The Collective launched in September 2020 with a simple view “Let’s find stocks that can double in the medium term and put pen to paper on ideas that we have always enjoyed discussing as stock enthusiasts”.
So far it’s been a great success and great fun – we do our homework on our investments, the panel of contributors are experienced and it has paid off on the performance side.
With many back to markets in the New Year and the Lockdown dynamic as prevalent as ever – we wanted to give you some observations on where we are with individual recommendations and market outlook. Please note 2 things if you are enjoying the material and seeing portfolio returns:
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Nothing has really changed for the last number of years – stocks are expensive absolute but inexpensive relative to bonds.
We still remain in an in environment where the vast universe of low risk government bonds do not generate a yield in excess of inflation. This means that investors get forced into corporate bonds for yield and this in turn means that the equity values of those same corporates is supported. Of course, the added plus is that equity has the benefit of earnings and dividend growth unlike bond coupons. Provided we have earnings and dividends growth, and interest rates remain low, equities will go up.
What could change? We could see a steep recession and the collapse of corporate earnings. 2020 has been an interesting stress test of the system – the reality is that outside of the energy and financials, analysts expect 2021 earnings and dividend growth to hold up and the government has provided significant monetary and fiscal stimulus. The central banks will tolerate some inflation (to erode the value of debt) before raising rates.
What we believe is more likely is that we see rotation and that there is scope for value and non-US markets to play some significant catch up with US and tech leadership. At such high market valuations the winning trade of buying and holding an S&P or Nasdaq ETF and low cost beta may be expiring. One needs to get more specific with your allocations. Watch for pockets of uncertainty to add to overall exposure. Like October 2020, we will flag such periods. As a reminder, we are investing with a 2 year view, not day trading, and these are all names that The Collective are holding in our personal investment accounts and pensions.
Performance To Date
Theme 1: The Lockdown Series
We first started writing about shares impacted by lockdown in September 2020. There was nothing implied in company valuation for a vaccine or lockdowns ending. The asymmetry was compelling and this proved to be an opportunistic time to accumulate shares.
If anything, we are surprised more risk premium has not returned to these stocks in January, However the market seems sanguine and is perhaps looking at the recent developments to focus minds on vaccination programs. We suspect any faltering on such will present a second opportunity.
Hostelworld (HSW.L) : Published 27/09/20 Closing Price £0.55. Current price £0.79. Return = 47%. Target price: £1.50.
The most significant development has been Charles Jobson (Delta Partners) disclosing a 10% stake in Hostelworld in December 2020. He has a track record of taking companies private (most recently in Europe, Wessanen food). being taken over by Charles Jobson and PAI. Please note our M&A model pointed to a very attractive IRR for such an exercise. There is potentially a lot of of value in the business as ex goodwill the intangible assets exceeded the market value. We believe Hostelworld is ripe for change or consolidation and this development is both interesting and supportive of our thesis. Add on weakness.
Mitchells & Butlers (MAB.L): Published 4th Oct. Closing Price £1.35. Current Price: £2.44. Return = 80%. Target Price £3.
Despite the company announcing an opportunistic rights issue the shares remain close to their recent highs. Our investment thesis remains the same, despite the obvious near terms uncertainty for UK pubs, M&B is a strong franchise with freeholds and it will trade at £3 (1x book) again. For now, we would be looking for a bigger discount to target price to initiate a position.
Headlam (HEAD.L): Published 12th Oct. Closing Price £2.71. Current Price £3.83. Return = 41%. Target Price £5.50.
The company will provide a trading update on 21st January – we would use any weakness as opportunity to add and the market will be keen to see if there has been disruption with Brexit related cross border logistics challenges. To date, we have seen insider buying and we will be monitoring the return to dividend growth.
GameStop (GME.US): Published 20th Oct. Closing Price $13.86. Current Price $40. Return = 290%. Target Price $40.
We are closing our buy recommendation on $GME. We first wrote about $GME on 20th October saying that a squeeze to $44 price target can be justified fundamentally. That has happened violently over the last 2 days trading intraday to $43. It is difficult to tell with the amount of stock trading (multiples of the entire market cap in the last 2 days) how much the short interest has been addressed. We will not speculate at this point.
The target price was based on the stock trading at 2018 revenue multiple of 0.5x revenue and regaining revenue traction with the console cycle. Ryan Cohen (founder of Chewy.com) recently increased his stake to 13.8% and on the 11th January, Cohen was brought on to the board of directors as well as 2 other new board members. This has acted as the catalyst for the massive short squeeze and our hypothesis has played out.
Followers of The Collective have seen a return from $14 to $40+. That’s fine with us. We may revisit at a future point.
TP ICAP: Published 23rd November. Closing Price £2.16. Current Price £2.37. Return = 10%. Target Price £5.50.
The investment thesis is based on TP ICAP transforming from a voice broker to a trading platform and data play. This means that 6x earnings compares with US comps on 20 to 30x earnings that are more advanced technology and data businesses. They are doing a rights issue this quarter to pay for the Liquidnet acquisition to support this with a subscription price of £1.40. The next trading update is March 2021, full year looked in line with expectations for both Liquidnet and TP ICAP. While such turnarounds can be slow to execute the company is supported by a 5% div yield
Datalex (DLE.IR): Published 24th November. Closing Price €0.54 Current Price €0.53 Return (Loss) – 2%. Target Price €1.30.
There has not been any significant developments since we published. The investment case stands and we would be using any weakness to add. The catalyst would be a new significant airline win to counter the smaller clients they have flagged they are expected to lose.
Domino’s Pizza Poland (DPP.L): Published 24th December Closing Price £0.076. Current Price £0.1 Return 32%. Target Price 26p.
The stock was completely off the radar on re-listing. It has a new management team, is now profitable and has decent scale in Poland. The re-brand and ability to buy some Telepizza outlets will consolidate its position further. Eventually one of the larger Domino franchises in UK or Australia should buy the Polish market leader.
Theme 2: The Inflation Series
US Oil & Gas Exploration ETF (XOP.US) Published 15th December Closing Price $60.92. Current Price $65.5 Return 7.5%. Target Price $150.
The collapse in crude production in the US is unheard of – meaning any demand pick up will see higher oil prices. This ETF is equally weighted to the largest exploration names in the US. The strongest have survived and will now pay down debt and increase dividends/buybacks.
What Next In 2021?
Get ready for vaccination programs! With the consumer flush with government cash and governments hitting the fiscal boost to get employment back to normal levels, the demand response will be inflationary see our inflation series post (https://thecollective.finance/2020/12/the-inflation-series-commodities-precious-metals-value-stocks-and-yes-digital-currencies/ ).
Prepare yourself by having commodity, value, dividend growth and non-US exposure in your portfolios. We flagged digital currencies in our first inflation series. We wanted to write up on but we did not expect Bitcoin to go up 100% in a few weeks. What a missed opportunity!
What now, do we chase Bitcoin? Difficult. However, we would note that the ratio of Bitcoin to gold (and gold to silver) is at levels where prior it has made sense to switch back to “old world”. Watch this space!
Best wishes this year!