1st quarter report 2023

Why 24% of the portfolio is in just one stock plus an incentive to deploy more cash

Aug 14, 2023

Quarterly performance reports for Pilane Capital are compiled from broker statements net of expenses, and publicly available information on the S&P 500.

Results for Pilane Capital v the S&P 500 for the first quarter of 2023 are as follows:

The Pilane Capital: 1.15%
The S&P 500: 7.03%

Review

The lag in returns v the S&P 500 is due to cash not being fully deployed in 2023 so we will look to put cash to work this quarter.

There were two significant purchases in the first quarter, namely, Diageo and Apple.

My main concerns with Diageo are 1) the amount of debt it is not only carrying but how it is increasing, and 2) the softening of future growth.

But the numbers from it’s half-year report looked impressive:

net sales of £9.4 billion, up 18.4%
organic net sales grew 9.4%, with growth in all regions
operating profit of £3.2 billion, up by 15.2%
basic earnings per share of 100.9 pence, up by 19.7%
Free cash flow of £817 million, down by 48%

So long as growth continues, I’m happy.

Moderate growth is still growth.

Apple’s chief problem is being able to sustain the unseasonably high returns on capital and equity it has enjoyed as a result of the pandemic.

Apple is the largest position in the portfolio – a whopping 24%.

Here’s what I said last quarter:

Apple is the best business in the world and so it makes sense to me to disregard textbook portfolio management theory that usually trumpets spreading positions equally among 15-20 stocks.

I’m glad I took my own advice because Apple is performing extremely well so far.

Outlook

Even though Jerome Powell and his team have suspended rate rises, they’re clear about the pathway for future rate rises:

This will only add to the uncertainty that permeates the stock market in 2023 which has shrugged it off as no more than a minor inconvenience.

As rates have been going higher, reasonable valuations have been diminishing, necessitating a renewed focus on those once or twice-a-year opportunities to purchase large stock stocks at a significant discount to their intrinsic value.

I have no idea when that might happen, I only know that human beings make mistakes, and when they do, absurdly low valuations appear.