10th February 2021

‘The best measure of quality thinking is your ability to accurately predict the consequences of your ideas and subsequent actions.’

—Milton Friedman, Nobel Prize-winning economist

Like many of you, I find myself at a crossroads with decisions.

Do we try for another child before it’s too late? Is it time to move house and realise a country dream? Can I do more to optimise my investing and that for clients?

Investing is ultimately a decision business. Which is why I guess you’re reading this. You need strategic analysis to make decisions that could make you money. And as with many such decisions, you only have a limited opening of time to capitalise on them.

Most of our monitored positions are well into the green now. With some returning 50%, 100%, and more. The market is also trending higher, meaning we need to tread carefully. Both in potentially adding positions and closing any existing.

In a moment, we’ll review portfolio opportunities.

First, let’s consider some of the key tenets in making investment — and indeed wider life decisions:

1. Think in years, not days or weeks

Think about it: On the stock market, you buy a company because it has potential it is still working to realise. Profits it has still to increase. A dividend stream it has yet to pay — and grow.

Some say: ‘Well, trade in and out to make money!’

That tends to be a zero-sum game unless you have specific knowledge that the market does not. It can also be costly in time and brokerage fees.

But, over the longer period, the stock market frequently misprices securities everyday. If considered over a longer period.

Long-term thinking is not only key to investing success. Having a clear conviction on where a business may be in a few years’ time is also key to wider economic success.

Dr Edward Banfield was an American political scientist at Harvard University. He spent 50 years studying upward economic mobility.

His key discovery was that ‘time perspective’ was ‘the determining factor of whether or not a family moved from a lower socioeconomic class to a higher one.’ The most successful people, Banfield found, ‘are intensely future-oriented. They think about the future most of the time.’

It is the same with investing. The most successful investors model and predict the future of the companies they are investing in. This alone can make it easier to make money over the longer term.

2. Avoid decision fatigue

One of the key reasons for bad decisions is people simply get tired of making too many decisions. Good decision-making involves analysis and thought, which has an energy burden.

In a well-known study by Jonathan Levav of Stanford and Shai Danziger of Ben-Gurion University, it was found parole judges were more likely to free prisoners in the morning or after the lunch break, than in the afternoon after they’d made many decisions.

The key is to reduce the number of decisions you need to make. Within investing, that means keeping the size of your portfolio to an optimum number of positions. Enough to achieve most of the benefits of diversification.

Extensive studies — and my own experience — suggest that around 16 stocks may be enough for 90% reduction in diversifiable risk. Assuming those stocks are in different sectors and areas. Hence, we tend to monitor around 20 to 30 companies in this research at any one time, realising that some positions will not interest all readers.

I know many investors with portfolios of hundreds of stocks. It is almost impossible to effectively monitor or make decisions on upside and downside across that spectrum. Even a large team at a fund would struggle to do so. In such case, such portfolios act more like passive funds, delivering the overall market return.

3. Get an independent view

‘Get all the advice you can, and you will succeed; without it you will fail.’

—Proverbs 15:22

Research finds that better decisions are made by getting an outsider’s opinion. This helps reduce overconfidence in what you know, reduces the time needed to make a decision, and increases your chance of success.

In our research here, we consider other analysts’ opinions and the track record of these analysts. We consider news and opinion on companies. We watch when internal directors buy and sell shares. And we consider reports from existing and former staff and customers.

It is about getting to know a business. And this takes time and commitment.

Well, let’s consider opportunities and decisions on where our portfolio sits this week:

Portfolio update

Current as of 9th February 2021 at 10pm GMT. Please click to enlarge

Microchip Technology [NASDAQ:MCHP] announced its Q3 results for fiscal year 2021:

• Net sales of $1.35 billion, up 3.3% sequentially and up 5.0% from the year ago quarter. The midpoint of guidance provided on November 5, 2020 was net sales of $1.34 billion.

• On a GAAP basis: Record gross margin of 62.6%; operating income of $245.6 million; net income of $36.2 million; and EPS of $0.13 per diluted share.

• Cash flow from operations of $509.7 million.

• Paid down $289.7 million of debt in the December 2020 quarter. Cumulatively paid down $3.24 billion of debt over the last ten quarters.

• Record quarterly dividend declared of 39 cents per share, an increase of 5.8% from the prior quarter.

While at least one analyst has increased its target price on this stock to $165, we are taking a more cautious approach in a bubbling market.

BHP [LSE:BHP] has just become the most valuable company in the FTSE for the first time. It has rebounded strongly from the pandemic. We are seeing growth of around 30% since adding in October.

Yet the FTSE #1 position is not ideal for buyers. They may now face increased competition from institutional and passive funds adding more BHP.

We are watching for weakness, particularly if resource demand slows after pent-up demand has worked through.

Kina Securities [ASX:KSL] — our speculative PNG bank and sharebroking business is showing signs of its price heading upwards. Its successful bid for Westpac Pacific (PNG and Fiji) could see the business have a duopoly in banking in PNG.

This sort of moat is attractive for shareholder returns.

But it should be noted that the Westpac deal is still pending shareholders and regulatory approval.

While approval is expected in the second half of this financial year, the duopoly situation could put a spanner in the works.

There are only four main banks in PNG: Kina Bank, Bank of South Pacific (BSP), Westpac, and ANZ.

In 2019, Kina was given full regulatory approval to acquire ANZ PNG’s Retail, SME, and Commercial businesses. 

With acquisition of Westpac, this could mean Kina and BSP will control the market. BSP currently has a market share of around 63% of loans — meaning Kina will likely have nearly all the remaining share.

Investors are then faced with a speculation. The share price will likely rise or fall depending on whether final approval is given on the Westpac acquisition.

M.D.C. Holdings [NYSE:MDC] released its earnings for Q4 2020. Founder and longstanding executive chairman Larry Mizel announced:

• ‘MDC delivered strong results in the fourth quarter of 2020, highlighted by fully diluted earnings per share of $2.19, representing a 54% increase over the fourth quarter of 2019.

• ‘Home sales revenues increased 10% year-over-year, and home sales gross margin expanded 350 basis points to 22%.

• ‘We continue to experience robust demand across our homebuilding operations as the dollar value of our net new orders increased 92% for the quarter on a sales pace of 4.7 homes per community per month.

• ‘The strong order activity resulted in backlog value of $3.26 billion, our largest year-end backlog ever.

• ‘The size and quality of our backlog gives us great visibility into 2021 and allows us to enter the new year in a position of strength.’

The Company goes ex-dividend on February 9, 2021. A cash dividend payment of $0.40 per share is scheduled to be paid on February 24, 2021. Shareholders who purchased MDC prior to the ex-dividend date are eligible for the cash dividend payment. This represents a 21.21% increase over prior dividend payment.

Although the market is high and homebuilding is showing signs of a stimulus-fuelled bubble, this still demonstrates MDC’s ability to scale and grow operations. We are increasingly liking the management we see.

The Buy-Up-To price on MDC is increased.

Please note that Stobart Group has changed its name and ticker. It is now Esken Ltd [LSE:ESKN]. So Stobart under our portfolio is now Esken. This change was elected by shareholders earlier to move away from the Stobart trucking brand. Which is no longer relevant to the focus on aviation and energy infrastructure.

Speaking of aviation, both Esken and easyJet [LSE:EZJ] have just fallen around 4%. This comes as no surprise. Yesterday, Britain announced the tightening of travel restrictions next week. Passengers arriving from countries where coronavirus variants are spreading will need to pay for 10 days of quarantine in hotels. Those who don’t comply will face heavy fines or jail terms.

This may not be a long run problem as the vaccines are showing they may beat these variants. Early results from Pfizer [NYSE:PFE] shows their vaccine protects against new variants, but is slightly less effective.

We are increasing our Buy-Up-To on these businesses; though please note the higher risk profiles.

With most of our positions delivering strong income and growth amidst a bubbling market, the party is getting exciting. More than ever, good decision-making is required.

The above should give further insight on our long-run thinking and strategy. And an independent view.