Sunday 15 December 2013

End of year overview of my contrarian stocks 2013

Panda Bear, contrarian stocks, 2013

As requested by my brother, a bear, I will now go through all the stocks that I have and write down why I bought it, what the development has been, when I will start to consider to sell it and the mistakes or better put what I learnt with each stock. Sorry for the length of this article but I do not like to break things up once I get started.

A German reinsurance company

Münchener Rückversicherung - This was the first stock that I bought and I must say that I am very happy with this company. Back in 2012 it had a negative P/E due to the accident in Fukushima and it was being traded at a P/B of 0.7 and paying 5.5% in dividend. I did back then not look upon it as a turnaround case but looking back now that was actually the case so already then I seemed to have a taste for that direction of companies... the underdogs simply.
I bought 18 shares for 109 € per share since I liked the stability of it, I liked the low P/B and the high dividend payment. Looking at last months summary I was +47% since 1st of March 2012. If we add that during this period I have also received 238.5 € in dividend then I am +58% so a very good result. After I had bought the company I realised that Warren Buffett owned it which also relaxed me.
The sell criteria I added on this company was P/E around 25 I think I wrote which has been adjusted to 18.9 now and/or that the dividend drops to below 2% (which is also a direct indication that the company is getting too expensive).
Lesson learnt: As of yet nothing.

A German energy company

E.On. - This was the second company that I bought and I bought it back then due to three reasons: Low P/E, low P/B and high dividend payment which was the main reason for me buying it. E.On had in principle been punished for the same reason as Münchener Rückversicherung namely due to Fukushima and the German decision that then also came that nuclear power must be closed down in Germany.
This I did however not consider back then when I bought the company and on the 13th of March 2012 I bought 120 shares at 16.95 € per share and I increased my position with an additional 120 shares for 13.87 € back on the 4th of December 2012. Today that means that I am -9% but I have however received 384 € in dividend which means that I am currently +1% with E.On. it is of course not very good.
The biggest reason for the drop in share price has to my opinion been that they decided to pay out 50-60% of their earnings which annoyed investors/fund managers that were calculating with a certain payment from their E.On. shares. I made my own calculation and came to the conclusion that I would still receive a good dividend which meant I stayed with the company. I also do not regret the addition to my position that I made in December because for me the fundamentals of the company had not changed. Part of all the energy companies problem is that there is so low inflation in Europe which means that they have problems to increase their prices and they are also pushed by the politicians and governments not to increase prices due to the necessity of electricity and the importance of that everyone can afford to pay for it.
I will sell E.On once the dividend drops below 2% or if the P/E becomes too high meaning around 20 or so.
Lesson learnt: The effect of the share price when a company decide to change their dividend payment. Which is bad if you own the company but can be good for buying into a company that you like for other reasons besides of dividend payment.

A German bank

Deutsche Bank - The third company I decided to buy was DB and I bought it on the 14th of March 2012. I bought it because the entire financial business in Europe was pushed down and I considered that DB would be a good company to own since it will turn around at some point. Back then the P/B was excellent! The P/E was also fully ok and a dividend was paid but it was pretty low. So it was purely bought as a turnaround case.
I started off buy buying 50 shares at 37.37 € which was increased on the 7th of May with 68 shares at 30.67 € and finally at their very bottom I managed to buy an additional 70 shares at 24.63 € per share on the 1st of August 2012. Today this investment is +17% only due to that I bought more shares when it was dropping and I have received 229.5 € in dividend which means I am currently +20% with this share. Also here I did not see that the fundamentals of DB had changed and they were still making money. The thing here is that yes, DB have a lot of skeletons in their closet like all the banks and it is shameful to see how individuals in these companies have acted to increase their own bonuses but all the banks will bounce back and I see no morally reasons for not owning shares in a bank. Clean out the criminals which will scare the dishonest employees and increase the moral of the honest ones and the banks will once again be trustworthy companies.
I will step out of DB once the entire financial business has bounced back but that will take a couple of more years. I do not like that DB have turned up so often in the inside trades and being sold. Of course that is a very bad signal but I guess or hope that they are more short minded than what I am with my investment but the share price have kept dropping since they started selling off.
Lesson learnt: Buying more shares when the share price drops BUT the fundamentals are still solid can give you future profits. I have to start thinking about how to respond to the inside trading. Is it really of importance to me? Should I focus only on when they buy and not sell?

A Germany registered forrest company

Asian Bamboo - My fourth investment turned out to be my biggest investment mistake and have in principle cost me my entire development against DAX that I compare myself against. I bought it at a point when the company looked very cheap. The fundamentals then kept changing and I kept buying into the company. I have as an investor hopefully learnt a lesson from this but it is also sad to see that one really bad investment can bring down the entire portfolio and especially if one steps in by throwing good money after bad. This said I still believe in the company but I should never have added more shares.
So it was bought due to excellent P/E, P/B and the dividend was so, so back on the 5th of April 2012 when I bought 180 shares for 10.68 € per share. The shares then kept dropping and dropping and due to a stupid rule that I had made up which was that I would increase every position if it dropped more then 20% I ended up increasing even though the fundamentals had gone bad. So I bought an additional 170 shares for 8.04 € on the 27th of June 2012, which I increased even further with 300 shares at 6.15 € on the 4th of December 2012 and then I made the final increase on the 1st of March 2013 with an additional 300 shares at 5.23 € per share.
After that final investment I decided that I had to remove my stupid rule. Today Asian Bamboo is being traded at below 2 euro per share and the 6721 € that I invested is today worth only 1843 € so I am -72%. In the first year I did however receive some dividend in the value of 72 € which means I am currently -71%. Woohoo! This investment will be sold once the fundamentals are back on track and they are fairly valued again.
Lesson learnt: Never increase in a position due to a stupid rule! This lead to that the rule was removed and a new one was made. Never increase into a position if the fundamentals have changed! Never buy more shares into a company where the fundamentals have changed UNLESS they show a good quarter result OR better yet a good half year result. Think twice before investing into smaller companies that are not as controlled and analysed as bigger ones are.

An oil and gas company from the UK

BP - My fifth investment became yet another turnaround. Due to the disaster that happened with Deepwater Horizon the shares were significantly pushed down. So BP had an excellent P/E, P/B as well as paying out a nice dividend. When I compare to the other oil companies I would say today that more or less any of the other ones would also have been good investments... maybe even better because their key values are also great and they pay equally high dividend without all the litigation business going on.
So on the 19th of March 2012 I bought 350 shares for 5.54 € today that then means that I am almost +3% and during this period I have received 140.9 € in dividend which means that I am almost +10% today. It is an ok development but nothing to be too cheerful about. I will keep BP until the dividend drops below 2%.
Lesson learnt: Do not invest into a company where there are known litigations running UNLESS a decision has already been made!

A German bank

Commerzbank - The sixth investment was the second largest German bank that was being traded on DAX. It was bought for exactly the same reason as DB meaning that all the banks were and still are pushed down in Europe and I looked upon it as a future long term good investment. The P/E was negative due to losses, the P/B was great and they paid no dividend so once again a turnaround.
I bought back on 28th of June 2012 a total of 115 shares at the today converted price of 13,0 € per share. I then increased my position with 120 shares on the 5th of February 2013 for 14.8 € per share. Looking back the addition of shares were done at a bad moment but that was still ok in my opinion.
The worst thing was that I messed up to double my shares in spring 2013 when that was being offered to me. At the cost of only additional 1000 € I could have received an additional 230 shares and that mistake was due to me not fully understanding German I thought I had to give no answer to join in on the deal. So a classical foreigner mistake. Also I give away these shares to my nephews so the calculations of my total shares are decreasing for each year.
These shares will, just like DB, be sold ones the banks are back in favour which will take a couple of years. Today I am -22% but if we add to that the money that I received from selling the "shares" that I got last spring then I am today -3%. If I would have joined in that deal then my Commerzbank investment would today have been +18% instead of the -22% so it is really a sad story.
Lesson learnt: If I am not 100% certain what the letters mean that I receive then call up the broker and talk to them! I am not again allowed to miss out on an excellent deal due to such misunderstandings!

A sugar and retail company from the UK

Associated British Foods - The seventh investment has turned out to be another good one. It was a classical Peter Lynch investment into what he would call a growth company. I took a look at the shopping centre and saw a crazy amount of people buying their cloths at Primark. I then found out which company it was, looked over the values and even though the P/E was high (but still fairly valued on the market based on their growth rate), the P/B was also higher than I usually like and the dividend low I still decided to make an investment as an experiment of Peter Lynch shopping mall principles.
I therefore bought, on the 5th of November 2012, 100 shares of ABF to a price of 16.84 € per share. Today that has increased by 69% and Í have also received 35.1 € dividend which makes my increase a total of 70% so pretty good. The P/E is today very high but when I see that people stop shopping in Primark then it will be time to sell the company.
When I look at the numbers from the ABF I am more thinking that they might break off Primark and make it into two companies one day which would of course be very exciting to be part of. What is however a concern to me is that ABF is currently being valued as if it was a fashion retail company such as H&M or Inditex but revenue wise for ABF Primark only corresponds to 31% even though it is strongly growing.
Lesson learnt: I would like to say that I have learnt that Peter Lynch shopping mall technique works but since I have only found one company via this method I do not dare to claim that yet but I will continue to try to discover those type of up and coming companies.

An American chip producer

Intel - My eight investment is jogging along slowly like the big old turtle it has become over the years. I decided to step into Intel due to many reasons. First off was that I was interested in making an investment into an American company since the dollar is so cheap compared to the euro. Much can be said about that but I think I will leave that for a separate article instead... secondly I had read that companies that have happy employees tend to perform very well in the long run.
 I therefore took a look at employee happiness and found out that Intel employees were very happy. I looked over the key figures for Intel and found that P/E, P/B as well as the dividend payments were all great. The market is currently punishing Intel hard for failing to come up with great products within the hip markets such as mobile phone and tablets/iPads but also without that Intel is making a lot of money and have solid cash cows that they are milking.
So on the 4th of April I decide to buy 100 shares of to the price of 16.37 € per share. Today that is currently valued at +4% and I have received 50.88 € in dividend which then places me on +6% which is fully acceptable for a half year investment. Intel will be sold when their employees are unhappy, miserable and over worked. No, no, just kidding, Intel will be sold when the P/E and P/B reaches more acceptable levels which means practically a doubling of the share price according to their earnings and growth from 2012.
Lesson learnt: As of yet I have not really learnt something with Intel. The only thing would be that I find it interesting to see how the market punishes a company based on their capacity to perform in what the market consider to be the "hot" thing were money should, according to them, be made. Especially after the last reports the Intel share got pushed down due to this reason. A long time ago I used to own Ericsson shares and I had a feeling that they had the same issue that the market completely valued them based on their mobile phones which was only a part of their business.

A Polish registered agricultural and logistics company

Kernel - My ninth investment is currently also on a downslope but it concerns me very little. Since it is an agricultural company it is very dependant on weather and wind which means that there will be fluctuations from year to year in revenue and secondly since there are very few trades being made the price is jumping more than ordinary which will often be the case with smaller unattractive companies.
I found this company when I was going through the Polish stock market concerning P/E and P/B values which are great for Kernel but I did however not like that they did not pay dividends. The growth of Kernel has been amazing in the last six years that I have looked at it with yearly +27% in revenue growth. So on the 3rd of Mai 2013 I bought 115 shares of Kernel for 13.9 € per share and on the 6th of November 2013 I added to the position with 95 shares at the price of 10.58 € per share.
The development today is that I am -21% with the outlook of that they will start to pay dividend next year. I expect to be a shareholder in Kernel for a long time and I am looking forward to a more fair valuation on the stock market.
Lesson learnt: The only other small company that I owned was Asian Bamboo before and that has been traded a lot which means that the share price do go up and down but in a smooth fashion. With Kernel that is a "small" company sitting on the Polish stock exchange and few trades the share price is making very strong jumps without even a single share being bought and sold on the Frankfurt stock exchange. One should therefore be very careful of looking day by day of the share price on small companies with very low trade volumes.

An Italian energy provider

Enel - The tenth investment is currently also doing pretty ok but I must admit that the buy was in a way a mistake. Yes, I did want to buy a company in Spain or Italy and I was looking at Iberdrola in Spain and Enel in Italy because the energy companies are very much pushed down in the entire Europe just like the banks are with the difference that they classically have been paying great dividends.
So I bought Enel as a turnaround with good P/B (bad P/E due to a bad year in 2012), excellent growth and as I thought the potential of paying an excellent dividend if they got back to normal conditions again. I completely failed to realise their large "non-controlling interest" lump in the financial statement which take off a handsome 1.3 billion € of the profit each year.
Either way I bought 450 shares for 2.38 € per share on 3rd of July which today means that I am +35% a couple of months later. I have received no dividend since I bought them and I expect to get none for this year. Enel will be sold when the P/E and P/B is reaching more acceptable levels and the dividend is once again being paid out. P/B should at the very least be 1.3 before I will consider selling it. This investment is a little too small for my liking but due to my investment mistake I have decided not to increase my position any further.
Lesson learnt: I think there will be a lesson to be learnt with Enel but I am still not ready for it. The share price has increased by 35% which is excellent in the short period I have owned it but still I am very annoyed since I stepped into the company based on the dividend and due to that I thought I would receive a lot. So the reason for stepping in was completely wrong but the current result still good so I should maybe just learn to accept that and go with the flow.

A German potash and salt miner

K+S - The eleventh investment was yet again a turnaround company. I analysed it based on a request from a reader and discovered that it was looking like a solid German company being traded on DAX at a very low price so the P/E was great, the P/B was so, so and the dividend was great. The shares then started dropping even further due to the business with Uralkali and I decided to step in which was done a little too early because on the 30th of July 2013 I had to pay 21.09 € per share and I bought 50 shares.
The shares then dropped even further (due to Uralkali and due to statement of unknown year and unknown dividend payment...) and was down at around 15 € before I on the 9th of October decided to increase my position with 55 shares for 18.72 € per share which was done to get a lower average price in a company I want to own for a long time with usually nice dividend payments made year after year. On the 6th of December 2013 I stepped in and bought another 47 shares at 21.02 € per share but this time the reason for the buy was different. 
I wanted to buy a new German , ideally large, company with a ROE that was around or above 20. I then realised that K+S actually fits to that criteria and I then also bought more shares in it instead of expanding into a new one. Based on last months report I was up 5% on this investment but the knife that fell has still not stopped shaking so I care very little about it. I have received no dividends and will probably get some next year but I doubt it will be more than 1 euro.
My plan with K+S today is to own it forever. I expect to get, besides from some hiccups every now and then, an increased yearly dividend with a huge potential in increased share price on the side.
Lesson learnt: In a business with few players the statement of one guy can push down share prices easily over 50%. This is to me idiotic and I am looking forward to seeing more such scenarios which I will then also act upon by buying shares.

A German investment company

Deutsche Beteiligungs AG - The twelfth and currently final investment was in an investment company that holds good sized German machine producing companies that are often not registered on the stock market. The P/E, P/B was excellent and the ROE will ok. They have had an excellent yearly growth which should qualify for a much higher share price. The dividend they pay are acceptable but also not much more than that.
I bought on the 13th of September 2013 a quantity of 50 shares for a price of 20.06 € per share. Today this investment is up 1% and I have not yet collected any dividends from them.
Actually I would like to increase this position since I consider it to be slightly too small at the moment but that will in that case happen during 2014.
Selling it I will do once the price for investment companies are getting closer to a more fair valuation by the market. Which I still have to write an article about that I am sure will upset many.
Lesson learnt: Nothing that I can think of yet.

You managed to make it to the end of this long article so well done you!

What are your opinion about my investment? Have I learnt correct things or is there more lessons that I should have extracted from my companies and what has been going on with them?


Jan said...

Hi Frederik,

Thanks for the update! Your Kernel investment has inspired me, I will be buying those shares soon. I think and hope it will prove to be a an investment with great foresight.

All the best,

Fredrik von Oberhausen said...

Dear Jan,

Interesting article that you passed on! Thanks! I hope that Kernel will not get into too much trouble with such a big competitor...

Please Jan, make sure to make your own analysis of the company before you buy a part of it.

I have however realised, over the short time that I have been writing this blog, that my readers are many times much better investors than me and have been doing it for a much longer time so I am sure that you make your own control of it.

Chris Bailey said...

Am enjoying the daily updates and especially this post. It is always good to review investment lessons learnt, as this is the way any of us become better investors.

It is over 17 years now since I originally entered the investment industry. The most important lesson I have learnt is to be able to sleep at night with investments. For me this has always been generated via original work and an understanding of valuation and potential catalysts (not dis-similar to yourself, which is probably why I enjoy reading your output). What is that old adage again? 'The harder I work, the luckier I get'. Very true. On this basis you have a great chance of being successful on your quest.

Don't beat yourself up about Asian Bamboo - it is far better to learn such lessons earlier than later. My personal suggestion would be that if you wish to add to an investment after an x% fall (I think you cited 20%) then if the share falls another 20% from this new level, then it must be sold. What ruins investment performance over the longer-haul are those shares that are down 90% from an original purchase price. By definition many have moved through an interim level of down 40%, down 50% etc. Nevertheless, you have identified some good winners and, most importantly, time is on your side.

Keep up the good work...and anyone reading this should themselves read (if they have not already) Peter Lynch's 'One up on Wall Street'. One of the best investment books written and - as this website shows and I entirely endorse too - a source of very practical advice about what to look for and why.

Chris Bailey

Fredrik von Oberhausen said...

Thanks for your great comment Chris Bailey!
Since you have been working with investments for 17 years then I am indeed a toddler in comparison to you!

Hmmm... I fully agree that a share that is down 90% is a disaster that hurts any portfolio much more than what I had expected and even worse when adding good money to bad.

I listened to too much information in the beginning and had problems to sort out what was important. Which is why I still today are trying different ways and approaches.

I think that the words of Peter Lynch are excellent and this I quote freely from my mind so it might be slightly wrong: "skip the weeds and water the flowers".

I have no data about it but it sounds as if he just left the rotten stocks and if they went belly up that was it and with the good ones where the fundamentals improved I guess he even bought more stocks and actually increased his buy price but he did so in a healthy company with large potential and improved fundamentals...

Still I am not sure he actually did that but I am thinking about this and I will see what I can do with this in the future. Especially if one of my bad stocks actually manages to turnaround.

At least it sounds more logical then to buy more of a company that are going downhill not only in share price but maybe also in the fundamentals which maybe you as a small investor have not even been able to catch on to which the bigger investors have managed to do.

I have therefore decided not to have a rule that kicks in during share drops and I am even thinking about doing the inverse which today means to buy more MüRe and ABF to try to water the plants.

It Is logically correct but emotional a tough nut to crack which I need to find out why I feel like that before I can change my investment style slightly.

I am very glad that you read my blog and I hope to receive excellent comments from you also in the future to help me and other readers to improve as investors.


Chris Bailey said...

Yes, i just got out my copy of 'One up on Wall Street' and on pg 286 Peter Lynch says: 'you won't improve results by pulling out the flowers and watering the weeds'. Very true. Now we just have the trouble of working out which shares are 'weeds' and which ones 'flowers'! n

Keep on thinking and working...and good luck.