The Hard Rules of Portfolio Management (NOTW#103)
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Both indices were up considerably this week, aided by lower tensions in the Middle East and improved sentiment around semiconductors and hyperscalers. I share a word or two about this in the market commentary together with what I consider to be my hard rules in portfolio management. There is also plenty of company-specific news this week.
Without further ado, let’s get on with it.
Articles of the week
I published four articles this week, all earnings digests. The first article was an Amazon’s earnings digest in which I go over the perennial debate for the hyperscalers: will AI ROIC be enough to justify the investment? You can read it here: You can’t sell the picks and doubt the miners.
You can’t sell the picks and doubt the miners
You can read this article for free, but a paid subscription gives you access to…
The second one was Stevanato’s Q2: “The Tip of the Iceberg.”.
“The tip of the iceberg.”
Stevanato reported good earnings today, although (once again) these were not precisely “clean.” The company has faced a couple of headwinds over the past few quarters that have not enabled management…
The company reported strong earnings but lowered its reported guide again due to a divestment. The call was the highlight of the release and honestly what long-term investors should focus on.
The third article of the week was Topicus’ earnings digest.
The truth behind the headlines
Topicus reported what I would categorize as an overall strong quarter yesterday. I believe there are certain things worth pointing out that should help contextualize the headline numbers (there’s always relevant info under the hood). Let’s jump right in.
The company reported okay earnings at first glance, but they are significantly stronger when one is able to look underneath the surface.
The fourth article was Shift4’s earnings digest.
A merciless market (and the reason behind the drop?)
Shift4 reported pretty decent Q2 earnings yesterday but management lowered the guide by 100 bps (on an FX neutral basis) due to ongoing headwings from the Middle East conflict…and the market had no m…
The company reported strong Q2 earnings but lowered the guide and the stock fell 24% in two days. I explain why this might have been the case.
What I’ve been looking at
As for an update of what I’ve been looking at…after looking through many companies I am currently looking closer into 2, both of which I believe have potential and are pretty unknown across the investor community (at least I have not seen them mentioned elsewhere). This evidently doesn’t make them better, but just to give you a glimpse…
One is a software business that has a lot of things in common with the most recent addition to the portfolio (which is off to a strong start), albeit it operates in a different vertical
The other one is an engineering business that I came across due to pure serendipity (one never knows where ideas might come from)
One of them looks cheap due to a narrative that I don’t believe makes sense and I have yet to figure out why the other looks cheap.
I will continue looking into these and I am fairly confident that one of the two might end up making it into the portfolio (maybe both), but all possibilities are on the table at this point.
Without further ado, let’s see what the markets did this week.
Market Overview
Both indices were up considerably this week:
Indices are at ATHs while many continue to claim that we are in a bubble. This might end up being true, but there’s no denying that earnings are growing faster than many expected last year. Now, earnings growth must be contextualized. For starters, it has been concentrated primarily around two groups of companies and the same theme: hyperscalers and semis:
The above is fuel to the bears which can claim that earnings growth is extremely concentrated across two sectors related to the same theme (AI), a theme that is in exuberance mode and that it’s not sustainable. This is a fair concern, which takes us to the second point: earnings and returns durability. Even though earnings are growing fast, many claim that the growth is not sustainable. The concerns are driven by the fact that hyperscalers will (supposedly) not generate an acceptable ROIC on their AI capex, which will eventually lead them to capex cuts that will impact the entire AI supply chain. While this is a fair concern, I believe the hyperscalers are slowly but steadily putting these concerns to rest and I explained why in my most recent Amazon article (in which I also discuss the caveats).
Another thing that popped into my mind this week (after experiencing a pretty volatile earnings season which somehow reminded me of this) was the topic of diversification. I published the following on X:
Even though most of the fortunes have been made through extreme concentration, the reality is that those are a small subset of the entire population. In short, there are many more people who have gotten liquidated or gone bankrupt through extreme concentration than those who made it (evidently, we only hear about the latter). The goal of investing is to compound capital over long periods (which is when compounding is most noticeable) and to do this one has to survive, and the way to survive is through diversification, why? Because we are going to be wrong even in high-conviction situations, so better accept it and try to isolate oneself against it. I’d say that my portfolio management has gotten polished over the past few years, which has resulted in the following “hard rules:”
Never overconcentrate (even if very confident)
It’s okay to sell being a LT investor
Never leverage (it also stops compounding)
There are evidently more things I think about when thinking about the portfolio, but these three above are pretty important.
The industry map was pretty much green this week as the strength was broadbased:
The fear and greed index improved markedly and jumped to greed territory:
