2024 Portfolio Review

For calendar year 2024, the Superfluous Value portfolio gained 24.8%, underperforming the MSCI ACWI which rose 28.3% (both in AUD).

Since I began formally tracking my portfolio in Aug 2018, I have gained a cumulative 92.2%, underperforming the index which has returned 99.4% (both in AUD) by 1% annually.

It was another pretty decent year. We are in a full-blown market mania now and I don’t expect to keep up with the indexes until we get to the other side. Many market participants aren’t even pretending to care what their stocks/memes are worth, which makes staying disciplined more important than usual. Long-term readers will know I have mostly avoided US stocks for several years now and am satisfied to be making reasonable returns in spite of this.

The plus side is the opportunity set in international value is currently about as good as it gets, so I have been able to redploy gains into other outstanding situations. We have the excellent scenario where the US is as expensive as it has ever been, while markets such as the UK, Hong Kong and Brazil sell for GFC-low prices. Many international currencies also look very undervalued.

Consequently, 2024 saw more companies added to the portfolio than usual- Impala Platinum, CK Hutchison, Hysan Development, Anglo American Platinum, S4 Capital and Birchcliff Energy. So far this year I have also added another UK company I will share soon. I recently discussed some names I am seeing being destroyed there and the motherland remains one of my favourite hunting grounds.

Conversely, Saipem was sold, Exito and Osisko Mining were bought out and Cameco and Babcock International were trimmed due to strong performance. It is pleasing to see multi-year holdings leaving the portfolio for the right reasons. A number of these positions were thorns in my side at various points but patience works wonders if something is bought approximately right.

Please also see my 2024 H1 review for a fuller discussion of many of my holdings.

Several of the portfolio’s largest positions had a strong year, including Cameco, Millicom and Babcock.

Millicom is a very strange stock. As has been beautifully documented by alwaysinvert and Jefke, the stock price is essentially flat since mid-year despite starting at around 6x FCF, announcing their tower deal, reintroducing large dividends and a buyback, dramatic operational improvement and a solution to their market challenges in Colombia. Further, the majority shareholder has bid for the company before and the chances of a higher bid seem quite good. At least the new yield of over 10% will make the waiting more pleasant.

At time of writing Babcock is very close to my fair value estimate and may free up cash in the coming weeks. This is the sort of holding I want to make a career out of. Purchased for 220p in the depths of capitulation selling, angst over shorts and the hangover from poor previous management, the business has reduced debt, greatly improved operational efficiency/focus and even reintroduced a (very small) dividend. Babcock now sells for 15x my estimate of normalised earnings and has its reputation restored in the market. Time to move on.

First Pacific is a winner I am guilty of undersizing and have failed to benefit fully from. I strongly believe a portfolio has a greater chance to outperform the less it is meddled with, so am hesitant to trim and add very often. However, I should have added here as soon as it was obvious management were taking the right steps to keep holdco debt under control in the covid aftermath. Such is life, but the stock has done well and still looks reasonably cheap and defensive, while paying a good dividend.

Luckily, the worst performers were mostly smaller positions including Liberty Latin America (LILAK), Aimia and the orphaned Companhia Brasileira de Distribuição (CBD), although the perenially overlooked Telefonica Brasil detracted from a fairly large position size.

LILAK is just such a dog. There is a funny cycle at play where the CEO Balan Nair spends quarterly calls talking up how much he loves a market only for it to blow up on him the next year. We witnessed it with Chile in 2022 and last November we saw it in Puerto Rico with the mangling of their AT&T integration. It is getting very hard to take anything management projects seriously, especially considering how generously they are paid at only a $1.3b company. It’s time for the rubber to meet the road, but the price action does have a whiff of desperation about it and there has been decent insider buying since the announcement, so I’ll give it one more chance…

Investors are pretty well done with Aimia. The share price keeps falling, but there were hopeful signs over the second half of the year- a buyback was initiated and the activist investor Mithaq gained two seats on the board. If anyone wants a good laugh, I would once again direct them to Mithaq’s original letter highlighting nicely the ineptitude of recent management. As mentioned above, Aimia remains a small and frustrating position.

Superfluous Value’s most read piece ever was Brazilian Value: The Trade of the Decade published around 18 months ago and since then Brazilian Value has done less than nothing. Luckily a decade is a long time. Telefonica Brasil and CBD were both weak over the year, but I would say their pricing reflects sentiment much more than operational issues. Telefonica in particular is executing well and focused on returning as much capital to shareholders as possible. It is growing steadily and trades under 4x EBITDA.

Finally, the election of Donald Trump has raised the possibility of an end to the Russia-Ukraine War, with easing sanctions reportedly on the negotiating table. It is far too early to tell, but there is a slim chance of Gazprom and Lukoil making a return to the liquid part of the portfolio. I will keep readers abreast of any material updates.

The portfolio consisted of 23 positions and 15% cash at year end.

The top five holdings are currently Millicom (9.4%), Cameco (8%), KT Corp (6.6%), Antero Resources (4.5%) and Babcock International (4.5%).

Conclusion

The longer I invest the more I realise the way you manage your bigger winners may actually be more important than how you deal with your losers (both are very important to be sure). My performance would be very different without Cameco 5-bagging or Barrick ripping during Covid. Consequently, one of my focuses this year is to manage the exit of my larger positions as they (hopefully) keep converging on fair value.

The conditions are in place for a multi-year run of outperformance for deep value, so it is an excellent time to be priming the watchlist and redploying into bargain names. Being off social media has helped me avoid most of the meme silliness, so continued patience and discipline will hopefully keep turning out acceptable returns.

Regards,

Guy

I own positions in all the companies mentioned.

PS. As always (and especially when I'm mentioning so many stocks), this isn't investment advice. Please do your own due diligence and seek professional advice if you're unsure about your finances.