Timing the market accurately and consistently is something 99% of investors will not be able to do as they do not have the resources and luck for it. This is especially relevant for fundamental, value-based investors where discipline and thorough quantitative and qualitative analysis is key to success.
Our Top 10 global portfolio follows the philosophy of buying undervalued stocks based on fundamental indicators and analysis. Readers and investors should note that the stock picks are not a direct call to buy, but instead part of a framework to guide them in making investment-related decisions based on their individual risk profiles and objectives.
For the period of slightly over five months from Feb 23 to Aug 2, our global portfolio underperformed most benchmarks with a return of –2.8%. This is mainly attributed to Nasdaq-listed CrowdStrike Holdings, which saw its share price almost halve within a week after the global IT outage on July 19. CrowdStrike lost 30.0% in our portfolio and was our worst performer, followed by Tokyo-listed Nippon Paint, which lost 21.8% at the onset of interest rate hikes in Japan. The rate hikes also contributed to the Nikkei 225’s poor returns for the period, as it was the worst benchmark with –7.4% returns.
The top benchmark was none other than our Straits Times Index, which returned 9.2% for the period. Chart 1 shows the performance of the individual stocks in our portfolio, while Chart 2 shows the performance of our overall portfolio against comparable benchmarks. Chart 3 shows the performance of our virtual portfolio since inception — and we are still comfortably ahead of every comparable benchmark since the inception of our virtual portfolio on Jan 24, 2020.
See also: Global portfolio up 2.1%, including profits from sales
We have decided to retain seven of our portfolio’s stocks for the remainder of the one-year period, including both our top losers. Briefly, we think CrowdStrike’s fundamentals, represented by its cloud-based security products and services, along with total addressable market potential after accounting for loss of potential customers, one-off losses and a significant discount to its cash flow projections, is still undervalued. We are revising its intrinsic value from the previous US$566.50 ($750.50) by almost half to US$287.50.
For Nippon Paint, with a strong cash flow generation history, along with the fact that the company only derives slightly more than 10% of its revenue and operating income from Japan, it is strongly undervalued. We have slightly discounted Nippon Paint’s intrinsic value to JPY1,240 ($11.30) from JPY1,290.
Portfolio adjustment
The three companies that will be liquidated from our portfolio are New York-listed Altria Group, Tokyo-listed Anicom Holdings, and London-listed Games Workshop Group. After revaluing our portfolio, the three are trading on a par or at a premium to their intrinsic value. The stocks returned 29.8%, 0.1% and 3.8% respectively for the period of Feb 23 to Aug 2. We believe that the rest of the companies still have much value to offer, with intrinsic values relatively unchanged or similar to when the top 10 picks for the year were unveiled in Issue 1126.
To replace the three liquidated stocks, we will be buying stocks that have scored highly in our valuations and scoring tables over the past few weeks. For logistics and tracking purposes, we will sell the stocks due to be liquidated on Aug 9 using closing prices, and purchase the three new stocks on Aug 12 using closing prices. To reiterate, we will not account for transaction costs and exchange rate fluctuations in tracking the performance of our portfolio. On the other hand, dividends and capital changes to the stocks will be accounted for in tracking the performance of the portfolio and benchmarks. We will also buy, sell, add or reduce stocks for the portfolio based on our discretion when their investment theses have changed or if the trading prices have reached their intrinsic value.
Soup Holdings
The first stock to be newly added to our portfolio is domestically-listed Soup Holdings 5KI . Since we do not have a virtual portfolio for domestic stocks, this company will be the first to be included in our global portfolio. We will consider domestically listed stocks in the future for geographical diversification purposes.
Soup Holdings derives almost all its revenue and income in Singapore, by operating food and beverage brands such as Soup Restaurant, Teahouse, Cafe O, Pot Luck and Little Teahouse. Our thesis for investing in the company has not changed (See “Undervalued Soup Holdings serves up liquid balance sheet spiced by ginger sauce”, Issue 1125). Charts 4a and 4b show Soup Holdings’ valuation overview using a balance of various quantitative metrics.
For more stories about where money flows, click here for Capital Section
Kweichow Moutai
The second stock is Shanghai-listed Kweichow Moutai. The company is mainly engaged in the production and sales of Moutai Liquor and Moutai-flavored series liquors. Kweichow Moutai’s market cap is around a whopping US$250 billion. Being one of the largest companies globally, the company’s market share has grown tremendously for both its cheaper and more expensive line of alcoholic beverages. Kweichow Moutai has an estimated close to three-quarters of market share and higher for its more expensive line of alcoholic beverages.
Our thesis for the company is similar to all companies in our virtual portfolio — the price is low for what the company has to offer in terms of value and value growth. Moutai (a style of baijiu) is known as China’s national liquor, and Kweichow Moutai is expected to see inelastic demand growth for its baijiu spirit. The demand for baijiu is driven by social and cultural customs, which makes it easier to capture the younger market of alcoholic consumers. Furthermore, as China’s middle-class growth continues to grow, the demand for more expensive and premium beverages is expected to rise, such as the ones offered by Kweichow Moutai.
Despite regulations by the Chinese government to control alcohol consumption, the company has grown tremendously profitable over the years. We believe that although the risk of investing in Chinese equities is prevalent, this risk is significantly reduced given that Kweichow Moutai derives more than 95% of its revenue domestically, and that almost 85% of its ownership is from Chinese entities, ranging from the government to smaller funds and retail investors. The lack of foreign involvement, along with the company’s alcoholic beverages being a socially important brand, reduces the investment risk of the company. Charts 5a and 5b show Kweichow Moutai’s valuation overview using a balance of various quantitative metrics.
Vici Properties
The third stock that completes the list of our top 10 global stocks is New York-listed Vici Properties. Vici is an experiential real estate investment trust that owns one of the largest portfolios of market-leading gaming, hospitality and entertainment destinations consisting of 54 gaming properties and 39 other experiential properties across the US and Canada. Some of its key properties include Caesars Palace, MGM Grand and the Venetian Resort, three of the most iconic entertainment facilities on the Las Vegas Strip.
Vici is a play on the entertainment and hospitality industry, and we think the company is cheap at current prices given the way it has structured its portfolio and how it manages leases and downside risks.
Firstly, Vici is one of the largest triple net lease REITs globally with 100% rent collection since formation. Secondly, the company has progressively hedged its portfolio for inflation risks, with inflation-linked escalation for its rent roll over the long term, with 96% protection by 2035.
Additionally, almost three-quarters of Vici’s tenants are from the S&P 500 and 80% of its rent roll is derived from SEC reporting operators, which provides transparency into tenant performance and health. Logistically, gaming regulations create high barriers to entry and limit gaming tenants’ ability to move locations, contributing to Vici’s 100% occupancy rate, which is further augmented by a secure 41.2-year weighted average lease term for its portfolio.
With 33 acres of undeveloped and underdeveloped land around the Las Vegas Strip, there is much opportunity available for Vici’s growth pipeline, supported by right-of-first-refusal and right-of-first-offer agreements. Charts 6a and 6b show Vici’s valuation overview using a balance of various quantitative metrics.
Disclaimer: This article is for information purposes only and does not constitute a recommendation, solicitation or expression of views to influence readers to buy or sell stocks, including those mentioned herein. This article does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and or after consulting licensed investment professionals at their own risk. The writer of this article has long positions in all the listed stocks except Kweichow Moutai.
