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A Fundamental Formula: Focus on Valuation

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Stockholm (HedgeNordic) – The sharp hawkish shifts adopted by the ECB, Federal Reserve and other central banks, as well as Russia’s invasion of Ukraine, formed the dominant market narrative in the first quarter of 2022. The resulting cocktail of consequences in the form of rising interest rates, inflation spiraling out of control as commodity prices rise and geopolitical uncertainty have put richly-valued high-growth stocks under pressure, underscoring the mantra of “no stock is worth buying at any price” and the importance of focusing on valuation.

Anders Palmqvist

Magnus Angenfelt’s focus on valuation – on a company’s intrinsic value or “true worth” – has paid off for the market-neutral equity strategy he has been managing since early 2015. Chelonia Market Neutral, which Angenfelt has been managing under the umbrella of Archipelago Investments founded by Anders Palmqvist, since late 2017, advanced about ten percent in 2021 and an additional 1.3 percent in the turbulent first four months of 2022 after booking a gain of 2.5 percent in March and 3.8 percent in April.

“Before this year’s stock market fall, the stock market has risen for more than ten years in a row,” says Angenfelt. “For a long time, we have expected a weather change in the stock market,” emphasizes the deep fundamental investor, who was a co-founder, CEO, CIO and portfolio manager of Brummer & Partners-backed Manticore during the 2000-2011 period. The expectation of a weather change in the stock market has been reflected in the decision to cement valuation as his most important selection criterion.

“All shares can be a bad investment if the price is too high at the time of purchase regardless of how good the company is.”

“In recent years, classic stock valuation has been an outdated way of composing a stock portfolio,” claims Angenfelt. “Of course, years of earnings losses can be justified for businesses that are breaking new ground and want to take market share,” he elaborates. Even so, there is a high risk and likelihood of permanent loss of capital by investing in loss-making companies as well as businesses trading at triple-digit profit multiples, according to Angenfelt. “All shares can be a bad investment if the price is too high at the time of purchase regardless of how good the company is,” says the veteran portfolio manager. “This is a fact that many investors have experienced during the spring.”

Chelonia Market Neutral seeks to maintain market-neutral equity exposure but can have a maximum of 30 percent of the fund’s value in long or short net exposure to the stock market (currently at nine percent) and with a maximum of 300 percent in gross exposure (currently at 139 percent), with its long positions focusing on attractively valued Nordic small- and medium-sized companies. Magnus Angenfelt seeks to find growth at a reasonable price (GARP) across companies with clear economic moats. “In addition, we want to see growth, strong balance sheets, good owners and company management in our long positions,” says CIO Anders Palmqvist, who is part of the Chelonia fund’s advisory board alongside a team of Senior Advisors.

“We believe it is easier to identify losers than winners, as potential winners are often too expensive.”

“The company profile on the fund’s short side is in many ways the opposite,” says Angenfelt. “But above all, it is the structural headwind we are looking for in our shorts, related to evolutionary trends and disruptive threats due to technology change, changes in customer behavior, sustainability and so on,” he elaborates. “We believe it is easier to identify losers than winners, as potential winners are often too expensive,” explains Angenfelt. Valuation has always been the central piece of Angenfelt’s selection process. “We share this view with Warren Buffett,” says Palmqvist, referring to Buffett’s comment on the Dot-com bubble in 1999:

“Sometimes, incidentally, it’s much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then … and that was to short horses … Living in Nebraska, we would have found it super-easy to borrow horses and avoid a “short squeeze.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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