Investing in undervalued securities worldwide

Weekly Update 9 September 2024

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The majority of my portfolio was invested in the Financial sector during the first half of 2024. In June, the weight of the Financial sector was reduced, and new positions were opened in the Real Estate, Utilities and Telecom sectors.

Today the portfolio still contains a few banks. Let’s take a closer look at one of them, Banco Santander, and analyse why it is in the portfolio despite macro trends which are turning less positive for the banking sector.

$SAN.MC (Banco Santander SA) is a large global bank serving 168 million customers. The majority of its business is lending to individuals and businesses. Interest income makes up 75% of revenues. 25% of the profits are made in Spain, 25% in the rest of Europe, 25% in North America, and 25% in South America.

Santander is an average-quality bank. Its return on equity, a measure of profitability, hovered between 6 and 7% for most of the 2010s. More recently, as interest rates increased, the bank’s return on equity almost doubled to 12%.

Improved profitability and capitalisation have allowed the bank to increase shareholder payouts. Santander pays a 5% dividend, and there is a 5% buyback on top. In total, investors are paid 10% a year to hold the stock.

So why is Santander valued at only 6x earnings, when the historical average is 9x?

It does not seem there is anything wrong with the bank’s recent operational performance. Revenues are increasing, costs are under control, and shareholders are being rewarded. Instead, to explain the low valuation, we must turn to macro factors: fears about lower interest rates, an upcoming recession or a financial crisis.

It can however be argued that Santander will be resilient in many adverse macro scenarios. The bank is less interest rate sensitive than many other European banks. It did well in the European Banking Authority’s 2023 stress test. And credit spreads indicate that a financial crisis is currently not an imminent concern.

As interest rates decrease, the profitability of Santander will decrease. But if euro interest rates settle at around 2% as I think they will, Santander should stay more profitable than it was in the 2010s. A longer-term, normalised return on equity of 10% would support a share price just below €6 today. With the shares at €4.33, more than 30% upside may be available.

2024 performance
@triangulacapital +35.9%
SWDA.L +12.3%

Portfolio changes
Verizon was replaced by Orange.

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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Disclosures

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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Your capital is at risk. Other fees may apply. For more information, visit etoro.com/trading/fees.

Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

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
  • trades more
  • avoids following the index

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.