Investing in undervalued securities worldwide

Weekly Update 1 May 2023

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We are in the middle of the Q1 earnings season. Last week, a number of large European banks reported, including portfolio positions Santander, Deutsche Bank and Natwest.

$SAN.MC (Banco Santander SA) posted good numbers on Tuesday. The bank’s profit topped estimates, and it confirmed 2023 guidance. The shares fell 6%, however, as investors did not like a fall in profits in the bank’s North and South American units. We view this as an overreaction and continue to hold the shares, which trade at an extremely attractive valuation of 5x 2024E earnings. Before the pandemic, the bank was valued at 8x earnings, which suggests 60% upside may be available.

$DBK.DE (Deutsche Bank Aktiengesellschaft), a riskier holding, reported on Thursday. Deutsche’s earnings were important because the bank had faced a speculative attack against its creditworthiness in March, and investors were waiting to see what collateral damage the Silicon Valley Bank collapse might have caused. It was a relief therefore that the numbers were good. Deutsche’s turnaround remains on track and the shares trade at a depressed valuation of only 5x 2024E earnings. If the turnaround succeeds, 50-100% upside will be available over the next couple of years.

$NWG.L (Natwest Group PLC) ended the earnings week on Friday. The bank reiterated its 2023 guidance, but the numbers were somewhat softer than expected on interest income. We view the shares as chronically undervalued, given that they trade at 5x 2024E earnings and a 7% dividend yield, despite the bank’s high profitability (~15% ROTE). A normal bank is valued at 10x earnings, and Natwest is very far from that level today.

Overall, “investors still view Europe’s banks with a mixture of skepticism and indifference.”

Such skepticism was justified in the past decade because European banks were unprofitable. That has changed with higher interest rates. Yet valuations continue to languish at levels that would be justified only if another European financial crisis was around the corner.

We believe these low valuations create an opportunity and continue to overweight European banks in the portfolio.

2023 performance YTD
@triangulacapital +15.9%
$SWDA.L +9.6%

Portfolio changes

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.

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Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to invest in any fund or security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
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Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.