Looking Back at 2019
To Our Readers:
Each year we try provide GuruFocus members with an overview of Nintai Investment's composite portfolio performance for the previous year. Being a professional investment manager, we try to limit the amount of detail provided. Our performance was quite good considering portfolios ranged from 15% to 30% cash.
Fourth-quarter 2019 and annual returns
The fourth quarter of 2019 as well as the total returns for calendar year 2019 reflect U.S. markets hitting on all cylinders. Overall we remain pleased with the short-term (fourth quarter alone) as well as long-term performance (returns since July 2018). Our 2019 performance modestly beat out its proxies. The Nintai Investment portfolio performance for calendar year 2019 exceeded our expectations. The overall Nintai Portfolio generated a 34.82% (inclusive of fees) return versus a 31.83% return for the S&P500 Index, a 21.52% return for the Russell 2000, a 25.22% return for the Fidelity Blended Index and a 22.29% return for the MSCI ACWI ex-USA Index.
Since Oct. 31, 2017, the Nintai portfolios have outperformed the S&P 500 with a 46.71% cumulative return versus a 24.57% cumulative return for the S&P 500.
Portfolio changes
2019 saw us fill out the portfolio and reach the maximum number of positions I look to hold. New positions included Abiomed (NASDAQ:ABMD) (August 2019), Biogen (NASDAQ:BIIB) (April 2019), Craneware PLC (LSE:CRW) (June 2019), F5 Networks (NASDAQ:FFIV) (March 2019), PetMed Express (NASDAQ:PETS) (January 2019) and Veeva Systems (NYSE:VEEV) (September 2019). In addition, we made meaningful additions to iRadimed (NASDAQ:IRMD), Adobe (NASDAQ:ADBE), Biosyent (RX), Guidewire (GWRE), SEI Investments (SEIC), Cognex (CGNX) and Check Point (CHKP). After taking significant profits in Skyworks (SWKS) in 2018, we added to the position after a significant price drop. Additionally, after adding to Manhattan Associates (MANH) through 2018, the sudden increase in stock price allowed us to harvest significant profits in 2018-19.
We closed out the several positions in entirety. With Allergan (AGN) we felt the recently announced investigation by the Center for Medicare/Medicaid Services made it the right time to exit the position. We simply will not be part of systemic overcharging of the CMS systems. We exited our position in Taro Pharmaceuticals (TARO) when our investment thesis turned out to be flawed - and in the final analysis - broken. In the third quarter, we sold both NIC (EGOV) and Infosys (INFY) on valuation basis alone with both trading significantly higher than our estimated intrinsic value. We also solve Veeva from the portfolio to only add it back after a comprehensive review of the company in the fourth quarter.
Winners and losers
Two stocks led the way in 2019. These included Manhattan Associates with a return of 95.29% and Skyworks Solutions with a return of 95.41%. Both companies overcame strong market headwinds related to Chinese trade negotiations and tariffs. Additionally, both companies carry no short or long-term debt, generate high returns on capital, equity and assets and generate free cash flow margins north of 20%.
Our laggards this year were Biosyent, which was down 23.45%, and iRadimed with a return of only 3.94%. Biosyent's business took a significant downturn when two cardiovascular products failed in their regulatory review for Health Canada. After talking to management and regulators we feel the investment case remains compelling. We have been adding significantly to the position as we believe the shares are trading at a significant discount to our estimated intrinsic value. iRadimed has simply experienced slower growth than originally planned with the sales force not performing at the level originally planned. Over the next five to seven years, we still see no competition to iRadimed's product. The idea of an Food and Drug Administration-enforced monopoly remains compelling. Management has a clear plan for moving forward and we think the company will be a great long term holding for the portfolio.
Portfolio characteristics
The current Abacus view as of Dec. 30, 2019 shows that the Nintai Portfolio holdings are roughly 9% cheaper than the S&P500 and projected to grow earnings at a 24% greater rate than the S&P500 over the next five years. Combining these two gives us an Abacus Comparative Value (ACV) of +33. The ACV is a simple tool which tells us how the portfolio stacks up against the S&P 500 from both a valuation and an estimated earnings growth stand point. The numbers - as of January 2020 - are where we like to see them. They represent a portfolio that is significantly cheaper with much greater profitability and higher projected growth. Like an increasingly compressed spring, these numbers should lead to long-term outperformance. An ACV of greater than 15 has led to outperformance over 90% of the last 20 five-year rolling periods.
Bringing back Veeva, adding Abiomed and divesting Infosys and NIC (both based on taking profits) left the portfolio with an average of 16 holdings as of January 2019. If opportunities arise, I will add or reduce position size. I might also swap out an entire position for a chance to invest in a situation with a better risk-reward profile. I will be actively looking to take profits or find cheaper prospects over the next 12 to 24 months.
I remain highly focused in my industry and sector weightings. I currently have holdings in only four of the S&P500's 11 categories - financial services, technology, industrials and health care. Industrials is an extremely small position. Twenty holdings that make up roughly 90% of assets are in just three categories - financial services, technology and health care. However, I should point out I see the categorization of the portfolio slightly differently. For instance, Computer Modelling Group (TSX:CMG) is categorized as a technology company by the index. However, with 100% of its revenue derived in the oil and gas discovery process, I consider the company a way to gain exposure in the energy industry.
Turnover and cash
Turnover for the year was roughly 42%. I expect this to drop as assets under management increase and I finalize holdings. I try to look for turnover of roughly 5% to 10% annually. This is dependent of course on factors such as overall market performance (steady increases over the past few years have allowed me to take profits thereby increasing turnover) or individual stock performance (a sudden price drop of 20% might make for a compelling buy scenario). I have reached the upper end of stocks I look to own in the portfolio. It's likely that most trading going forward will be additions or subtractions from existing positions (This process has begun with seven add-on purchases versus only one new position this quarter).
Cash as a percent of assets under management remains high, ranging from 14% to 31% depending on each individual portfolio. This number is a reflection of the lack of opportunities to invest in the current markets. It is also a statement on the valuations of current holdings (meaning that individual portfolio holding valuations are at record highs) which forces me to take profits and reduce individual holdings' size.
Some final thoughts
The last four years has seen market focus on growth stocks. Whether it was the launch of the latest unicorn or the return of non-GAAP, pro-forma financially-engineered Wall Street wonders, it sure feels like 1999-2000 again. The fact we've been able to keep up with the S&P500 while maintaining 15% to 30% cash has been a blend of luck and skill. Companies with enormous debt generating returns on capital far less than weighted average cost of capital in 2014, 2015, 2016, 2017, 2018 and even 2019 have defied the laws of corporate gravity. At some point, reality will catch up with such irrational exuberance. These calculations and this type of capital structuring suggest there is considerable risk in the equity markets. It is for this reason I have been taking profits - or eliminating entire positions - to protect against the downside. Until prices come down (or earnings show far greater growth estimates), then cash represents a safe holding to prevent a permanent impairment of your capital.
At Nintai Investments LLC, I take my responsibility seriously to wisely allocate capital, prudently manage risk and attempt to generate adequate returns. Helping individuals and organizations achieve their life goals, support their corporate giving or meet their retirement needs carries with it a great degree of responsibility. Every day I look to continue earning my investment partners' trust. I simply couldn't have a better job and get more satisfaction from my work.
As always, I look forward to your thoughts and comments.
Disclosure: Nintai Investments LLC has long positions in Abiomed, Biogen, Craneware, F5, PetMed Express, Veeva, iRadimed, Adobe, Biosyent, Guidewire, SEI Investments, Cognex, and Check Point.
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This article first appeared on GuruFocus.
