PROSF - My Portfolio November Update: 5 Buys 1 Sell

Summary

• This month I had 6 transactions.
• New forward dividend is approximately $1,165.
• Next month I will look into Fresenius, CBOE Global, Armada Hoffler, and Brookfield Asset Management.

The end of the year is approaching and it hasn't been a pretty one for stock investors. High levels of inflation and rising interest rates stocks have brought stocks down after a few years in which the market only went up. As a long-term investor, I don’t lose much sleep because of this as every cloud has a silver lining (or as we like to say in the Netherlands: after rain comes sunshine). With that in mind, the future is already starting to look brighter as economic news in November was relatively positive with inflation showing signs of reversal and the tone of the Fed becoming less hawkish. With that being said, we are not at the end of the rate hikes, and overall economic news is still not great. Thus, investors should buckle up their seatbelts as 2023 might be as bumpy as 2022. As for my portfolio, I have made 6 purchases this month and closed one position. The main reason for selling that position is that the company's business model isn't sustainable with higher levels of interest, but I will elaborate on that under "Transactions".

For the people that have not read my previous articles: I am a 25-year-old investor from the Netherlands who is trying to start early so that I will have the option to retire early or at least earlier (the current retirement age is 67 in NL and is trending upwards). If you are interested in previous updates on my portfolio, you can find them here:

• My Portfolio August Update - 3 Buys

• My Portfolio September Update: 5 Buys, 2 Sells

• My Portfolio October Update: 6 Buys

November Update

In November investors could finally catch a break with inflation down MoM in both the US and Europe. This might have come as a surprise as the tone of the Fed was quite hawkish before the data came out. What this means for investors is that interest rate hikes could be less extreme than we have seen over the past few months. I do not expect that interest rates will remain stable as inflation in the US was still at 7.7% (down from 8.2%), while it was at 10% in the Eurozone (down from 10.6%). After the news came out stocks rapidly appreciated and I think that this could potentially be an overreaction. However, we are also at the end of the year and stocks tend to do better at the end of the year. This effect is especially strong during the last 5 trading days of the year and is sometimes referred to as the Santa Claus rally.

Personally, I would have loved for stocks to remain at the levels of the beginning of November as this gives me the opportunity to increase my positions in some high-quality names like Microsoft ( MSFT ) for a lower price and potentially start positions in other quality stocks. In November I did add to Microsoft but due to limited time availability and rising stock prices, I haven’t started any new position. I did sell one of my stocks, CareCloud ( MTBC ) as the quality of its operations was questionable, and higher interest rates will make it significantly harder for the company to continue its strategy of acquiring smaller competitors to increase the company’s product offering and efficiency. I replaced CareCloud with two stocks from the iGaming industry as I wanted to limit the idiosyncratic risk of these stocks. Besides the aforementioned transactions, I also added more capital to 2 other positions.

At the beginning of November, my association also started its annual competition. Last year we were victorious with a risk-adjusted return of 11.91%. This made us the 2nd group with 2 wins in the competition since 2009/2010. It will be hard to retain our title as no group has done this since at least 2009. As for our strategy, we will try to continue our winning strategy of last year, which consisted of macro investing, merger-arbitrage, and fundamental analysis. We currently have 2 positions, one real estate company and one industrial company. The investment decisions were based on the company’s fundamentals and undervaluation (real estate) and the current macro environment (industrial company). In the latest update of the association, we were approximately in the middle of the pack but we currently have a very low standard deviation. This can be vital at the end of the competition as we will need lower total returns to win the competition.

Transactions

Rules

Beginning of November:

Aroundtown ( AANNF ) - Bought 150 shares for €2.076 each:

European real estate continues to trade at significant discounts to NAV, and Aroundtown is no exception. The company trades at 1/4th of its asset value per share (as per the company's Q3, excluding suspended voting rights/shares), while its results have been stable. What I like about the company is that it also buys shares in other companies that trade significantly below their estimated NAV. For example, it has positions in Grand City Properties, a residential landlord with apartments in major cities in Germany and London, and in Globalworth (30% through a joint venture), the largest office landlord in the CEE region (Central Eastern Europe). The company is also very diversified in terms of its real estate, but it does mainly focus on three countries: Germany, the Netherlands, and the UK (mainly London). This gives it a lot of knowledge about local real estate markets and could work to its advantage. Debt maturities are also not a problem for the company as they are able to cover all maturities up until 2025. For these reasons I think that the company should be at least a double from here, which would put it at 1/2th of its NAV.

Microsoft - Bought 1.1 shares for $228.56 each:

Microsoft is a company that I started a position in last month. I had been looking to start a position in the company for quite some time but it never traded below my estimate of fair value. I really like the company as it is a tech powerhouse, with a diversified product range. The company offers something for everyone and most people deal with their products on a daily basis. The demand for some of the company's products such as Microsoft Office is almost completely inelastic. Many companies would not be able to continue to operate if Microsoft Office would cease to exist and there are not many competitors in this space. The company also continues to look for new markets to expand to, or add to some of its relatively smaller segments such as the potential acquisition of Activision (ATVI) for its gaming division. For the reasons mentioned above and the fact that the company was still trading below my estimate of fair value at the beginning of the month ($231.79), I decided to add to my position.

End of November:

CareCloud - Sold 153.3 shares for $3.184 each:

CareCloud is one of the few growth/small-cap stocks that I own in my portfolio. The company has a history of making acquisitions to grow its operations and has been very successful with this strategy. To finance this the company has used preferred shares, equity, and debt. With the increase in interest rates, I am afraid that the company will have a harder time financing the acquisitions and without it, the company is not growing fast enough. For these reasons I have decided that there were better stocks to invest my money.

Neogames ( NGMS ) - Bought 30 shares for $13.36 each and Bragg Gaming ( BRAG ) ( BRAG:CA ) - Bought 103 shares for $2.95 each:

To replace MTBC I started a position in Neogames (on which I also recently wrote an article ) and Bragg Gaming, two companies that are active in the iGaming software industry. iGaming is a sector that I have been bullish on for quite some time. The sector is undergoing some major changes and recently multiple countries, as well as states in the US, have legalized online gambling. I like both companies because they have relatively strong balance sheets and offer a diverse range of products. Both companies provide software solutions for casino games, sports betting, and lottery games and have been growing revenue very fast. Debt levels are also reasonable for both companies and with the iGaming market expected to grow at a double-digit growth rate I am confident that these investments will pay off in the coming years. The reason why I decided to buy two companies rather than one is that these companies are relatively small with market caps well below $1 billion. This gives these companies more risk and by buying two I try to diversify away some of the idiosyncratic risk.

L3Harris ( LHX ) - Bought 1.4 shares for $226.28 each:

L3Harris is a company that I have wanted to allocate more capital to for quite some time, but due to the war between Ukraine and Russia the stock had been trading above my estimated fair value. Even though I agree that you have to pay for quality, this does not mean that I pay more than what I think it is worth. What I like about L3Harris is that it has a strong focus on shareholder returns and its revenues are relatively stable as the company mainly serves governments. At the same time, the company invests a substantial amount in R&D. The company’s debt profile also looks relatively strong with a net debt to EBITDA ratio of 1.6. What also speaks in the company's favor is that multiple countries have pledged to substantially increase their investments in defense. The latest country that increased pledged to increase its spending is Japan , which wants to increase its spending from 1% to 2% of GDP. It isn’t only good news though as inflation has significantly increased the prices of raw materials, which increases the cost of the company's manufacturing. However, in my opinion, the positives outweigh the negatives in this case and I will gladly add more as long as the company trades below my fair value estimate of $240.76.

Dividends

In November my dividends were up YoY again. This was mainly driven by the addition of new capital and a special dividend that was paid by Inditex. The special dividend was €0.30 per share and the company has now paid a special dividend in 5 of the last 7 years. Without the special dividend, my dividends would still be up by approximately $25.

*dividend was paid in September this year

** dividend includes special dividend

This month Enbridge raised its dividends by 3% from C$0.86 to C$0.8875 per quarter. Given that my contributions are still relatively large compared to my portfolio size, dividend increases don’t add that much to my forward dividend payments. Nevertheless, as my portfolio grows this will start to play a bigger role.

At the end of November, I had a forward dividend of €1,113.07 ($1,166.88), this is down almost €30 but up $30 due to the appreciation of the Euro versus the USD. My goal this year is to reach a dividend of $1,200 at the end of the year (up from my goal of $1,000 at the beginning of the year), this is tough but not impossible.

Sector Overview

Compared to last month we see an increase in my allocation to the IT sector. The IT sector is now my second largest allocation and I plan to add more capital to this sector in the future. The main reason why my allocation was relatively small compared to the weight of the sector in the S&P500 is that the sector had, in my opinion, been priced for perfection for quite some time. With the significant rise in interest rates these stocks have come down significantly and now I am finally able to build out my position in this sector. Other than that not much has changed compared to last month.

Current Holdings

Going Forward

In December I plan to add approximately €1,000 (~$1,050) again. I might add a little bit more if that would mean that I am able to reach my goal of $1,200 in forward dividends. I will also try to finalize consolidating one of my smaller portfolios into this one. For December I am looking at the following stocks (besides some of the recurring names).

Fresenius

It has been quite some time since I added to my position in Fresenius. The company is a deep value play and is slightly riskier than some of my other positions. For that reason, I have limited my buys over the past few months. Since my last purchase (beginning of April) the company’s shares fell from €35 to less than €20. Currently, it trades at approximately €25, and with other stocks up since the news about slightly lower inflation, the company's price/quality ratio is starting to look attractive again. This company is by no means a get-rich-quick stock and will be part of my long-term holdings. What I like about the company is that it is a very diversified player in the healthcare sector. The company is the largest operator of private hospitals in Europe, produces biosimilars, and also owns a significant stake in Fresenius Medical Care ( FMS ), a company active in the dialysis sector. Given that the average age is still trending upward and this is most likely to continue for the foreseeable future, I expect the company to grow in the mid-single digits. Furthermore, if the company decides to break up its different business segments it could lead to price appreciation as it will make the company easier to value. One example of a company that has done this successfully is Siemens ( SIEGY ) which spun off multiple segments over the past few years. On that note, the position of activist investor Eliott Investments could be positive, but it remains to be seen if the company will ever take this step. For that reason, I did not take this into account in my investment thesis.

Armada Hoffler

With the Euro rallying against the USD American real estate companies are starting to look more attractive again. One of my favorites in terms of price/quality is Armada Hoffler. Armada Hoffler is an owner/developer that is active in the Mid-Atlantic region. The company has been active in this region for over 40 years and has a lot of knowledge about the local real estate market. The company has a diversified portfolio of real estate and has increased its allocation to multifamily over the past few years which, in my opinion, is a good development as many regions have a housing shortage. What I also like about the company is that it has strong ties with local governments. One of their largest partnerships is with the city of Virginia Beach, ranging back over 20 years. Furthermore, some of its employees have also served in roles such as a member of the board of visitors of the University of Virginia and Chairman of the Virginia Port Authority, which helps in growing their network and thus can be advantageous to the company as well. In terms of valuation, the company is trading significantly below my estimated fair value of $15.78, which is based on a discounted cash flow analysis, an estimation of the company’s NAV, and peer multiples.

CBOE Global

CBOE Global is the operator of the Chicago Board Options Exchange and the BATS exchange. The company has been a great performer since I first started a position in the company. One of the main reasons that the company has been a great performer is that options trading has significantly increased in popularity over the past few years, mainly driven by retail traders. In the current market environment which, in my opinion, can be best described as volatile, investors like to hedge their positions. One of the best ways to do this is to buy put options, which gives the owner the right to sell their assets at a certain price. At the same time, investors still try to make money during a downmarket and one way to do this is to write out-of-the-money options, which allows investors to collect a premium. This plays right into the strength of CBOE Global, which is one of the largest options exchanges in the world. Another thing that I like about CBOE is that they are very good at following trends, for example, they have added mini options which are more attractive to smaller traders and they also acquired ErisX which gives them access to the spot and derivatives market of digital assets such as cryptocurrencies. But it doesn’t stop there as they will also be able to collect more data, which they can sell for a fee to institutional investors. For these reasons, I would love to add to my position in CBOE Global.

Brookfield Asset Management

I have been wanting to increase my stake in Brookfield Asset Management for quite some time now but saw better opportunities in other stocks. I still like the company and think that it will be a great compounder over the coming years. Unfortunately, with the spin-off taking place at the beginning of December, new shares will no longer receive shares in the new company. This is a letdown but after the spin-off has taken place, the company will be easier to value and this might lead to a re-rating. The company has done this multiple times in the past and so far has unlocked a tremendous amount of value for its shareholders. Most of the spin-offs have significantly increased since their spin-off, the two exceptions here are Brookfield Reinsurance ( BAMR ), which has only been public since last year, and Brookfield Property Partners (which has been taken private again). Additionally, with the markets being very volatile, I expect BAM to profit and buy high-quality but low-priced assets. Therefore, I would still love to add to this position.

Consolidating portfolio

I mentioned last month that I wanted to consolidate one of my smaller portfolios to my main portfolio. Unfortunately, I wasn’t able to finish analyzing all the positions that I have in this portfolio (there are approximately 6 positions in this portfolio that I do not own in this portfolio and I want to keep at most 2 of those). In order not to have multiple smaller positions I have postponed the consolidation to December and thus will tell you more about it in the next update.

Conclusion

In November inflation finally went down MoM and this led to a small recovery in stock prices. Personally, I would have loved for stocks to remain low for a little longer as it would allow me to purchase more stocks for a lower price. Nevertheless, I still allocated more capital to 4 positions and replaced one of my small-cap companies.

During this month I received approximately $75 in dividends, which was up approximately $40 compared to last year. My forward dividend at the end of November was $1,167, which is up over $30 compared to last month.

I hope you enjoyed the update about my progress, and I would love to hear your thoughts on my portfolio and what you would like to see in future updates.

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