Aug 2023 - A tough month means new opportunities!
August has been a tough month for investors. In this month’s investment journal, I discuss the impact this has had on my holdings as well as all relevant news related to it and my investments. I share two possible explanations for why the market is moving like so as well as a HUGE update to my Watch List picks, with plenty of new exciting stocks for me to continuously research, talk about in the future, and perhaps invest in. I have even made a new trade this month, which I will also discuss.
Overview
Unlabeled on the chart:
In Consumer: Farfetch (1.0%), Starbucks (1.1%)
In Industrials/Manufacturing: 3M (0.6%)
In Technology: Adobe (0.9%) Alphabet (1.5%)
Moves
On August 22nd I purchased a small stake in Farfetch (FTCH) at an average price of $2.74 USD.
Performance
My portfolio value decreased by 2.79% in the month of August, underperforming the Dow Jones World Index up ever so slightly more in the same period.
Dividend overview
| Name (Ticker) | Received | Amount (USD) |
| AbbVie (ABBV) | Aug 16th | $48.72 |
| Realty Income (O) | Aug 16th | $14.02 |
| Starbucks (SBUX) | Aug 28th | $10.68 |
| Total | Aug 2023 | $73.42 |
I received a total of $73.42 in dividends before taxes for August 2023, an increase of 6.2% compared to the same month last year at $69.15.
Commentary & Review
A market easy to disappoint
August proved to be a challenging month for investors, yet perhaps a necessary recalibration. After a few months of impressive market recovery, it seems everyone has now grown weary and stand ready to secure profits at even the slightest sign of weakness. While not immediately apparent, this trend became clearer over the course of the month, with the first notable instance for me emerging with the Unity (U) earnings report in early August.
Initially, Unity stock jumped 6% in after-hours trading, after beating expectations quite handily on both the top and bottom line. Earnings per share came in at $0.26 vs. $0.08 and revenue at $533m vs. $510m-520m expected. Margins rose significantly to 18.5% as well. More importantly for the long-term investor, company management shared on the call that Unity is once again cash-flow positive - but this time sustainably so. They also attested that the next milestone for the company is to turn profitable on a GAAP basis, as opposed to merely on a non-GAAP basis as of now. The reason this is so important is because of what it will HAVE to entail: There is little chance of Unity making it to true profitability without seriously dealing with its biggest issue, which has long been expenses related to stock-based compensation. This is the latest and most significant sign we as investors have received that management cares to do something about an issue that has grown so big that, if you recall, it became a reason for me to pause purchasing more shares.
However due to a restructuring, as part of the company’s cost-cutting efforts, Unity is taking a one-time expense this quarter in order to reduce its reliance on what is called “Professional Services” (consulting non-game developers on how to build with Unity). And with that, all the good that came from these earnings flew out the window and sent Unity on a record uninterrupted two week loss streak…
Even Big Tech can struggle
Shortly thereafter Amazon (AMZN) delivered an earnings report so bulletproof and at such a big scale that it simply could not disappoint. EPS came in at nearly twice expectations: $0.65 vs. $0.34 expected, while the company beat on revenue too. Unlike Unity, Amazon saw its jump in stock price actually realized in open trading the next day - but has since slowly crawled downwards and ended the month up only just 1% from where it started.
Investors likewise jumped out of Tesla (TSLA) as an announcement came on August 7th that the company CFO Zachery Kirkhorn has decided to step down. Often times losing a CFO is not a good sign for a company - and immediately people started to speculate an explanation for his sudden exit. In good time, however, it was revealed that this move was not all that sudden and that Kirkhorn intends to stay on to help the new CFO Vaibhav Taneja step into his role until the end of the year. Likewise, it seems Musk and Kirkhorn remain on good terms - there is no real trouble in paradise. It is, however a negative for me personally, as I hold Kirkhorn in very high regard. He is often the voice of reason during earnings calls which at Tesla can end up going a little off script. Kirkhorn has a record of flawless execution and was always highly knowledgeable and collected on the calls. It is indeed sad to see him go. He now wishes to spend more time with his family and probably wants to enjoy the fortune he has amassed during his successful tenure at Tesla.
Meanwhile, Microsoft (MSFT) has had to go above and beyond in order to settle all criticism for its acquisition of Activision Blizzard (ATVI). While the deal is sure to go through now, as I described last month as I took profits on the trade, they are still to find a compromise with UK regulators, the CMA. That came with an announcement on August 22nd, which to me, goes extremely far and is a clear sign of Microsoft’s desperation to finally close this long-delayed deal: Microsoft has offered Ubisoft (UBI), fellow game publisher, all cloud gaming rights for the entire Activision Blizzard portfolio for the next 15 years. Cloud gaming rights were a central point of this acquisition and Microsoft’s overall strategy in gaming. It is a big restructuring of the deal and one that lowers the valuable proposition of the acquisition considerably for Microsoft investors in my opinion… at least for the next decade and a half. Furthermore, in order to avoid an EU antitrust fine, Microsoft has been ordered to unbundle Teams from Office this month, which in truth, had given it an unbelievably unfair advantage compared to competitors like Slack. I do not think it has been a great month for Microsoft.
What could have put the final nail in the coffin for investors, during this August of horrors, would have been if Nvidia (NVDA) had failed to live up to its sky-high expectations. Fortunately for us all - they did not fail. EPS came in at $2.70 vs. $2.07 and revenue at $13.51b vs. $11.04b expected. Due to these impressive earnings, just like the quarter before it, Nvidia surprisingly now carries a lower valuation than before. As with the rest, Nvidia rose sharply in after-hours trading and looked to be the savior of the market this month. But ultimately the stock ended up just 0.1% by the end of the following day and market optimism shrunk along with it.
Could China be to blame for all this?
Is there another explanation for all this nervousness in the market? Perhaps!
China’s economy is now truly under pressure. The long-awaited fall of real estate developer Evergrande is now finally taking place, as the company has officially filed for bankruptcy. Its stock price fell nearly 80% after being unhalted after a two year pause. Around the time the stock was halted, I wrote about what the consequences of the company defaulting on its $300 billion debt may turn out to be. While exports out of China also dropped to a level not seen since the COVID-19 lockdown, they are attempting to combat this apparent slowdown in the economy. Overnight, China’s governing entity supposedly lowered taxes on stocks by up to 50%. They have also introduced caps on real estate prices in order to stop prices from dropping lower - although this has amusingly been countered by Chinese real estate sellers through handing out bars of pure gold when they hand over the keys to buyers.
With the understanding I have of Chinese economic practice and culture, I decided to take a bet on this particular situation and the worry that it brings. With the liquidity I had left over from my Activision Blizzard play I have purchased a small stake in Farfetch. This may come as a surprise as it is not a stock I have ever listed on my public Watch List - although it is one that I have kept an eye on unofficially for a while. That I have not mentioned it on my blog as of yet is quite simply a coincidence and I do apologize for that. Farfetch is a British online e-commerce platform, operating globally. Unique in the way that it focuses on the distribution of exclusively luxury goods and brands. For this reason, it has a large presence in China, where these types of goods are usually in high demand and e-commerce is thriving. It operates there through a joint venture with Alibaba (BABA) and one other Chinese company.
After peaking under COVID-19 lockdowns, the stock now trades at a 90% discount from its IPO in 2018. Its latest earnings report caused the stock to drop 40% in a single day and that is where I granted it increased attention. I did a deep dive into the numbers, the general story surrounding the stock, and realized that it is now essentially priced for bankruptcy. I disagree with this sentiment and have decided to take a risky bet on its mere survival. Something similar to this occurred earlier in the year with Carvana (CVNA) which is now up 1000% YTD - Given my understanding of the situation I am not letting this chance go me by. The market is clearly all over the place in the wake of COVID-19: I am betting here that the market has misplaced its confidence in the early death of a promising new approach to selling luxury goods online. This adventure, although probably very unlike my normal dabbles, will also serve as an introduction for me to the luxury goods space, which I have grown increasingly fond of in the past couple of years.
Watch List
Big updates to the Watch List this month
First off, Tapestry (TPR) has replaced Hasbro (HAS) in the Consumer category this month. Hasbro has had too many recent troubles in management and execution for me to seriously consider it a potential buy right now. Tapestry is not perfect, but operates in a different space altogether - namely the luxury goods market, alongside LVMH (MOH). Previously completely unknown to me, the company, which owns brands such as Coach, Kate Spade, and Stuart Weitzman, has announced a takeover of Capri Holdings (CPRI), which owns much more recognizable brands for me, such as Michael Kors, Versace, and Jimmy Choo. Despite this, the $8.5 deal was received favorably by the market as there are worries regarding the balance sheet. Tapestry certainly would indeed be a much riskier bet than LVMH, but also one that is priced much much lower and one that seems to be committed to paying out a rather significant dividend, which makes it a super interesting pick to me.
In the Industrials/Manufacturing category, this month I have replaced one Danish transportation/cargo service provider with another: A.P Møller Mærsk (MAERSK-B) has been replaced with DSV (DSV) following a recent commitment from the latter to new automation efforts. DSV offers shipping over land rather than water, where I think this opportunity will be very large. On top of that DSV has a much more consistent recent track record than Mærsk, a very interesting M&A growth strategy, and management seems extremely investor-focused.
Another automation opportunity that has made it onto the Watch List this month is DoorDash (DASH). It is the number one food delivery service in the US. In Europe, they operate mainly under the brand Wolt, which they acquired in 2021. While I have long known about these types of services as I use them from time to time, I have never seriously considered any of them a serious investment: It is a difficult business to make money in… for now. But I believe the automation opportunity here is huge, and I think DoorDash is doing something special. They have developed a proprietary algorithm to optimize delivery times and the user experience they offer on Wolt is simply phenomenal compared to its peers. Delivery services where I live are very expensive to use due to regulations and high income levels. Because of this, they remain somewhat of a semi-luxury offering for regular people. But I recently went on a trip to Athens, where hourly wages are much lower and here I think I got a glimpse of the future potential platforms like these may hold once automation takes the place of drivers. I saw so many businesses thriving and depending on Wolt alone and I personally had a few wonderful customer experiences too, ordering takeout to our rooftop terrace.
Novo Nordisk (NOVO-B) and Ørsted (ORSTED-B) are another two Danish companies on my Watch List, which both experienced large moves this month. Novo Nordisk jumped significantly as it guaranteed a major spot in global healthcare medication purchase programmes going forward after a study revealed that its new flagship product WeGovy reduces cardiovascular disease risk by 20% - by far the leading cause of death in the world. It is a great mistake of mine to have ever sold out of this company in the first place, but it is now only a matter of when and not if I will reopen a position. On the flip side, another Top Pick on the list is Ørsted, a renewable energy company, which just a few days ago took a massive beating to its valuation, following a massive write-down of its US projects. The stock still remains a Top Pick for me, although I am now glad I have not yet pulled the trigger.
Finally, I have added American Tower (AMT) to the Real Estate category - another interesting REIT, which specializes in offering plots for telecommunications towers. I know not too much about this one, but a recent pitch of the stock from one of the super investors who I follow made me take a look at it. Also, Visa (V) has made it onto my list and is actually under serious consideration, after I discovered that almost every successful large fund manager in the world, has this or its counterpart Mastercard (MA) as a large part of their portfolio. I took a serious look at the two and realized that they have long outperformed the market significantly. I have also come to consider that they continue to eat up market share from cash - which really stands no chance. I have, in the past, viewed both as companies that could eventually be disrupted by either Crypto or new FinTech ventures, but it seems none have really been able to pose any kind of serious threat as of yet. The question of whether to go for Visa over Mastercard is purely a matter of familiarity - I have and have always had, a Visa card and it seems generally more popular here in Europe.
Also, Squarespace (SQSP) has been removed from the Technology category for now, as my interest has faded somewhat for whatever reason. This website is, however, built using it and I am sticking to that.
My Watch List sorts stock by sector and notes are included for each one, describing my interest and reservations. The status indicates the likelihood of a position being added to my portfolio. ‘Watching’ means I just keep an eye on them, whereas ‘Top Pick’ means they are very likely to find their way into my portfolio at one point - ‘Under consideration' means somewhere in between, with notes offering some elaborating thoughts. Please note my Watch List is based on my own research and goals and is in no way a recommendation of what to buy.
| Sector | Name (Ticker) | Status | Notes |
|---|---|---|---|
| Healthcare | Novo Nordisk (NOVO-B) | Top Pick | Strong innovator, previously owned, familiar |
| ARK Genomic Revolution ETF (ARKG) | Under consideration | Considering as an alternative for CRSP | |
| Merck & Co (MRK) | Watching | Casual interest, limited familiarity | |
| Medtronic (MDT) | Watching | Casual interest, limited familiarity, attractive dividend | |
| Industrials/Manufacturing | DSV (DSV) | Watching | Interesting strategic M&A expansion, great execution, automation opportunity |
| Elkem (ELK) | Top Pick | Cyclical industry, but well positioned to break out | |
| Otis (OTIS) | Under consideration | Potential dividend growth play, familiar | |
| Norsk Hydro (NHY) | Watching | Casual interest, limited familiarity, attractive dividend | |
| Lockheed Martin (LMT) | Watching | Ethical concerns, too expensive | |
| Corning (CLW) | Watching | Weakening moat, rising competition, familiar | |
| Consumer | McDonalds (MCD) | Watching | Strong brand, limited optionality |
| LVMH Moët Hennessy Louis Vuitton (MOH) | Under consideration | Strong leadership, performance, too expensive | |
| Costco (COST) | Top Pick | Incredible moat, leadership, too expensive | |
| Coca-Cola (KO) | Under consideration | Strong brand, stable giant, too concentrated, familiar | |
| PepsiCo (PEP) | Under consideration | Strong brand, well diversified, familiar | |
| Tapestry (TPR) | Watching | Interesting recent acquisition, high debt, cheap | |
| DoorDash (DASH) | Watching | Automation opportunity, strong marketshare, unprofitable | |
| Energy/Utilities | Ørsted (ORSTED) | Top Pick | Strong positioning, leadership, familiar |
| Waste Management (WM) | Under consideration | Stable giant in a rock solid industry, limited familiarity | |
| NextEra energy (NEE) | Watching | Strong position, too concentrated, too expensive | |
| Enphase Energy (ENPH) | Watching | Rising star, limited familiarity, too expensive | |
| Technology | Embracer (EMBRAC-B) | Under consideration | Incredible acquisitions, not profitable, familiar |
| Sea (SE) | Watching | Core business weakening, innovator, just turned profitable | |
| Palantir (PLTR) | Watching | Amazing tech, highly dilutive, unprofitable, opaque | |
| Meta (META) | Watching | Strong leadership and userbase, undergoing big change | |
| Apple (AAPL) | Watching | Strong brand, loyal userbase, risk of disruption | |
| Mercado Libre (MELI) | Watching | Great execution, growing market, too expensive | |
| Shopify (SHOP) | Watching | Innovator, well positioned, unprofitable | |
| Xiaomi (1810) | Watching | Fast innovator, China risk, previously owned | |
| Nvidia (NVDA) | Watching | Strong brand and leadership, too expensive, previously owned | |
| Finance | Coinbase (COIN) | Under consideration | Strong brand and leadership, unprofitable, previously owned |
| BlackRock (BLK) | Under consideration | Strong execution, exposed to the economy, attractive dividend | |
| Whitehorse Finance (WHF) | Watching | Attractive dividend, strong execution, high risk | |
| SoFi Technologies (SOFI) | Watching | Strong leadership, innovator, unprofitable | |
| NuBank (NU) | Watching | Great execution, interesting market opportunity | |
| JP Morgan Chase (JP) | Watching | Stable giant, overlapping industry with holding | |
| Visa (V) | Under Consideration | Long-term market beater, part of duopoly, familiar | |
| Manulife Financial (MFC) | Watching | Stable giant, attractive dividend, limited familiarity | |
| Real Estate | VICI Properties (VICI) | Top Pick | Strong leadership and execution, attractive dividend, too concentrated |
| American Tower (AMT) | Watching | Interesting real estate space in mobile towers, great execution | |
| Digital Realty (DLR) | Watching | Good positioning, attractive dividend, limited familiarity |
Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.
