Half-year 2025 update, reflections on -8.5%
Not a good year so far
Disclaimer: This is not investment advice and meant for entertainment purposes only, I hold a position in the discussed companies and therefore may be biased in my opinion. Please be aware that this is an illiquid Microcap, please only buy and sell with a limit-order. I also may trade around the mentioned positions.
It's fun to write quarterly updates when you beat the market. However, quarterly updates are less enjoyable when you are underperforming the market and losing money. But both scenarios are equally part of the investing game. So far this year, it has been relatively tough for my portfolio. Until April, the markets were in turmoil due to tariff threats. The markets have recovered impressively quickly, but my portfolio has not. This shows that my stock picking has been subpar this year. The strong euro versus the dollar made the lackluster performance even worse.
The biggest losers so far were the biggest winners from 2024: Koil Energy and Innovative Food Holdings. Talk about regression to the mean! These were my two largest holdings going into 2025. In my 2024 reflections, I wrote the following about Koil Energy:
”I am not quite sure what to make of the stock at $2.27. I would estimate that they will earn about $0.22 in 2024. That would put the stock at a P/E of 10. Probably fairly valued given the cyclical nature of the business.
However, in 2025, they should be delivering one of the biggest contracts in their history. In addition, management seems optimistic and confident that they can continue to grow in 2025 and beyond. I am a believer in letting your winners run, especially when the valuation is not completely absurd. But I am not sure if I am comfortable with a 15% position in Koil Energy.”
This is ultimately how it has played out so far. After a strong start to the year, they had a disappointing first quarter. Fortunately, I sold half of my position in the $2 range earlier. I am still long Koil Energy. It is now a 5% position, which feels exactly right. I still think the business has upside from here, and that it is more likely than not to be a bigger business in three years than it is now. However, given the nature of the business, it will be a bumpy ride.
Innovative Food Holdings had a rich valuation at the beginning of the year. At its peak, the stock reached $2.35, but then declined to $1.30. The issue is declining sales from their biggest customer, US Foods. This has ultimately been the biggest risk since I pitched the stock, but I underestimated it. The second reason for the decline is the unprofitable cheese operation. Management decided to start supplying a retailer with cut cheese. While it's impressive that they've created a new business segment with minimal capital that can generate millions of dollars in revenue, the market is disappointed by the lack of profitability thus far.
The original thesis from 2024 did not play out exactly as expected. The warehouse never got sold, and they started a new retail business. For the sake of transparency, I sold 16% of my holdings after the disappointing Q1 results. Looking ahead, I still believe that management, in combination with the board, is capable of creating shareholder value. That being said, it's a fine line between calling these problems structural or temporary. I am confident that they would not have started the retail business without a clear path to profitability, so it seems somewhat logical that this problem is temporary. However, it remains to be seen to what extent they can tackle declining sales with US Foods. They are developing a new tool to simplify the onboarding process for new vendors, which could address the issue of declining sales with US Foods.