Rebalancing August 18/27: Selling Kroger and Arc Document Solution; Buying Sumitomo Rubber Industries Ltd and ADF Group Inc
In my opinion, one main advantage of a (semi)quantitative investing approach is that one can continue trading according to plan even in case of stress or time constraints. In August, I had a longer vacation and was quite happy that I don’t have to worry about the markets too much. I can reduce the effort needed for my strategy to the bare minimum (downloading data, running R script, sell/buy accordingly) if needed. Unfortunately, my writing process is not automatized. So I once again have to use one blog post to summarize the two rebalancings in order to catch up to the present (sorry).
SELL “$KR” AND “$ARC”
On August 18, I sold my Kroger position (bought on Dec3, 2020) for 52% pre-tax total return. Most of the returns came from a boost in stock price over the recent 2 months as the stock broke out of its multi-year trading range. As a defensive COVID stock, Kroger was a perfect diversifier to the portfolio, which mainly consists of cyclical (reopening) businesses. However, rebalancing was due and after the recent run, the stock lost its LT and ST Reversal qualities, Valuation is bloated (P/E = 24; P/FCF = 19) and “Accounting” scores are mediocre (F-score, asset growth, external financing).
Source: gurufocus.com
On August 27, I furthermore sold ARC Document Solutions Inc (bought on Dec21, 2020) for a 100% pre-tax total return. This total underdog stock coming from the “dying” business of printing solutions (USA) is one of my best performers this year. Between January and July the stock was basically flat but mooned in the recent month after a favorable 2021 2nd quarter report. The stock is still very cheap and has a excellent “accounting” score. However, short-term reversal and revenue growth currently provide 2 red flags and the flat performance over the first two quarters of 2021 leads to a bad 6_1-month Momentum Rank. Overall, the stock still ranks in the top Multirank decile. Unfortunately, that’s not good enough (sorry ARC, thanks for the ride).
Source: gurufocus.com
BUY “SUMITOMO RUBBER” AND “ADF GROUP”
I bought two more industrial companies: Sumitomo Rubber (Japan, MCap = $3.1B) and ADF Group (Canada, MCap = $54M). The following table shows their main rankings within my system in comparison to the replaced stocks:
Sumitomo Rubber Industries generates most of its revenue in Japan by selling rubber tires for automobiles and motorcycles under the Dunlop and Falken brand names. However, the company is also known for its sports segment selling golf, tennis, and fitness equipment (Srixon, XXIO, Cleveland, Dunlop). Within the industrial product segment segment, the company furthermore sells rubber parts for printers, floor coating materials, portable ramps, gloves, tubes, valves, amongst others.
Japanese companies are known for “being cheap” for a long time now but failed to deliver. The Nikkei Index is still trading below its 1989 all-time high and only recently managed to break out of its 30 year (!!!) trading range. Some names now show momentum, paired with very cheap multiples. In my opinion, buying my first Japanese company at the intersection of Value, Long-term Reversal (LTR), Momentum (MOM) and Quality is worth a shot.
Source: gurufocus.com
The second stock I bought is ADF Group. The company operates in the US and in Canada and generates its revenue from the design, fabrication, coating, and the installation of steel structures and architectural metalwork. Business segments are: Office towers and high-rises, Commercial and recreational buildings, Airport facilities, Industrial complexes, and Transport infrastructures. The client base mainly involves the non-residential construction industry.
Similar to Sumitomo Rubber, the company shows all the basic qualities I am looking for. The bad trailing revenue growth is close to being a red flag for me but barely missed that categorization.
The two stocks add further cyclical small-cap exposure to my book. As always, it is important to understand the high-risk/high-reward profile and the high idiosyncratic risk of such trades. In a diversified portfolio (industry-wise and geography-wise), a lot of these names will be losers or stay flat but sudden winners like ARC will lift the whole boat at some point in return.
I believe that the specific LTR-MOM setup (in combination with the “time-displaced” rebalancing of the individual positions) generate favorable “overlaps” in the portfolio construction which lead to reduced volatility. At least that was the case recently. On an individual stock basis, my portfolio is a total mess. However, the portfolio as a whole behaved quite calmly over the course of the recent “turmoil” (also thanks to my Bitcoin exposure and despite my discretionary China-Tech exposure).
Let’s see what happens next.
Yours sincerely,
Non-Prophet