The second quarter of 2019 was another strong one for the Mercator Fund.*
|MS EAFE index||3.53%||14.24%||1.35%|
The world has turned decidedly manichaean. So have stock markets. Everything seems divided between good and bad with nothing in between. Favored stocks go up, no matter the valuation. Unfavored stocks go down, no matter the fundamentals.
I call it the Amazon trade. Investors who took profits early on because of the high valuation made good profits but missed out on even bigger long term returns. The lesson is clear: buy winners in an emerging industry and then never sell.
Valuations don’t matter if you own the leader in a winner-take-all environment. Valuations of these perceived winners have now reached last century’s excessive levels. However, today’s investors are more discerning than they were in 1999.
It was all right to be long Amazon (AMZN), but one had to avoid the many Pet.coms. We believe this logic has now been stretched. Shopify (SHOP; 1.21% of MOPPX), which was MOPPX largest holding is an example of the Amazon trade. (Here is what I wrote about Shopify 3 years ago: Shopify: The E-Commerce Solution) The stock was trading at $25 at the time. Three years later, Shopify is up more than 13 times and trading at 35 times 2018 sales.
Shopify is a success story, no doubt. But to say that SHOP is valued for perfection is an understatement. Prudence and the belief that the Amazon trade is overdone lead us to reduce our position to 1.21%.
Stretching this Manichaean logic, the valuation gap between perceived winners and losers has widened to a degree that no longer reflects fundamentals. For example, CrowdStrike (OTC:CRWD), a leading Artificial Intelligence-based cybersecurity platform and a recent IPO, is trading at 38 times forward sales. Compared that to the under 7 times sales that BlackBerry (BB; 2.87% of MOPPX) paid for CRWD competitor Cylance. CRWD's 75% projected growth vs Cylance’s 25% justifies a premium, but the gap seems excessive. BlackBerry, who now has 25% of its revenues coming from Cylance, trades at 4 times trailing revenues. (BlackBerry Should Stop Talking To WS Bean Counters)
Another example is the valuation gap between two highly profitable car manufacturers, Ferrari (RACE)* and Aston Martin (AML.LN; .99% of MOPPX). RACE trades at 12 times trailing revenues while AML.LN is valued at less than 2 times last year’s sales. We sold RACE and bought AML.LN.
I realize that there are many other factors that determine stock prices, but today these excessive valuation gaps offer opportunities to investors looking for small to medium growth stocks overseas.
Hervé van Caloen
Mercator Investment Management, LLC
Mercator International Investment Opportunity Fund (MOPPX)
*Past performance does not guarantee future results. Loss of principal is possible. Investment returns and principal value of an investment in the Mercator International Opportunity Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. For up-to-date performance information please contact the fund’s transfer agent at 1-800-869-1679T.
DISCLOSURES: Mutual fund investing involves risk. Such risks associated with the Mercator International Opportunity Fund (MOPPX) as well as applicable investment objectives, charges and expenses must be considered carefully before investing. This and other important information about the Mercator International Opportunity Fund is found in the Prospectus, a copy of which or current performance information may be obtained by contacting Mutual Shareholder Services (“MSS”) toll free at 1-800-869-1679. We encourage you to read the prospectus carefully before investing. MOPPX Total Annual Fund Operating Expenses is 2.20%. The Advisor has contractually agreed to waive fees and/or reimburse expenses of the Fund to the extent necessary to limit total annual fund expenses (excluding brokerage costs; underlying fund expenses; borrowing costs such as (A) interest and (B) dividends on securities sold short; taxes; and extraordinary expenses) at 1.65%. The waiver of fees and/or reimburse expenses is scheduled to expire on May 31, 2020. Past performance does not guarantee future results. Loss of principal is possible. Investment returns and principal value of an investment in the Mercator International Opportunity Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. For up-to-date performance information please contact the fund’s transfer agent at 1-800-869-1679. Investing in mid or small cap companies can be considered riskier than investing in large cap companies. In addition, the size of companies comprising an Index, although midcap by some country standards, could be considered small cap in the U.S. Currency risk involves the chance that the value of a foreign investment, measured in U.S. Dollars, will decrease due to unfavorable change in currency exchange rates. Arbor Court Capital, LLC serves as the Distributor for the Fund and is a member of FINRA and SIPC
Disclosure: I am/we are long BB, AML.LN, SHOP.
Additional disclosure: This is the Q2 report of my international mutual fund (MOPPX)