Continuous Compounding Substack Update
Update on active and inactive Ideas, and more
Discussion Points:
-Thanks for the support
-Active and Inactive Positions
-Japan Reform
-Net-Net Investing in Japan
-Other: Learning Japanese
Hey Everyone!
I reached over 1000 FOLLOWERS!
The road hasn’t been easy, but meeting like-minded individuals along the way has made the journey worth it.
I have been experiencing a major uptick in subscribers recently, primarily due to my write-up on Round1/SK Japan being graciously featured and recommended by major Substacks in no particular order:
-Emerging Value
-Asian Century Stocks
-Clark Square Capital
-Stock Analysis Compilation
-Capital Employed
-Iggy On Investing
-AltayCap
My apologies if I am missing anyone, pls DM me if I made an error of omission. The above are all high-quality resources for idea gen, stock pitches, and learning about investing in different geographies.
I want to thank all my subs for their continued support.
Haier Smart Home (690D):
Quick Stock Pitch (Active Idea, but pitch is outdated, working on it atm)
For readers who have invested in Haier 690D, the stock has finally been experiencing an uptick in price. This is likely due to the Shanghai and Hong Kong lines rising in price.
If we factor in the 6-7% dividend we received in August and the current roughly 5-10% price appreciation, we are looking at a very decent result for an 8-month investment period.
Also, I haven’t crunched the numbers, but from August until now, despite the HK and Shanghai lines dropping -20% approx. at their lowest, the German line experienced a fraction (around 5% decline) of the price volatility. Hence, my theoretical thesis of the dividend yield being a support of price decline has proven itself for the first time.
Before, based on statistical analysis of the correlation between the price decline of the HK/German line, the dividend yield increasing had no hindrance to the price dropping.
From August 2023 until now, this has no longer been the case. The following is the HK line (6690) and we can see the stock dropping to it’s lowest level before the end of the year.
Contrast this to the German Line (690D):
Without redoing my statistical analysis of price correlation, we can clearly see the German line did not experience the same downside as the HK line. In technical analysis terms, there was support at 1.06 euros per share. The lowest point in the HK line was in December; somehow, for the German line, Dec prices were above June to Nov prices.
The most plausible reason for this is dividend support. This is likely due to the dividend yield being 6-7%. For investors chasing yield, a further price decline would put the stock in 7-8% territory. Given that 690D trades at a roughly 60% (57% as of March 8th, 2024) discount to the mainline, maintaining this discount on the way down is extremely difficult.
Again this was never the case historically. The dividend yield had zero hindrance on the German line’s stock price going down. But then, back in August when I released my research, I rationalized that it would produce possibly the greatest buying opportunity if the dividend yield truly had no hindrance all the way down.
As we can see now, my rationalization was correct. I believe the dividend yield has been one of the major factors supporting the share price of the German Line. If the HK line drops to 20 HKD, at a 60% discount and 8.55 EUR/HKD, the German line should trade at €0.94, at €0.07 per share dividend, this would be a 7.5% dividend yield.
This further highlights the appeal of 690D; we get 2.5x the dividend yield than the HK line, a fraction of the downside and price volatility, and more potential price appreciation (intrinsically speaking) on the upside.
Now that we have established that investor’s are willing to defend the price at high dividend yields, 690D actually becomes a much safer investment in my eyes, as there is a limit to the downside. This means that as the HK line declines, the 60% discount rate cannot hold and contracts as investors in the German line are drawn in by attractive dividend yields.
The way I would invest in 690D is to simply view it as a low-volatility dividend investment with lots of upside and very little downside. We are more than fairly compensated to sit on our asses and do nothing.
*Update: The company recently repurchased A-shares, amounting to roughly 1% of the company’s total market cap.
Disclaimer: I am currently long shares of Haier Smart Home 690D
Round 1
Round1 Stock Pitch (Active Idea)
SK Japan Stock Pitch (Active Idea)
Round 1 is currently trading at 820+ yen per share (March 15, 2024). It is up roughly 40% from 600 yen per share when I first discovered and shared it.
There seem to be a lot of tailwinds that are assisting in Round1’s price increase.
For 1, Japan is becoming a stock market that is slowly changing to accommodate shareholders.
AltayCap, a Substack I highly recommend, made a post on the topic:
My key takeaway from the article is the following:
“One major criticism of my investment thesis in Japan is that companies will simply ignore the new Tokyo Stock Exchange rules about improving corporate governance, but despite a slow uptake, it’s clear that companies are following through with reforms. On January 14th, the exchange published a list of companies taking action. This list will be updated monthly, and companies not on the list will face investor criticism and social pressure.” (AltayCap)
Before, Japan was the land of value traps, where management would simply hoard cash. By creating a list, management will be held accountable in the eye’s of the investment public. At least, that is the intended outcome.
An easy inference from the above action is that on a conference call, what will management say if an analyst asks, “Why aren’t you on that list?”
Embarassing…… (Drake meme)
Of course, there are much smaller companies with little to no coverage. This is the prime hunting ground for undervalued stocks. I expect some micro/small-cap JP stocks to still not care, but if we can get ahead of the curve to identify JP stocks that are on the transition to increasing shareholder value before they are added to the list, there could be something called a “listing catalyst.”
I am happy to say that Round 1 is on this list! (Jan 31st edition)
SK Japan is not on the list. SK Japan does have a dividend, but they currently haven’t been proactive in buybacks. Based on my SK Japan stock pitch, I believe if R1 wants to acquire SK Japan, then they probably want to keep prices low and the stock under the radar.
My short-term price target is 1000 yen per share. At 820 yen per share, the price isn’t expensive, but it is no longer cheap. The risk-reward ratio was far greater at sub 600 yen levels. Hence, if the stock somehow drops to the 600 yen level and nothing fundamentally changes, Round1 becomes a great investment candidate.
Disclaimer: I am currently long shares of Round1 (4680) and SK Japan (7608).
CNTY:
CNTY Stock Pitch (Inactive idea, will update post Haier)
Francois Rochon, in his annual letters, highlights his biggest blunders and gives them awards. This is my gold award for the blunder of 2023.
I read Michael Burry’s investment letter, and it states that when a stock he owns drops below its 52-week low, no matter what, he just sells. This has allowed him to avoid disasters. When I reviewed my biggest losses, it was uncanny how useful this rule would have been if I blindly followed it. If I recall correctly, Carl Icahn also has a rule of just selling when a stock drops 20%. I wonder if any Quant people have done the math on when one should consider selling after a % price decline?
I categorize CNTY as a dust-settling investment. You should enter the stock when the dust settles. When interest rates rise, people are looking for stocks to short, and highly levered companies are the first one’s on the chopping block. Investor’s aren’t willing to do all the complex work needed to fairly value CNTY.
To put it simply, if a stock is entering a storm, just exit. When the dust is about to settle, then consider re-entering because you’ll likely have a far better risk/reward. Hence, waiting for a better opportunity is more of a virtue.
I will be revisiting this stock at a later date.
Disclaimer: I am currently long shares of CNTY.
GAN:
GAN Stock Pitch (Inactive Position)
I was fortunate enough to purchase GAN just 2 or 3 days before the Sega Sammy acquisition announcement. I was in the process of acquiring more stock. I only got a little more than a starter position. I can’t complain about a high double-digit return.
As it currently stands, I don’t like investments where there are multiple branches in the decision tree where there are sizeable capital losses in the -100% variety. Anything above $1.60, I don’t think you are being fairly compensated for the potential losses you are taking. In fact, if the stock rises to $1.60 with no new news, GAN is a potential short candidate. (This part was written in advance of the recent developments, so in hindsight, the stock might even be a good short at $1.50)
This is not a special situation I would allocate any meaningful % of my portfolio into. You should ask the question, “If this stock goes to 0, what percentage of my portfolio am I willing to lose?”
But then why put any energy into something that can’t meaningfully impact the return of your portfolio?
Disclaimer: I do not have a position in GAN.
BRAG:
Brag Stock Pitch (Active Idea)
BRAG is an ongoing position of mine that was written by Jeremy Raper. It is yet to be seen if Jeremy can really influence the decisions of the CEO to get the company sold. As it stands, I’d have a small position, call it a day, and follow Jeremy on X for updates. Follow me too while you’re at it!
Disclaimer: I am currently long shares of BRAG.
Net-Net Investing:
The reason I bring up Net Net investing is because I have been inspired by AltayCap who invests in undervalued and net-net (NN) stocks in Japan. I will be creating a portfolio of Japanese NN over the next couple months.
I have read “Net-Net Stock Strategy” by Evan Bleker in the past, and it is a book I recommend to anyone interested in it. Under the tutelage of Benjamin Graham, Warren Buffett started off looking for dirt cheap stocks that were priced by the market at less than the net current asset value (NCAV).
Calculation of NCAV:
+Current Assets
-Less Total Liabilities
-Preferred Shares
-Less Off-Balance Sheet Liabilities
=Net Current Asset Value (NCAV)
There are many ways you can play around with this formula to suit your needs, but the core idea of this investing style is that if a stock is trading for less than it’s NCAV, it means the stock is trading for less than it’s liquid cash after paying back all debtors and all liabilities. This implies that, in a state of liquidation, the investor would generate a positive return without even factoring in long-term assets like real estate.
Couple this with Benjamin Graham’s idea of “Margin of Safety,” and you get an investment setup where the downside is theoretically 0, with lots of upside.
Net-Net (NN) investing, as described in the book I mentioned earlier, should be performed systematically. Meaning we would not create a highly concentrated portfolio of NNs. The reason for this is that prices for NNs, absent a catalyst, could stay stagnant for a very long time. Based on the studies the author did in the book, by creating a highly diversified portfolio, one can generate market-beating returns in the long run (20-30% in certain geographies, don’t quote me on this). Japan has been characterized as a value trap region for deep-value investors, but with the recent reform to bring corporate governance to the expectations of foreign investors, I see this moment as a golden opportunity to invest in Japan.
The former landscape for JP net-net investing was that stocks/management had no pressure to address the destruction of shareholder value. If the former landscape could generate 20-30% returns, what can an investing landscape with pressure on firms that destroy shareholder value yield?
Potential investment approach for NN investing in Japan:
The beauty of this systematic investment approach is that it brings to mind a quote by Joel Greenblatt on the magic formula: “Your two cents may hurt you.”
The magic formula investing approach looks for stocks with the lowest EV/EBIT multiples and the highest ROIC. Joel would categorize the stocks into deciles of ranking. By pure logic, you should invest in the top deciles of undervaluation. *Magic formula investing is a completely different investment approach, but it is also a systematic investment approach.
Joel did an experiment where he had his analysts at his firm try to add alpha by performing stock selection on the stocks within the top deciles of undervaluation. What he found was that his analysts underperformed the simpler approach of just blindly following the magic formula.
What makes this approach great for the layman is that the more complex valuation techniques/value investing philosophy required to find concentrated positions are not necessary.
My goal is to continuously improve my stock picking skills, so I don’t mind underperforming a blind NN investing strategy in Japan. So for the next 3 months, I will be creating a Japanese net net investment portfolio. I will document my journey as I learn and execute on this investment approach.
I will also allow myself to deviate from a pure NN approach if a particular company has growth prospects. Basically, paying up for quality if it is justified.
Other: Learning Japanese
One question I submitted for last year's BRK annual meeting that was not picked, was: If an angel could grant Warren Buffett full fluency in all languages, where would Buffett go hunting for stocks outside the US?
I believe Japan would be on Buffett’s list.
Earlier this week, I decided to learn Japanese. I want to learn Japanese for the following reasons:
-Travel
-Read JP books
-Consume Japanese content without relying on Eng Subs (movies, tv shows, anime)
-As an investor, being able to read JP filings would be so helpful. I'm sure Buffett simply puts many JP companies in the too-hard pile simply due to language barriers or a lack of English filings.
-Allows me to be less reliant on English filings. Things can get lost in translation.
Step 1: Learn #Hiragana and #Katakana.
Progress:
This week I read "Remembering The Kana" by James W. Heisig and completed 5 lessons so far. Each lesson is around 20-30 minutes long, so I’ve been completing one lesson per day or roughly every other day.
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I'd argue Sega Sammy can get out of the GAN deal if they want to (see what Jeremy Raper commented here https://twitter.com/puppyeh1/status/1767915294172065979), not a special sit I would play (although on balance, I think they will go through, even if they shouldn't)