This the editorial of our monthly Quant Value Investment Newsletter published on 2022.08.02. Sign up here to get it in your inbox the first Tuesday of every month.
More information about the newsletter can be found here: This is how we select ideas for the Quant Value investment newsletter
This month you can read all about the market Crash Portfolio we are starting this month.
But first the portfolio updates.
Portfolio Changes
Europe – Hold One
No new recommendations this month as the index is below its 200-day simple moving average.
Hold Carlo Gavazzi Holding (+15.0%) as it still meets the portfolios’ selection criteria.
North America – Nothing to do
No new recommendations this month as the index is below its 200-day simple moving average.
Asia – Buy One – Sell One – Hold Three
One new recommendation this month as the Japanese index is above its 200-day simple moving average.
Buy One
It is a food company that mainly manufactures and sells sauces. The company is very attractively priced trading at a Price to Earnings ratio of 11.3, EV to EBIT of only 4.0 times and EV Free Cash Flow of 7.7 times.
Hold - Three
Continue to hold:
- Bando Chemical Industries (+10.3.%)
- Iwasaki Electric Co (+37.0%)
- The Hour Glass Limited (+48.1%)
as they all still meet this portfolios’ selection criteria.
Sell - One
Sell Fuji Furukawa Engineering & Construction (+33.1%) as it no longer meets the newsletter’ selection criteria.
Crash Portfolio – Buy Two
Two recommendations for the Crash portfolio this month.
The first company is a Norwegian shipping company. Due to the current record high charter rates, it is so cheap it is nearly unbelievable. The company is currently trading at Price to Earnings ratio of 3.5, Price to Free Cash Flow of 4.6, EV to EBIT of 5.1. Its recurring dividend yield is just over 18%!
The second is a Japanese company that manufactures and sells fluid control equipment for the chip industry. It is also nicely undervalued trading at a Price to Earnings ratio of 7.7, 6 times Price to Free Cash Flow and 3.7 times EV to EBIT. It also pays a nice dividend of 3.9%.
Starting the Crash Portfolio
It's a hard time to invest.
Markets are falling, start-up IPOs and have fallen up to 90%, crypto investors have been wiped out, and profit warnings are popping up left and right.
You may also have the feeling that investing at the moment is like walking through a minefield. You do not know if something you have bought falls 30 to 40% next week.
We are starting a Crash Portfolio
And in spite of this we are (very selectively) starting a Crash Portfolio this month.
Why start buying now?
Why start investing now you may be thinking.
The main reason is cheap high-quality companies.
I admit that we haven't seen a complete selloff with markets falling 10% or more in a day – who knows if we will even get that?
But that doesn't mean that a lot of investors are not losing their nerves and selling stocks because they just want to get out.
This is especially true for small companies where there are no buyers lining up.
You know these companies can fall further. But if they are already down so much, and are already dirt cheap how much further can they fall? And if they do we have the 20% trailing stop loss to keep your losses low.
No one rings the bell at the bottom of the market. So, at some point we must have the courage to start buying.
How to start buying
The fear of markets falling further is also on my mind, so this is how am I approaching my investments.
Start with small positions
I'm starting with small positions maybe half or even a quarter of my normal position size.
I do this for two reasons.
First, it makes it easier for me to buy as there is not that much money on the line.
Secondly, should the stocks fall further I can buy more and bring it up to a full position at a lower average price.
Buy fewer companies
I'm also buying fewer companies.
Even though we are recommending two companies this month I may only by one of them (I already own MPC Container). And, depending on how the markets develop, I may buy the other one next week or next month.
