Commonwealth Tries to Beat the Market

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28

Sold all my remaining META at $334.82. Current VOO $411.84.

75% of current sale was bought 2/7/22 $225.525.
Result +48.46%

VOO 2/7/22 $411.16 → $411.84 + $10.503 in dividends = $422.343
Result +2.72%

25% of current sale was bought 11/7/22 $94.99
Result +252.48%

VOO 11/7/22 $349.14 → $411.84 + $6.228 in dividends = $418.068
Result +19.74%

(Had previously sold some from 11/7/22 on 4/26/23 at $228.14.)

META has moved outside value range, and I think there’s a lot of risk in 2024 which weighs pretty fairly (at best) against the upside at current prices. I’m not looking for fair (at best) pricing.

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29

Sold all my MHO.

In at $46.24 on 8/5/22. (VOO $379.98)
Out at $103.15 on 11/14/23. (VOO $411.76 + $7.70 dividends = $419.46)

MHO +123.07%
VOO +10.39%

Like the company, it’s just a bit too expensive relative to my value metrics now.

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30

Down to $1.53, bought it back to my normal allocation. Very bad quarter, one of their main customers lost a lot of business. It should recover cyclically with agriculture, and $1.53 is an attractive price relative to the upside here.

This is a reasonably good business at a cheap price, and there’s a freeroll upside on climate change for a product that significantly reduces water reservoir loss to evaporation. They’re currently making nothing on it, seems like a reasonable chance that takes off at some point and blows them up into a much bigger business.

31

Bought DHI at $127.73. Similar play. I like the company a little less long-term, but it’s a little better price on my value screener, and I think it’ll be steadier than MHO if there’s a housing crash in a high rate environment because they have less debt, a segment selling to rental companies, and more room to acquire distressed companies.

They’re obviously highly correlated but the thought here is to rotate between a handful of housing stocks and other correlated stocks based on their value metrics.

32

Bought SILC today for $15.40. They make network adapters, smart cards, and edge networking products. Israel-based, not directly impacted by the war. Locations near Haifa and Tel-Aviv. Also locations in the US and Europe.

Tangible book $22.73, NCAV $13.95. Something like $19.25 in cash and inventory, and they reaffirmed that their inventory is money-good inventory.

TTM P/E 6.04, but they’re going to lose a little or break even in 2024. Customers built up inventory the last year or two to mitigate supply chain risks and now they’re working through it and purchase orders are down. They expect a return to baseline and double digit growth in 2025.

No debt, good current ratio for the situation (almost 9), $67M in cash against a market cap around $103M.

18 straight years of profitability, 22 consecutive quarters of accurate guidance, so to basically get the business at negative value after cash and inventory is insane to me.

Baseline profitability is a very fluid definition I guess, but they seem to mean in the neighborhood of $1.50 to $2.00 eps. They’ve previously hit valuations as high as 28x earnings (ignoring the inflated ratios in 2020), so I think 15-25x is very reasonable, so $30-40 seems like a reasonable target using the middle of that range for the end of 2025, which means annualized returns in the ballpark of 50%. And they intend to continue buybacks through 2024.

If they manage to hit closer to $2.00 eps in 2025, restore their margins, and guide for double digit growth, it could get even better.

Also could easily see them being acquired in the next 12 months if they keep trading this low.

33

I’m still in FSI, don’t plan on selling it near current levels. I’ll post if/when I do sell it, though.

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34

Bought GGB yesterday at $4.28. Brazilian steelmaker but half their profits come from US operations. Trading below tangible book, for like 5x ttm earnings and < 10x future earnings. Low debt.

China is dumping steel in Brazil and globally so steelmakers are in a down cycle, that’s why it’s cheap. But tons of infrastructure spending in the US, and on a relative basis like 5 times more in Brazil. They should get through it just fine, quite possibly stay profitable, and the infrastructure spending should fuel higher steel demand for the next 3-5 years. Brazil may also increase tariffs on steel which I’m not banking on but if it happens, we could get a fast win here.

35

Just doubled my position in SILC since it’s back down to $15.70. I had been regretting not taking a bigger position initially.

36

Sold BSET today at $15.30 per share and bought LZB at $39.35 a share. Didn’t want to own those two and WSM all at once. LZB is a good furniture company at a cheap price, which beats a mediocre one at a cheap price.

Including dividends, the total return on BSET was 1.71% against 12.32% for VOO with dividends. Still think BSET would beat it in the long term had I held, but I think LZB is going to beat it by more.

LZB has a reasonably good balance sheet, no long-term debt, good earnings growth over the last decade, and a good plan to continue to grow earnings - which analysts are predicting will stay flat. I think their plan is simple, straight forward, and reasonable. Return supply chain efficiencies to pre-covid levels to improve wholesale margins from the 8% range to 10%. Increase the number of company-owned stores and buy as many existing stores that aren’t company owned back as possible, as their margins run at 16.5%.

They seem to be buying back several stores per year, going from ~170 to ~180 company owned stores this year (350ish total), and they want to open 50 stores over the next several years. Given their cash on hand, this seems eminently doable and if they pull it off and the economy stays flat, their earnings go up. If the economy improves, even better.

While we’re on furniture/furnishing stocks, WSM up 59.66% since I bought it 9/5/23. If I see something great, I could consider selling this one, but I think it’s an extremely well-run business and I’m not exactly looking for reasons to exit. Earnings next month.

Bought OXY today at $57.85. Pretty simple one here. Warren Buffett/Berkshire is buying it hand over fist in the $56 to $58 range, and has also added it up to $61 maybe $62. They own ~28% of the company and are allowed to buy up to 50% of it. So my margin of safety is Warren Buffett’s buying power. Seems very unlikely this can crash below $56 when he’s got another $10 billy ready to fire into it. Also I get to buy a stock at the same time he does at the same price, hard for that not to be a +EV trade right?

On top of the obvious (it’s Occidental Petroleum, after all), they have a chemical subsidiary and they’re actually doing some cool stuff on climate change. They’re opening a direct air capture plant in 2025, they’re already selling carbon credits, and they’re going to be opening more of them after that. So I think what Buffett is seeing here is at least 7-10 more years of gas consumption before alternatives really start to take over, the possibility to continue after that due to the DAC plants, and the possibility to sell carbon credits in the future… and of course the chemical business, probably worth around 1/4 of the share price right now.

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37

Sold WIRE at $227.83. Including dividends, +37.9% since 9/5/23. VOO +11.99% over that span incl divs.

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38

Bought more MBUU, they’re down around 10% because the CEO is departing which seems like an overreaction for a company with such a strong balance sheet, given that they reaffirmed their recent guidance. Topped it off to standard allocation.

39

Sold about 40% of the additional shares at $1.90. Still holding the original position and 60% of the additional shares. Wanted a bit of extra dry powder in case NVIDIA misses and stocks go on sale the next couple days.

Return on this chunk was +24.18%, VOO +9.78% in that span. Still down on the original investment, of course. Still think it’s a good play long-term, we’ll see what happens.

40

Alright, just finished opening my positions on the Tokyo Exchange. These are all aiming to be sized around 40-50% of a normal position. Orders on the TSE are in increments of 100 (at least through my broker), so I couldn’t size them all perfectly. I’m sizing them down and taking more based on the abundance of stocks trading cheap and the increased risk of missing something fairly obvious to deter me from one of these due to the language barrier.

The general idea for going heavy into Japan (about 2 to 2.5x their market weight if I were evenly invested in all the markets I consider investible based on market cap) is that they’re broadly undervalued for reasons that I generally understand (lots of companies with a history of poor capital use/shareholder return), and there are reforms being put in place by the government/exchanges to try to force better corporate governance. Basically anyone trading under book value is going to be pressured to increase their share price through the available mechanisms. All these companies have more than enough cash/earnings to justify higher dividends and buybacks.

The research process was pretty daunting compared to US stocks, I had to find a new screener that could run the screens I needed on foreign stocks - which took a while, then verify that its data was accurate by going into the quarterly filings on the JPX site and translating. Given the reduced position sizes and the difficulty of finding coverage, I spent a little less qualitative time on each stock. I translated their most recent quarterly filing, their most recent annual report, and their websites for additional info. Some made transcripts of earnings calls available, and I translated those. I searched for news online, but didn’t find much.

Last but not least (well, early on in the process but lower down the totem pole of importance in the process), I did a lot of research on Japanese corporate culture, the differences in how their economy works compared to ours, etc. I used AI pretty heavily on this part, and also had a phone call with a friend who’s done some business there and spent some time there. I learned some interesting things, although I’m sure there are many differences that I didn’t learn about too. I also researched the earthquake and tsunami risks, which are pretty significant relative to other places - but there’s some geographic diversification within these although obviously Tokyo is heavily represented - I think it’s four in Tokyo, two in Nagoya, and no other metro area has more than one if I recall correctly.

Anyway, here are the stocks and entry points and some brief metrics/notes on each.

3/7 (PM EST)
8935.T FJ Next Holdings ¥1,309
3321.T Mitachi Co. ¥1,208.66
9856.T Ku Holdings Co. ¥1,170
3892.T Okayama Paper Industries Co. ¥1,395
6894.T Pulstec Industrial Co. ¥1,605

3/10 (PM EST)
5971.T Kyowakogyosyo Co. ¥5,680
6382.T Trinity Industrial Corp. ¥1,109
5078.T CEL Corp. ¥3,530
1997.T Akatsuki Eazima Co. ¥1,589.50

FJ Next Holdings
P/Tan Book: 0.66
P/NCAV: 1.09
P/E: 6.78
Real estate sales and rentals, predominantly in Tokyo. Earnings growing.

Mitachi Co
P/TB: 0.69
P/NCAV: 1.83
P/E: 7.77
Semiconductor trade company. Earnings growing.

Ku Holdings Co
P/TB: 0.61
P/NCAV: 0.89
P/E: 6.06
Chain of car dealerships. Earnings have trended up over time, but they’re cyclical and may be running out of room to grow.

Okayama Paper Industries Co
P/TB: 0.56
P/NCAV: 0.93
P/E: 6.48
What it sounds like - paper, cardboard, etc. Mostly boxes and retail packaging I think. Earnings have trended up over time, but cyclical.

Pulstec Industrial Co
P/TB: 0.65
P/NCAV: 0.96
P/E: 8.81
X-ray machines, medical and industrial uses. Earnings flat but they’ve consistently turned a profit.

Kyowakogyosyo Co
P/TB: 0.52
P/NCAV: 0.73
P/E: 3.80
They make bolts for construction machinery, earnings are growing, they are a home run on the value screener. The only area they’re lacking is in shareholder returns, and the reforms should apply pressure.

Trinity Industrial Corp
P/TB: 0.60
P/NCAV: 0.82
P/E: 8.36
They manufacture and sell auto equipment/components. Toyota is a large customer. Earnings have trended up over time, but a bit cyclical.

CEL Corp
P/TB: 0.64
P/NCAV: 0.71
P/E: 12.95
They build/manufacture and sell housing and maintain rental housing around Tokyo. Earnings are growing.

Akatsuki Eazima Co
P/TB: 0.49
P/NCAV: 0.65
P/E: 7.78
They design/construct/maintain HVAC/plumbing. They’ve remained profitable consistently, though earnings don’t appear to be growing.

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41

I just went to check what my cost basis was on UMC since I transferred brokerages and it hadn’t updated yet, so I checked this thread and realized I missed posting that trade in here. Bought UMC 2/22/24 for $7.75.

I had previously bought it 11/15/22 for $7.648 and sold it on 5/10/23 for $8.06, based on concerns over growing tensions with China (It’s a Taiwanese semiconductor manufacturer). I re-entered because I believe the Chinese economy struggling pushes back the timeline for any potential invasion, or at least makes it way less likely in the short-term.

Should probably split out my trades blog into a separate thread soon.

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42

Up nearly 20% today on a great earnings report. I trimmed it to a standard size position by selling just under half of my shares at $283.62, +100.15% (incl div). S&P (incl div) over that time frame +15.69%.

It’s not really a value play at this point, with that kind of remarkable gain. However, it’s still a great business with an exceptional ROIC. This is now a modern day Buffett stock rather than an old school Graham/Buffett type stock: a wonderful business at a reasonable price, rather than a reasonable business at a wonderful price. They kept their earnings flat in FY2023 despite really challenging conditions, and could benefit quite a bit from lower interest rates. However, it’s hard to justify holding ~2x a standard allocation when managing a small amount of money that allows me to find reasonable businesses at wonderful prices.

Some of the newly available cash will go into an additional Japanese stock, which I couldn’t quite purchase a 100-share block of. I’ll have to figure out what to do with the rest.

43

Bought 3765.T, GungHo Online Entertainment, for ¥2,123.20. 0.85x tan book, 0.95x NCAV, 6.5 P/E. Basically no debt, shareholder yield just under 5.5%. They own about 60% of Gravity (GRVY). Earnings have been pretty stable, but not growing. Some risk here, as they are reliant on two games for their revenue. But getting it below tan book when tan book is almost all cash and receivables feels like a pretty good bet at a low multiple.

44

Yeah these are my retirement fund, they’re in a Roth IRA and SEP IRA (and later probably an HSA). So the only taxes I’m paying are foreign taxes.

My average yearly income is a number that moves, so I guess that’s tough to answer. It’s right around a solid but not spectacular year’s gross earnings, which happens to be in the ballpark of half my net worth - the other half being bankroll/emergency fund.

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45

I have feelings about whether or not your choice of investments is wise in this case, but I think you’re set on your path so I hope it goes well. What I would advise is making sure you’re maxing out your Roth contribution every year if possible. You’re at a decent point, but definitely want to keep fully funding it to make sure you reach your eventual retirement goals.

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46

The Japanese investments have been a lot of fun to track, and it’s been a cool learning process. It’s also pretty interesting to have like 80% of my portfolio’s trading day run 9:30am to 4pm M-F and the other 20% is 8p to 2a Su-Thur.

So far, since I opened those positions:
Nikkei 225 +2.77%
S&P +1.01%
Commonwealth Japan Fund +7.11%

However, the yen is getting smoked against the dollar, so adjusting the Nikkei and my Japanese positions for that it’s:

Nikkei -0.28%
S&P +1.01%
Commonwealth Japan Fund +3.92%

Nine of the 10 positions are up, of course the one that’s in the red is my favorite of the bunch, -1.31%. GungHo is +15.6%, and Okayama Paper is up 23.4%.

The good problem to have is that I’m going to have to start thinking about my exit strategies on some of these sooner rather than later, as they’re going to have a lot more risk after they cross past book value. Given the corporate governance reforms, they’re going to be under way less pressure to do anything once they cross that threshold, and I don’t think I have much ability to make a read on how committed they are to actual reforms if they’re not under any pressure.

Part of my consideration will be other available ideas, especially in Japan.

47

Thanks… Yeah for the first time I’m pretty close to where I’d be had I maxed out the Roth every year up until now and stuck it in the S&P. Given my career path (broadcasting making under $15K a year → poker building a bankroll), I had close to no retirement savings five years ago.

I’ll definitely be maxing the Roth and HSA this year if we can afford it - and in the coming years making at least that sized contribution whether it’s to a Roth, SEP IRA, HSA, etc. Then probably opportunistic SEP IRA → Roth IRA rollovers. At some point if I keep beating the market handily, I’ll have to decide if it makes more sense to keep more money out of the retirement accounts.

My wife is also likely to have a 401k match available to her once she starts working, so I expect to max that out and assume that our options with that will be pretty limited - thus building up a side of our retirement portfolio that’s in the S&P. That said, depending on how good the match is, how high the 401k fees are, what the options with that are, and my results, we’ll see. I suspect the 401k will be lower EV than me running the money based on my results so far, but I’m inclined to take the up front win on the match and the “safety” of the S&P for what should become sizable chunk of our retirement portfolio.

Yeah, I’ve posted a lot about how frustrating our financial situation is, but that’s really about housing costs and not owning a house. When I manage to block that out momentarily, my investing results thus far and the fact that we should be able to put a reasonable amount into retirement accounts going forward is good. If we manage to buy a house in the next few years, then my hope is to “retire” early. I always see myself playing some poker, but I also don’t want to be in a position to be relying on my cognitive abilities being as good at 55, 60, 65, etc as they are now.