RICK - The Power Of Great Capital Allocators: A Portfolio Update

2023-04-02 10:00:40 ET

Summary

• In October I showcased my full portfolio.
• For my 100th Seeking Alpha article I decided to post an update and show how my portfolio developed.
• I sold out of 3 companies and added 6 new companies.

I've contributed to Seeking Alpha for over a year and have written many articles. This is my 100th article and I thought it would be a good reason to write a portfolio and strategy update. My first portfolio article is over half a year old and quite a bit happened in my portfolio.

About me and objective

I'll quickly summarize this because I already talked about this in my previous article:

I am a 24-year-old Business Informatics graduate from southern Germany who works as a software developer and author on Seeking Alpha. I aim to achieve financial freedom through long-term investing in companies with good management, dominating their industries and having significant growth potential. I hold companies for the long term, check on them frequently, and sell if the thesis is no longer intact. I aim to keep stock turnover at less than 20% of the positions per year and concentrate my portfolio around 15-20 positions.

In October, I aimed for a 60% allocation to Great Capital Allocators, 25% to Tech Leaders, 10% to high-growth and 5% to trades. I now aim to have even more in the Great Capital Allocator basket(which I define as companies with high-quality management and a track record of excellent capital allocation) and less high-growth stocks (which are often unprofitable and highly valued) and tech leaders. I learned that I feel much easier to own stocks that aren't on the cutting edge of technology. For example, I much rather hold Texas Instruments (TXN) in its boring Analog semi-market than exciting Nvidia (NVDA).

Capital Allocation as a driver for returns

My main focus hasn't changed: I am convinced that companies with moats and great capital allocation will outperform over the long term, especially if insiders own a significant stake. This is why I track the insider ownership of my holdings and I am happy that most of my companies have substantial amounts, except Texas Instruments and ASML (ASML). The weighted average for my portfolio is 11.4%. High Returns on Invested Capital ("ROIC") is an excellent proxy for a company's capital allocation and moat. The typical ROIC calculation uses NOPAT (net operating profit after taxes) as a numerator, whereas I use Free Cash Flow instead. I try to focus mainly on the Free Cash Flows or Owners' Earnings (Free Cash Flow + Growth CapEx), so I might as well use it in my calculations. I calculate ROIC twice, with and without Goodwill. My weighted average ROIC is 19.8% and 30.8%, respectively, significantly over the cost of Capital, which I estimate is around 10%. This leaves a 9.8% or 19.8% value creation spread for my portfolio. I expect this ratio to increase over time as Amazon (AMZN) exits its investment cycle, which currently negatively impacts this metric by 3%.

Changes since the last portfolio update

Since my last update, quite a few things have changed, so I'll review all changes. I bought the following stocks:

1. Adyen (ADYEY) is a founder-led payment company from the Netherlands with a relentless focus on efficient and profitable growth in a niche still dominated by traditional banks that lose share to better options like Adyen.
2. Nemetschek (NEMTF) is a German family business operating in the architecture, engineering and construction industry and offering various software solutions.
3. Copart (CPRT) operates the largest wrecked car auction platform in an oligopolistic market.
4. Atkore (ATKR) manufactures small parts used in the electrification of infrastructure. The company uses a Danaher (DHR) Business System clone to operate efficiently and roll up the competition.
5. Sonova Holding (SONVF) is the market leader in the hearing aid industry.
6. Alimentation Couche-Tard (ATD:CA) is the leading operator of convenience stores in the US and has over 15,000 stores globally.

I also sold out of companies that either disappointed me operationally or did not fit in my overall strategy anymore:

1. Fiverr (FVRR) is an online freelancing marketplace that has massively benefited from Covid but has had considerably more pulled-forward demand than I expected. Growth stalled, and the company still trades at 40 times adjusted EBITDA, even after falling >80%. I simply did not do the numbers when I purchased the stock and was too optimistic.
2. Spotify (SPOT) is the leading audio platform but suffers from a complex industry with low gross margins crippled by the music labels. I decided that Spotify should be on my "too-hard pile".
3. Salesforce (CRM) is a company that has lived by the grow at all costs mantra for the longest time. This does not fit my focus on strong capital allocation in companies, especially after looking at the company's past acquisitions and excessive spending behavior.

Over the last 12 months, my portfolio returned a positive total return of 2% versus the indexes with a negative return of around 6%. I am delighted with this performance and hope to continue generating Alpha with this strategy. During 2020 and 2021, when I just started, I went through many strategies and made many mistakes, so I don't believe it makes sense to look at that past performance. The current portfolio has little resemblance to those holdings.

I hope you got some inspiration from my strategy and portfolio. How do you construct your portfolio and do you have any suggestions for me? I'm still young and eager to learn, so let me know in the comments below.

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