#1 The Journey of Compounding - Introducing my portfolio

While 2022 was the year I started investing, 2023 is when I started creating and sharing investing related content. In this natural progression I have decided that in this 2024 I will share my portfolio to subscribers.

The idea behind this series of posts is forcing myself to periodically review the portfolio composition and consciously reflect on its composition. As I don’t intend to have a large rotation of the companies I own, I will most likely publish a portfolio review every 4 to 6 months.

DISCLAIMER: This article is for educational purposes only and does not constitute investment advice. Any decisions made based on the information presented in this article are solely the responsibility of the individual making the decision. The author disclaims any liability for any loss or damage, whether direct or indirect, that may arise from reliance on the information presented.

Portfolio considerations

Before starting, as this will be the first time I will share my portfolio composition publicly, I think the occasion requires me to share some basic rules my portfolio is required to follow.

The main considerations I follow are:

1. Maximum of 16 companies in the portfolio.

2. A position has to account at least for 3% of the portfolio (ex. cash).

3. A position cannot account for more than 8% of the portfolio just by own contributions (no share appreciation).

4. Maximum 2 companies in the portfolio whose appreciation depends on a catalyst or special situation.

All the considerations presented above are currently met by the portfolio. However, depending on circumstances that might not always be the case, especially in regards to the amount of companies which are in the portfolio.

Portfolio performance and composition

I started writing about value investing back in summer 2023. However, my journey as a retail investor started at the end of 2021. Since then, I have been constructing a portfolio I could feel comfortable with (an objective I didn’t achieve until not so long ago). The result of that process is shown below:

The portfolio presented above achieved a return of 35.12% during 2023 (vs 24.60% of the SP500 and 17.75% of the MSCI World), performance which I am extremely satisfied with.

Worth mentioning are Johnson & Johnson ($JNJ) and Sprouts Farmers Market ($SFM), companies which were part of my portfolio most of the year but I finally sold in December.

Johnson & Johnson (↓7.28% absolute return) is a defensive high quality company who has underperformed SP500 for the last decade. In combination with the controversies the company has been involved in during the last year, I decide to sell as there are substantially better opportunities in the market.

The second one, Sprouts Farmers Market, its a chain of supermarkets specialized in healthy food and proximity products in the USA. The chain is mainly present in the Southern half of the country and has a solid playbook to continue geographical expansion. However, I decided to sell as I consider the stock to overperform the market from sell price considering its growth potential. Moreover, it represented a very small position of my portfolio (<2.5%) so it was an ideal candidate to sell and improve portfolio concentration (↑37.51% absolute return).

As you can see from Figure 1, most companies are not unknown and indie companies I found myself but very popular ones among X investing community such as Brookfield, Evolution, Alphabet, etc. Hence, I will split the portfolio review in two parts, one where I will introduce the less popular ones, briefly sharing my thoughts on them, and a second one with a matrix of which of the qualitative requirements I look into are met by the most known companies of my portfolio.

Auto Partner ($APR.WA) - ↑47.62% (2023)

Polish small-cap in the business of auto parts distribution (2nd largest Poland’s auto part distributor). The company is led by Aleksander Górecki (Founder, President and Chairman), shareholder of 46% of the company.

Auto Partner has compounded its sales at a +26% CAGR and has consistently earned double-digit returns on its invested capital. Its sales are split 50-50 between the Polish market and other European ones, being the revenue coming from European markets, the one growing the fastest.

The company’s moat relies on economies of density, economies of scale and convenience business model (one-stop shop for the customers).

Pandora ($PNDORA) - ↑77.68% (2023)

The Danish jewellery giant has 1.3% of the global jewellery market. Expansion and market consolidation could lead to market share expansion, which is around 9% - 12% in the most mature Western markets.

I believe jewellery is an industry almost impossible to disrupt. Jewellery has existed since the Stone Age and benefits from the Lindy effect. Moreover, Pandora has been able to create a business model which generates recurrent revenue in a traditionally one-time purchase industry and business benefits from its large scale over competitors (there is no equivalent competitor).

The Italian Sea Group ($TISG) - ↑1.76% (2023)

Italian super yatch (>50m length) manufacturer. Yachts (especially super yachts) are so exclusive that when someone talks about buying/owning one the brand of the item is secondary because the item itself is pure luxury. Hence, I think would be the perfect type of good to get some exposition to the luxury industry.

The company has a great business model which provides high revenue predictability and recurrency (from the reconditioning part of the business) with Giovanni Constantino, founder and CEO, owning 63% of the company.

Eurofins Scientific ($ERF.PA) - ↓6.40% (2023)

French company with a worldwide network of laboratories capable of performing different types of analysis for a wide variety of industries. The company revenue is recurring and it grows through a combination of organic growth and the acquisition of smaller laboratories which are then incorporated into the network.

The company’s moat is sustained in several competitive advantages such as scale economics, switching costs and regulatory barriers (validated analysis, customers product sampling required by law, etc). Additionally, the company’s CEO and founder owns 33% of outstanding shares.

Novo Nordisk ($NVO, $NOVO-B) - ↑37.48% (2023)

Danish pharmaceutical company known for its treatments against diabetes. They are leading the change in diabetes care from traditional insulin drugs to GLP-1 analogues (they were the first company to develop and commercialize a GLP-1 agonist). Right now, they have a leading position in the growing obesity market.

It operates in oligopolistic markets where its moat has been built over various pillars: regulatory barriers of entry, vertical integration and proprietary technology. This wide moat and tailwinds makes it one of my portfolio favorites as you might know from my previous newsletters. However, current valuation implies the expectation of flawless execution from the company.

Spyrosoft ($SPR.WA) - ↑21.41% (2023)

Polish IT Consulting & Software Development micro-cap (capitalizing around 140M euros). I wanted some exposure to the digitalization macrotrend and Spyrosoft was the most convincing option due to its culture, management and extraordinary growth potential.

Management owns approximately 80% of the company and they have a success story in founding and running another company within the digitalization industry, SMT Software, so they are applying the same playbook again.

HP Inc. ($HPQ) - ↑11.38% (2023)

American company which is a global leader in the personal systems and printing industries. The main reason I added this one to the portfolio is because I saw Warren Buffet had it in his. I added it back in 2022 when it was undervalued. It has a nice dividend which has been growing during the last decade. Overall, a position to close in the near future.

Incap Oyj ($ICP.1V) - ↓-10.00% (2023)

Finnish micro-cap (230M euros) in the EMS (Electronic Manufacturing Services). Its share got beaten down (>70% down) during 2023 due to its major customer orders postponement to 2024 as they were normalizing their inventory. Hence, in a fragmented industry without great competitive advantages I decided to own shares in the company as a way also to test my ability to capitalize in special situations like this one.

Summary of the rest of the portfolio

Another 8 companies, more popular and better known among the investing community are also part of my portfolio. In the following table you can see an overview of which qualitative characteristics I look for in a company.

Mistakes of the year - Top 3

In this last section I pretend to share the largest mistakes I made during 2023.

#3 SimCorp ($SIM) position sizing

SimCorp is a Danish company which delivers integrated investment management solutions/platforms that empower financial institutions to manage assets, optimize portfolios, and enhance risk management.

Last January I started analyzing it and concluded it had solid competitive advantages, no pure competitors and it was priced with a remarkable margin of safety. I started a small position which I did not continue building despite the long thesis being solid. The 27th of April, Deutsche Boerse AG made a public takeover offer of the company for a price of 735 DKK (3.9 billion euros in total). The deal was finally completed during Q4 2023. I sold my position the day the takeover offer was made public with an absolute return of ↑51.67% in 3 months.

The main mistake was the lack of confidence in the thesis. The analysis, valuation and prospects of the company looked promising (probably one of the best opportunities in that moment among my investment universe). However, the lack of experience, self-confidence and isolation from the market noise prevented me from taking a more remarkable position on it.

#2 Danaher Corp. ($DHR) accumulation during Q4

Another case where I missed an opportunity to build a good position in a company I have studied and I perfectly understood. In this case, I made an omission mistake by not purchasing more shares during the drawback in Q4 2023. My perception is that the shares were going to be even more undervalued in the following months because the bottom of the cycle was not reached by that time (probably reached around this time according to recent data).

#1 Omission error on Laboratorios Farmaceuticos Rovi ($ROVI)

Laboratorios Farmaceuticos Rovi is a Spanish pharmaceutical large-cap company specializing in product development, manufacturing, commercialization, and CMO services. They offer a comprehensive range of healthcare products, including generics, over-the-counter medications, branded products, and biosimilars. Rovi's global reach extends to over 100 countries, backed by expertise in market research, product development, sales and marketing, and patient education. Their commercialization services empower pharmaceutical companies to navigate market complexities and achieve product success.

It was a company which met plenty of the requirements a request to a company to be aprt of my portfolio: company within my circle of competences, competitive advantages, owner-operator management, conservative financials and good capital allocation. However, my bias towards Spanish stocks and CMOs cycle moment after the Covid-19 imposed over objective arguments and an attractive valuation offering a good margin of safety. Stock finished 2023 appreciating more than 70%. I haven’t look into it again, maybe I should.

Hope you enjoyed this newsletter. Is the first time I put my thoughts of my personal portfolio in writing to share it with everyone else. Please leave a comment, give it a like and share!

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