories. Many stocks did not much and she had huge multibaggers. If I sell a good company because it now trades at a P/E of 20, I will not have multibaggers. The new company replacement could look equally good but turn out to have problems down the line.
The big advantage of stocks is that the upside is unlimited and the downside is capped at 100%.
The general findings of everything I read was:
Quality is good for long term returns.
Quality + cheap helps but in the long term quality does fine.
Small cap is better, as they have more room for growth
Quality in small caps is not always proven.
Not selling removes human error.
Not selling has an opportunity cost if a company is way overvalued, but we need to be 100% sure of the replacement company.
A big question is: are all my companies quality? Some that I know well are, but in terms of earnings growth, they are be bellow top quality compounders.
What is quality? Dollar General was quality until it all went down and maybe it was a cyclical stock. We don’t know yet. This is the downside of this strategy. Doing nothing should let the good ones rise and cover for the mediocre ones who will still throw some dividends at me.
I really am bad at not selling. I actually did very well at selling higher, and buying back lower during covid (Eurofins Scientific, Bastide, Modern Dental), or selling after a huge run (Xilam). But this was due to really exaggerated, caricatural market movements, that I do not expect much in the future. It was a bit lucky.
There are a few companies that I sold that ran up a lot and I should have kept: Mahindra and Mahindra in India is one of such compounders, and Grupo Bimbo with Bread in Mexico. Or Goodwin PLC in niche UK industry. Exor is a semi cyclical holding company that is a bit like Europe’s Berkshire except the lower quality of holdings, and I should maybe not have sold it. Yes, I turned a lot of rocks and I am a collector of ideas.
Despite some success in this trading patterns, I want to keep a longer term approach to investing in order to manage my time better. I want to spend more time researching ideas peacefully, and less time wondering if I sell and switch positions. It is a cause of stress and a distraction.
So I will switch more to buy and hold.
Another cool effect is that some of my smaller holdings are down 30-50%, but it does not move the needle much, while the holdings that keep doing well are getting more weight and capturing a bigger upside. Overall the portfolio does well, it is really confusing to observe.
One example
So I am adding back into a quality compounder that I had sold two times. (Eurofins Scientific).
Eurofins scientific is the leading testing company worldwide, for food safety and health diagnostics. It is historically one the stocks that had the best returns. It consolidated the testing industry while building up and adding more services, gaining scale and efficiency.
Eurofins has been a tremendous stock market success over 25 years. It has delivered a total return of 36,558% and CAGR of nearly 27%. In our view, the sophisticated hub and spoke network is key to the strong 8% CAGR rise in EBITDA/FTE between 2009 and 2019. Since its IPO, Eurofins delivered the fourth best global total return for investors and became the best European share investment over 25 years, as consistently shown by previous reports. Eurofins has also massively outperformed all its TIC comparison group and LabCorp over the last 13 years. This result is a testament to the talent and dedication of Eurofins teams to generate sustainable shareholder value.
This is also a company that does acquisitions, share issuances when expensive, buybacks when cheap, using the whole spectrum of capital movements. I do not expect a similar rate of return going forward long term as it is more of a blue chip, but it is currently in an investment phase and quite undervalued on a cash flow basis. It could also reproduce the growth model in emerging markets, and after all, it is only a 10 Billion Euros market cap. Some people call the company dodgy due to linked entities, but I am comfortable with this as a French, this is how family holdings behave in France.
Onto the full portfolio holdings with a downloadable google document:
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