Table of Contents
In this post I summarize October 2020 on global markets shortly. The usual month-end rebalancing of the Global Leaders Portfolio (GLP) is also described here. Further diversification of the equity portfolio is being conducted with this rebalancing. New entrants into the GLP are representatives of the Clean Energy (CE) sector. CE is clearly one of the best investment stories for the next decade, given the undeniable consequences of the climate change. A comparison of the best candidates precedes the final choice. Please read on…
October, up until last week, was generally a relatively quiet month. Volatility was subdue. Second wave of growing Covid-19 cases around the world as well as political quarrels around the next stimulus package and the presidential campaign did not do much harm to the markets most of the month. The volatility did eventually burst in the last week though. The official reason for that given in most of the media was the geometric acceleration of the virus cases in most Western countries (including France, Germany, but also US) and new forms of lockdowns introduced (France closed all restaurants again, Germany considers a rolling lockdown, etc.).
I think the approaching date of US elections that coincided with it also constitutes a pretty big portion of the volatility we’re seeing these days. Presidential elections have always been a substantial risk factor. Many sectors have already been impacted by the polls quite substantially. The recently seen Democratic or blue swing (fading into the election day now though) caused for instance the Pharma/Biotech space to underperform substantially of late. This is because Joe Biden is considered planning a lot of new legislative proposals that could change the whole pharmaceutical sector’s profitability and functioning. Among others there’s the Affordable Generics and Biosimilars Act or the Biologic Exclusivity in Trading Agreements issue, to name just a few. Generally there’s more burden for the sector expected, should US swing blue. On the other hand sectos like Autos (especially Electric Vehicles (EV) producers) or some Financials are said to be the ones that could potentially benefit the most.
Meanwhile we’ve had a long list of companies reporting their 3Q20 numbers. As fundamentals don’t matter as much as epidemic and political issues these days, the reporting season wasn’t the main theme of last month really. In my personal view fundamentals defend themselves this quarter. Almost 60% through the season we’ve seen an average 15%/3% earnings/sales surprise in the S&P500 space. Very low expectations, that’s true of course. I wrote about it many times. Besides building the positive surprise culture is the Wall Street’s biggest secret ;). But still earnings really do look OK so far, given the circumstances we’re all facing this year. Biggest positives: Energy and Consumer Discretionary. Biggest negatives: Utilities, Real Estate.
As we’re heading into the Autumn/Winter season the markets seem to be losing hope as I write this post. Many indices are down 8-10% from recent tops. The pandemic hits hard again and it looks like we’re heading into the 3rd wave of the W-shaped recession this one is supposed to be according to many macro specialists (including Dr.Robert Dieli from nospinforecast.com – the author of Mr.Model or the Enhanced Aggregate Spread we use here at GlobalAlphaSearch as our main macro forecasting tool). You can also see my short summary of EAS and its role in Smart Investing Approach here in one of may basic posts. By the way – I shall hopefully have some good news for you in regards to Mr.Model :). It all takes time, but stay tuned please. Going forward it’s still the prospects of lockdowns, new stimulus and new US elections that seem the most crutial issues to the markets. The next few months will surely not be easy.
Let’s get on with the rebalancing details…
Clean Energy enters GLP
I have had several conversations with some of you lately that indicated the need of further diversification of the equities part of the GLP. I fully agree with that. Our targetted number of companies in GLP is 15-20. It is still a concentrated portfolio and so should it be. I am naturally against overdiversification. A number of 15-20 is big enough to work the magic, but on the other hand it is still comprehendable without the use of an army of analysts ;).
This month we’re adding a new sector to our portfolio. Naturally it needs to fulfill the S1 part of SIAScore (no other sectors or their members qualify here, as per definition they have no prospects of producing above average value for the shareholders in the long run). Renewable energy market is forecasted to grow at an average pace of 5-6% in the coming years accordingly to most analysis. You can find some of them here and here and here . The extreme weather events are more and more often, the average temperature rises globally and the shift from carbon-based economy into Clean Energy is inevitable.
While looking for the companies which I’d want to add to GLP from the CE space I was, as usual, looking via the SIAScore “binoculars”:
S1: Growing Sector: wrote a few words about it already above. This is one is pretty clear.
S2: Incumbent or prospective global leader: As a filter for Global Leaders within the CE sector I decided to use an ETF called ICLN US. From CNBC: “The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global Clean Energy Index. The Index is designed to track performance of approximately 30 of the most liquid and tradable global companies which represent the listed clean energy universe“. ICLN is additionally the biggest thematic Clean Energy ETF listed in the US with assets of close to $2bn (as per end Oct 2020). How fast it grows can be shown by the fact that not earlier than August this year the AUM of ICLN were half that. For more info of the passive investing hottest topics I suggest you read my post on that matter here. So, concluding, the members of ICLN have all the characteristics of being “incumbent or prospective global leader” (S2) within their sector. That’s why I decided to dig into these stocks.
Now getting onto the purely qualitative part of SIAScore. Let me just remind you S3-S5:
S3: growing or stable wide margins (40%+ gross; 3yr avg)
S4: Net Debt/EBITDA <1.5 (last 3 ended FYs)
S5: above-average cash flows (FCF/MktCap (last 3 ended FYs) > S&P500 Dividend Yield or US 10yr Treasry Yield (higher of the values))
You will find a detailed table below showing all the S3-S5 data for the 5 stocks I chose. There’s 2 US stocks, 2 Danish stocks (not a surprise, Denmark is amongst the global leading countries in CE) and one from Spain. Here are the 6 candidates described in short (some of you possible know most of them):
SGRE SM (Siemens Gamesa Renewable Energy S.A.): designs and manufactures renewable energy equipment. The Company offers wind turbines, turbine gearboxes, offgrid, and other related equipment, as well as provides maintenance and reconditioning services. Siemens Gamesa Renewable Energy serves industrial facility management, automotive industry, and new technology development worldwide (source Bloomberg).
ORSTED DC (Orsted A/S): provides utility services. The Company engages in the development, construction, and operation of offshore wind farms, as well as generates power and heat from power stations. Orsted serves customers worldwide (source: Bloomberg).
VWS DC (Vestas Wind systems A/S): develops, manufactures, and markets wind turbines that generate electricity. The Company also installs the turbines and offers follow-up and maintenance services of the installations. Vestas produces the wind turbines and its components through subsidiaries and associated companies in many countries and operates a worldwide sales and service network (source: Bloomberg).
ENPH US (Enphase Energy Inc.): manufactures solar power solutions. The Company offers solutions to increase productivity and reliability of solar modules (source: Bloomberg).
SEDG US (SolarEdge Technologies Inc.): provides solar power optimization and photovoltaic monitoring solutions. The Company offers optimizers, inverters, monitoring equipment, tools, and accessories for power harvesting, conversion, and efficiency. SolarEdge Technologies serves customers worldwide.
Let’s see the table now (remember we’re averaging last 3 full finished financial years):
| Stock | 2017 | 2018 | 2019 | AVG | SIAScore | Notes | |
| SGRE (Spain) | S1 | 1 | YES: renewable energy equipment | ||||
| S2 | 1 | YES: member of ICLN US | |||||
| S3 | 0,00%* | 11,00% | 9,00% | 6,67% | 0 | *in 2017 only data from 2 quarters available | |
| S4 | -0,86* | -0,4 | -0,63 | -0,63 | 2 | *in 2017 only data from 3 quarters available | |
| S5 | -7,30% | 3,60% | 2,70% | -0,33% | 0 | negative FCF in 2017 | |
| Total | 4 | ||||||
| ORSTED (Denmark) | S1 | 1 | YES: offshore windfarms | ||||
| S2 | 1 | YES: member of ICLN US | |||||
| S3 | 32,00% | 30,00% | 43,00% | 35,00% | 0 | growing Gross Margin potential for 2pts later | |
| S4 | 0 | -0,1 | 1,24 | 0,38 | 2 | increase of debt in 2019 but avg still far from unsafe | |
| S5 | -6,00% | -2,00% | -3,00% | -3,67% | 0 | negative FCF | |
| Total | 4 | ||||||
| VWS (Denmark) | S1 | 1 | YES: wind turbines sector | ||||
| S2 | 1 | YES: member of ICLN US | |||||
| S3 | 20,00% | 16,00% | 15,00% | 17,00% | 0 | margin needs to be watched | |
| S4 | -2 | -2,1 | -1,6 | -1,90 | 2 | constantly cash positive | |
| S5 | 12,00% | 5,00% | 2,00% | 6,33% | 2 | easily over both US 10Y yield and S&P500 DY | |
| Total | 6 | ||||||
| ENPH (USA) | S1 | 1 | YES: solar power solutions | ||||
| S2 | 1 | YES: member of ICLN US | |||||
| S3 | 20,00% | 30,00% | 15,00% | 21,66% | 0 | needs to be watched | |
| S4 | 1,5 | 0,24 | -1,1 | 0,21 | 2 | no debt problems | |
| S5 | -16,00% | 2,40% | 3,90% | -3,23% | 0 | avg lowered by 2017 mainly ex that fulfills S5 | |
| Total | 4 | ||||||
| SEDG (USA) | S1 | 1 | YES: solar/photovoltaic solutions | ||||
| S2 | 1 | YES: member of ICLN US | |||||
| S3 | 35,00% | 34,00% | 34,00% | 34,33% | 0 | stable Gross Margin not far away from 40% | |
| S4 | -3,5 | -2,4 | -1,9 | -2,60 | 2 | easily cash postiive | |
| S5 | 7,00% | 9,30% | 4,00% | 6,77% | 2 | easily over both US 10Y yield and S&P500 DY | |
| Total | 6 |
As you can easily notice the chosen names earn between 4pts and 6pts in our scoring system. Some of them have yet to deliver on their fundamentals (S3-S5). On the other hand there can be clear improvements seen over the last 1-2 years especially. That’s when the CE theme basically started speeding up for investors. SGRE and ENPH clearly managed to go Free Cash Flow (FCF) positive over last two years. This underlines big positive changes in this sector and gives hopes for good value creation for equity holders going forward.
Eventually there’s two candidates, which collected the biggest amount of points. The Danish VWS and the American SEDG. Both easily cash positve. Both yielding good stable FCF. If I only had to pick one, the final choice would be SEDG mainly because of S3. It just works on wider margins (34%) than VWS (17%). I decided to include both of the stocks though to give GLP a little bit more sectoral diversification (2 names from CE space instead of 1). VWS is bought via an ADR (ticker: VWDRY US; traded in USD), which includes currency changes in USDDKK.
The rebalance
The GLP lost 2.2% since the last rebalancing (done exceptionally on the 5th October). Meanwhile the US stock indices (full month data) lost between 2-3% as well on monthly basis. Let’s see how the constituents performed last month:
-> TLT was down 1.2% since the last rebalancing. There has not been much on throughout the first 3 weeks of October, hence TLT traded kind of sideway. Only last week got volatile, but surprisingly we saw no flight-to-quality buying in the long end of the US curve and TLT dropped that week. This seems to be telling us that the recent burst of volatility is rather treated as a temporary phenomenon by the market (increase of cases + US elections + new rescue bill expectations). TLT’s impact on GLP -40bps.
-> GLD keeps consolidating and also traded narrow range all October long. On a net-net basis GLD is down 1.8% since 5th Oct (impact on GLP -60bps).1,2
-> The equities portfolio fell 6.4% since 5th Oct (impact on GLP -120bps). In that time range S&P500 is -4.1% and Nasdaq -3.7%. Major drag on our equity portfolio last month were BIIB (-11% in Oct) and INTC (-14% in Oct). BIIB underperformed mainy due to a general pressure on Pharma/Biotech due to the “blue swing” into the US election date (I wrote about it at the start of this post). INTC on the other hand disappointed with its data center group sales while reporting 3q20 numebrs (which themselves were inline).
Here are the trades done this month: Cash Buffer partially financed the purchase of VWDRY and SEDG. the rest was financed with a sale of: 10% of GRMN/FB/NOW and 20% of UBSFY. There’s been no changes in the holding of both TLT and GLD.
Portfolio holdings are traded at the closing price on the rebalancing day presented by www.morningstar.com (which may differ from official closing prices given by appropriate stock exchanges).
Current structure of the GLP can be found on Portfolios page.
Total Personal Return since inception (TPR) of GLP as of close 30th October 2020: +13.1%.
Next update in a month.
Yours,
PC
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Regulation of the Polish Minister of Finance of 19 October 2005 on information constituting recommendations regarding financial instruments, their issuers or exhibitors (Journal of Laws of 2005, No. 206, item 1715) or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be claimed eligibile for any losses of a third party resulting from trading activities based upon this article. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data.Full Disclaimers&Liability Limitations page.
