Q1 Portfolio Update: Reflections on -2% YTD
Down but still ahead of the MSCI World
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.
A very volatile start to the year. Tariffs have been the main talking point so far, keeping the markets on edge. It remains to be seen for how long and to what extent they will take place, but so far the whole back and forth has given the stock market what it hates most. Uncertainty. As a result, we have seen a rotation out of the US and into European, Asian, and South American equities.
My own performance was -2%. I can live with that. Apart from the fact that it is only one quarter and therefore of little importance, the main reasons for the performance were three. A strong Euro (EUR gained 4% vs. USD/CAD), an unfortunate buy that lost almost half of its value (more on that later), and a weak US market overall, but my core holdings did quite well.
I don't think there's a big takeaway from this quarter. Are US stocks dead now? No, probably not. Should I sell all my US holdings? No, probably not. Should I look in other countries outside the USA and Canada? Probably yes. But I have started that at the beginning of the year, when I was struggling to find cheap stocks in the US (see recent write-up on a UK stock).
Portfolio updates
My largest holding remains Innovative Food Holdings. Although the stock is only down 6% YTD, it is down 24% from its highs in early March. It's funny how that affects our perception of returns. If you had told me before the year that IVFH was down 6% while the broader market was down 4%, I probably would have signed up for that. But to have a 24% drawdown in one month in your largest position is never nice.
A lot of people have asked me if I think it is still cheap. The short answer is no. At least not by 2025 numbers. The current market cap is about $100 million. I estimate the current earnings power of the company to be between $6 million and $7 million, or about 15 times EBITDA. However, I think there are some levers that they can pull to increase their earnings power. First, it is important to note that the business is growing, excluding US Foods. Here is my estimate from their new 10-K (well worth a read, as it is now very differently structured).
The local warehouses should continue to grow as the new acquisitions getting integrated. The drop-ship customers other than US Foods should also see growth as they are new, and it takes time to get a customer to use their platform more and more. The retail cheese business is just getting started, and it remains to be seen to what extent they can drive margins there. One thing I would keep an eye on is their move into airline catering with their cheese offering. They have already announced a test project1 - and I would not be surprised if they are able to expand this.
So the overall question is whether you should sell a stock that has had a good run and now needs some time for the business to catch up with the stock price. Since I am very confident that the company will be making more money in two years than it is now, my answer is no. It may well be that the stock stays in this range until we see real EPS growth, though. Fortunately, Q1 should be the first quarter without divestitures or other one-off costs.