Long-Overdue Portfolio Adjustments

I've been remiss in keeping my portfolio up to date here, having spent much more time hacking away at email teasers on my Stock Gumshoe site that many of you have also been kind enough to subscribe to and read.

But still, I always have intended to keep my portfolio holdings and changes an open book -- so I'm sorry that I'm so late in making these changes here for you to see (and hey, many of them have been short term mistakes so far, so it's not like you're missing anything).

So ... without further ado, here's what I've done over the past month or so.

I sold Naspers (NPSNY), and bought Tencent (TCEHF). With Naspers ADRs going to the pink sheets some of the argument for keeping these shares for Tencent exposure has gone -- volume is much thinner now, and information will be a little harder to find. The other argument for keeping Naspers, that they offer a more diversified exposure to international media and technology properties, is still there, and it still may be the correct one ... but personally, what always attracted me most to Naspers was their major holding in Tencent. There is a significant argument against what I've done if you think Naspers will rebound in its other businesses, because by historical measures the share of Tencent that you get in Naspers is now trading at a discount.

But anyway, Tencent entered my portfolio more than a month ago, before I sold Naspers, and then I added more to my holdings when I sold Naspers a week or so ago. I got a little lucky with the timing, since Naspers has been a little bit depressed due to fear of local market competition and a declining South African currency compared to the dollar, and Tencent has had a nice boom of late.

I've written quite a bit about why I like Tencent, and all of that remains true -- but two things stand out for me: First, that their advertising revenue is growing pretty quickly and they're not showing any signs of losing much IM market share even though their competitors are trying hard; and second, that as a Chinese blue chip trading only in Hong Kong they're going to benefit significantly when more Chinese retail investors are able to invest in Hong Kong.

I think that's likely a significant part of the boost in Tencent shares over the past week or so, the gradual loosening of restrictions on international investing for mainland Chinese -- but I think we're just at the beginning of that trend, and while it's likely to be good news for many Hong Kong-traded Chinese companies (the Hang Seng is at or near highs right now), I think it will be especially good for popular Chinese consumer brands that are only traded in Hong Kong.

And of course, that fits Tencent to a T. I liken this a little bit to the earlier stages of the internet craze here in the US, to some extent -- what were the popular companies for individual investors? The ones they used ... they bought Dell computers, they used Yahoo email or they surfed on AOL, so those were among the more consistently popular investments. Obviously, the exuberance for these investments got out of hand, but I still think that investor psychology to some extent is universal and that the mainland Chinese are going to want to buy shares of companies that they use every day, but which have been until now forbidden investments.

So in for Tencent, out for Naspers. I won't tell you the prices, since these are old trades and you wouldn't believe me -- it would be too easy for me to say I bought Tencent for $3 and sold Naspers for $27, both of which would be significant exaggerations.

What else has changed for One Guy's Portfolio?

Well, I told you about Ambrian, and that has become a significant holding for me as I've added to it through the Summer at what seem to me to be depressed prices. They release earnings this month that I'm very curious to see, but no real news otherwise. Still a very low PE, and still a nice boost from the strength of the Pound for this commodity-focused investment bank.

And I also bought a few shares in one of Ambrian's major holdings and clients, Centamin Egypt (CELTF.PK). This is a gold exploration firm that is trying to revive the Egyptian gold mining industry -- they have an extremely promising mine site near the Red Sea, and they've got a processing plant that's being disassembled in South America and shipped to their mine so that they can begin processing ore next year. The shares are down from where I purchased them, I bought (again on the pink sheets) for 1.05, but what impresses me are the continual upward revisions in their reserve estimates -- every time they drill a a new test hole, it seems, they upgrade the potential gold content of the mine. This, obviously, is a play on the long term price of gold, and some folks might argue that it's a little pricey for a miner that hasn't yet produced (over a half billion dollars already in market cap). Some significant uncertainty remains, particular on timing as they await equipment and plan their mine, but I'm convinced that the risk/reward ratio is quite promising given the richness of the gold field they're aiming to work.

And aside from these pink sheets foreign holdings -- which I also might add more to in the near future, as I would like to own more Swire Pacific and SeaDrill -- I also bought some "regular" companies during the beating the market took a couple weeks back.

I sold my Chipotle LEAP options and used the profits to pick up some Chipotle shares, because I'm not entirely certain that this company will continue to ramp up rapidly but I am sure that the long term prospects are so excellent that I really want some shares in my portfolio. I expect that Chipotle will be to fast food what Starbucks is to coffee and Whole Foods is to groceries, the socially conscious and better tasting alternative (though their food isn't as premium-priced as those two).

I bought Class B shares, at a hair under $90, because I can't come up with any rational reason why the regular shares will trade at a premium forever (CMG is about $10 more expensive than CMG-B). Right now, they're at a premium because some traders don't know about them, the volume is much lower, and McDonald's has many of the class B shares still locked up ... and the difference is possible because B is no longer redeemable for A There was a nice SeekingAlpha summary of the arbitrage opportunity available for Chipotle shares back in June, and while I wouldn't really arbitrage them (short the Class A and go long the Class B) I can't imagine why a long term investor would buy the Class A. Logic will enter the equation eventually.

I also bought some China Fire and Security (CFSG), because it seems to me to be an appealing small cap that plays off of what I can only assume will be significantly increased needs for security and fire equipment as China continues to upgrade their building standards and, more generally, continues to build whole cities from nothing in the blink of an eye. This is a small position that I'm still researching, but the potential looks really good to me.

In other news, I've sold my holdings in two biotechs and used profits to buy LEAP options in those same companies -- Vertex (VRTX) and PDL Biopharma (PDLI). It has worked out well for Vertex, since the stock profits were considerable when I sold and the options have performed very nicely of late as emotion about their HCV drug Telaprevir has again run hot (it runs cold from time to time, too). It hasn't worked out so well for PDLI, though, I did protect more principal from the train wreck that these shares have been of late, but of course the options fell precipitously and may become worthless if PDL is really re-launching itself on a long road toward building as a research company instead of a producing drug company.

To be fair, if your lead drugs continue to disappoint, as PDL's have, it does look appealing to return to the strategy that built the company -- providing basic antibodies for other drugs and letting others take the risks -- I just don't know how long it's going to take them to "right-size" for that plan and redirect their research efforts.

Also in healthcare, I've upped the stability of my portfolio a bit by adding a big pharma name -- Novartis (NVS), which I picked up shares of at $52.99, right around where it's trading now. I like the big generics and over the counter business, their potential pipeline, and the fairly far-off dates for patent expiration for their biggest drugs. This one has been a favorite of analyts all year and has yet to really perform, in part due to some missteps with approvals that seem to me (a non-expert, believe me) to be fairly minor in the grand scheme of things. I thought about buying Pfizer for this part of my portfolio, I was incredibly tempted by their ridiculously high current dividend, but I opted not to make that contrarian play and bet against the problems they're likely to have with Lipitor patent expiration in the near future (still, they do have an awesome cash hoard ... and I might change my mind).

Finally, I just recently picked up a small entry position in HDFC Bank, one of the two Indian banking firms that you can get as an ADR. I bought shares at $83 a week or two ago and am considering adding more if they dip again. I continue to fear that the shares are a little bit expensive, but I also like the growing consumer banking need in India, and banks can often be good proxies for a growing capitalist society. I also do continue to hold the India iPath Exchange Traded Note, too, which is essentially an index fund for the Sensex.

Enough, huh? Other than that, I just have added a tiny position in a company that I probably shouldn't have touched -- mostly because it's an interesting story that isn't making any money, in Raptor Networks, and I continue to dicker around with some small options trading positions that for the last year or so have more or less broken even -- but they keep me busy, and keep me researching new companies (and provide the occasional 1,000% return that really keeps your investing adrenaline levels up).

Overall, there has been more of a trend to foreign investing in my individual stock holdings -- non-US-based companies now make up just under 50% of my portfolio.

I think that's all of the portfolio adjusting I've done that hasn't yet been reflected on the site here -- I'll try to do a better job of keeping up with my writing in the future. I've also got to take a much closer look at some of the real losers in my portfolio of late and try to figure out what to do with them -- that includes Chico's and MMC Energy, both stocks that several of you have emailed me about in recent months, and Akamai, which is still up 100%+ for me but is down close to 50% on the year. Then again, writing about those guys sounds too much like taking my medicine ...

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Switching Commodity Plays (NTO, AMNZF.PK)

I'm taking advantage of the Yamana offer for Northern Orion that boosted prices by close to 10% at one point, and selling my NTO shares in order to open a position in a very different kind of commodity investment.

Northern Orion (NTO) has been good to me -- I bought shares a couple years ago at around $2.20, and sold them yesterday morning at $5.90. I do think that their reserves are worth more than that, but they will be also very expensive to produce and/or take a long time top come to market, so I'll take the short term payout here and not hold on to Yamana shares.

Instead, I've decided to open a position in an investment bank that largely focuses on commodities -- a relatively new firm, now called Ambrian Capital, that's listed in the UK (AMBR in London, AMNZF on the pink sheets). I first heard about this when I saw it teased as the "best investment of 2007" by a newsletter publisher in my work over at stockgumshoe.com, but of course that recommendation and some other heavy buying (by Rick Rule and others, particularly US investors) made the price spike up significantly in April. It has since fallen back to more reasonable levels, so I've picked up some shares here at an average cost of about US$1.36.

Ambrian is an investment bank, asset manager, and adviser that focuses primarily on resource industries -- including underwriting and advising of commodity companies and trading of actual commodities, among them metals, energy and carbon credits.

They also own large or controlling interest in several mining and energy companies, including Jubilee Platinum, Centamin Egypt, Uruguay Mineral Exploration, Inc, and Anglesey Mining among many others.

At today's price in London they're trading at a PE on last year's earnings of just about 8 (8.6 pence in earnings, 67p share price.) -- that's substantially below most investment banks, and I assume it reflects some general pessimism that we're at the peak of the commodities cycle. I don't personally believe that, but even if we are, for these prices I'm willing to take a small chance that this is the peak earnings in the near term. Their yield is about 2.5% and growing, not bad for a very new operation.

But I think what I find most compelling about this investment, aside from what looks to me like clear progress in building an effective and focused investment bank in this sector, with rapid earnings growth, is the valuation of the shares if you consider their outside holdings.

Their principal investments group, which invests the firm's own money, holds investments worth roughly 50 million pounds (including those mining companies noted above). It's certainly true that those investments could all fall precipitously if commodities collapse, and about 10% of that money is in unlisted companies so it's even more illiquid than the rest, but the current market cap of Ambrian Capital is only about 72 million pounds. That means, if you want to do the math, that the value of the bank itself today, aside from its outside investments, is 22 million pounds.

If you then take out the realized gains from the income numbers as a "what if" exercise (the income for last year was roughly 60% realized gains/40% investment banking), you get income on investment banking of about 8 million pounds from a valuation of 22 million pounds. So that means if we ignore their assets, and they sold them off today for roughly book value (which may not be possible), as I read the numbers you'd then be dealing with a fast-growing investment bank trading at a PE of under 3.

[belated note: sorry folks, just realized my error here. I still like the valuation, but it's not a 3 PE unless you screw up the exercise, as I did. This fails to assign the majority of the administrative expenses to the investment bank. Admin expenses for the group were about 8 million pounds, and investment banking operating profit was about 8 million pounds -- so I think we need to assign probably at least 75% of the admin costs to the bank, since merchant banking is much more people-intensive than investment management. Ambrian doesn't break them out, since they have no good way to do so as all overhead is shared across the group. I still like the shares as much, since the whole is more important than the parts at this point and I expect dramatic earnings growth to continue, but my error in the exercise made the valuation look sillier than it is -- sorry!]

The group's general intention appears to be to realize gains on many of their portfolio companies or to use them to seed investment funds for various sectors (they currently manage one investment fund, Golden Prospect Precious Metals), and they recognize the need to diversify as much as they can given the volatile nature of commodities. They're also planning to start a small private equity fund that they hope will both make profitable investments and help steer firms to the investment bank for advising and IPO underwriting in the future.

Like many folks, Ambrian is also looking to the East -- they recently sold a small stake in the bank (about 9%) to Sun Hung Kai of Hong Kong, and they intend for this to be a pathway into the Chinese markets, both to advise Far Eastern commodities companies, and to help invest the cash that is pouring through many of those markets.

So ... although this is certainly a risky investment and a tiny company, I like the risk-reward profile, and I think that this is the best play I can make on commodities right now -- if the commodity markets remain at all robust, Ambrian should be well positioned to continue rapid earnings growth, and they are not nearly as leveraged to any one commodity or one project as most other investments I would consider.

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