Inside The Bedokian’s Portfolio: Mainstreet Capital

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what is actually inside our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will talk a bit about the counter, why I had selected it and what lies ahead in the future.

In this post, I shall talk about one of the dividend generating company: Mainstreet Capital (ticker: MAIN).

 

Business Development Company

 

Mainstreet Capital is classified as a business development company, or BDC for short. BDCs are organisations that invest in small and medium, as well as distressed, companies by providing funding and managerial support. To avoid being taxed, BDCs have to distribute at least 90% of their income to shareholders, similar to real estate investment trusts (REITs). This explains why their dividend yields are higher than the rest.

 

BDCs are a unique feature in the United States, and not all BDCs are publicly traded. There are similarities between BDCs and venture capital/private equity firms, with the latter two open to only accredited and institutional investors. This means a retail investor can have venture capital/private equity play by getting listed BDCs.

 

Why Mainstreet Capital

 

If you were to look around the publicly traded BDCs, some were more or less similar to one another in terms of profile, portfolio and sector exposure. Mainstreet Capital is no different than the others, but I prefer their massive diversification in terms of regions across the United States, and different sectors and industries ranging from IT services to construction and engineering.

 

With the exception of 2020, the period between 2018 and 2022 had seen a year-on-year (YoY) growth of between 4% and 51% in Mainstreet Capital’s total investment income, and a YoY growth between 2% and 56% in its distributable net income. The slump of 2020 was not so significant for the investment and distributable net incomes, which were -9% and -11% respectively. Excluding interest costs, Mainstreet Capital is aiming to keep total operating expenses of average assets at 2% or lower.

 

Since late 2007, Mainstreet Capital’s monthly dividends were increasing slowly and steadily. Despite the periods of the Great Financial Crisis of 2008/2009 and the COVID pandemic slump in 2020/2021, the dividend payouts remained minimally constant throughout.

 

Bear in mind that conventional value investing principles may not hold for Mainstreet Capital. It has high gearing, which is common for BDCs since they are in the business of funding private enterprises, so for this case profitability and cash flow are the more important variables to look at.

 

What’s Next

The small and medium enterprise sector is relatively large in the United States, given its industrial and entrepreneurial might that powers the capitalistic economy. Investing into companies of this sector would have huge potential of returns, especially some, if not most, of these are usually seen as supporting the larger, listed/unlisted organisations as sub-contractors. Investing into Mainstreet Capital could ride on the advantages of the potential of small and medium companies.

 

Disclosure

 

Bought MAIN at:

 

USD 36.80 at Feb 2018

USD 38.40 at Oct 2018

USD 36.50 at Oct 2018

USD 40.50 at May 2019

USD 28.50 at Mar 2020

USD 20.30 at Mar 2020

USD 41.30 at Sep 2021

 

Disclaimer

 

Reference:

 

https://www.investopedia.com/terms/b/bdc.asp

The Investing Playbook

The world of financial markets is often unpredictable as the weather, yet among the seemingly random events that occur within it, the markets also tend to behave in a somewhat organized manner (I cannot use the term “predictable” as it would sound like an oxymoron, but then again, the markets are already a form of oxymoronic oxymoron). Calling it an organized chaos, or chaotic organization, would be an understatement. 

I had mentioned a few times in my posts that the markets and the economy in general are run by many moving parts, which in turn are guided by many factors and variables that we can think of (yes, the weather included). Over time, these things would settle onto some sort of pattern, which we can (more or less) guesstimate (I am avoiding the word “predicting” here) what is going to come next.

 

With these patterns, investors sort of came out with their own versions of the investing playbook, or something along that line. It may exist in physical in the form of a scribbled journal or a typed-out manuscript in a Word document on one’s computer, and intangible in the form of spoken words during a discussion or stored within the neurons of one’s brain. The common thing about the playbook is that it is constantly evolving with new inputs after lessons are learnt and feedback obtained from recent experiences.

 

When compared together, the contents of each investor’s playbook will differ with one another, and ranging from almost similar to complete opposite. What works for one may not work for the other, but somehow they still bring in the dough for the authors, some or most of the time.

 

It is good to know the trains of thoughts of other investors (and traders) so that we could learn for the betterment of our investing (and/or trading) selves. You may want to incorporate ideas and concepts that align with your philosophy and methodology, and for those which are against yours, you could either try to amalgamate to suit your needs, or abandon if it is too adverse. No matter the alignment of the others’ playbooks, their common aim is to serve the owner and the eventual readers (and listeners) in their investing/trading journeys.

Apple’s WWDC: The Bedokian’s Take

As Apple product users and shareholders, occasions such as the Worldwide Developer Conference (WWDC) and other Apple Events tend to excite us. However, as we had known for the past years, Apple had turned from revolutionary to evolutionary in their product and service offerings. Unlike the period when Jobs was at the helm, where surprises (and secrets) were galore, the current Apple is kind of predictable during their announcements.

Besides the upcoming new operating systems expected sometime in 3Q 2023 and the new souped up Macbook Air, Mac Studio and Mac Pro, the current WWDC’s piece de resistance is the Vision Pro, which is somewhat expected but still packed a mild surprise to Apple pundits and fans. With its launch, Apple is now treading into the area of virtual (VR) and augmented reality (AR), yet this is not really the true story in my opinion.

 

Many observers noted that VR and AR were nothing new, and some claimed that Apple was WOLS (slow in internet speak) into the market; there were a few devices around, such as Meta’s Oculus and Microsoft’s Hololens, and not forgetting Google Glass, whose support for the Enterprise edition would cease by September 2023. 

 

However, knowing Apple (and their products and services), this is not a standalone product: this is meant to be amalgamated into the whole ecosystem that Apple was and still is building for the users. The presentation video showed that the Vision Pro could be used in conjunction with a Mac, and Disney’s streaming service Disney Plus can be watched on Vision Pro. The potential of the former two: the expansion of the ecosystem with more products, and services, respectively, is huge, and there is no lack of Apple super users and fans who would willingly be part of the entire Apple environmental system. Despite the dominance of Microsoft in the desktop and laptop space, Apple is comfortable being second fiddle, for Windows is an indispensable computing tool, but Apple is the world for its users.

 

The intangible brand power of Apple still holds firm, regardless of the price that was tagged to its products. Although some products are really meant for the professionals (e.g., Mac Pro desktop), for the rest, utility, style and the logo still dominate. This spells good news for the investor, and the past four years saw an increase of Apple’s net income and free cash flow, signs of a company with healthy stable growth.

 

Disclosure

 

The Bedokian is vested in Apple and Alphabet directly.

 

Disclaimer

Having A Ride Of Our Lives

If you had been following very closely to the markets (especially the U.S.’s), you would have probably experienced a metaphorical roller coaster ride, mainly due to the debt ceiling issue that the U.S. government was grappling about, not to mention the various finance and business news channels blasting about it daily. What we had been hearing were things like “markets selling due to debt ceiling concerns” or “markets rebound on resolution of debt ceiling”, or along those lines, and trust me if you had read enough of these, your heart would have experienced the same level of adrenaline rush that was felt as if you were on the Cylon ride in Universal Studios Singapore.

If you are a trader, yes, having those feelings described above would be completely understandable as the positions that you take are short term in nature, perhaps lasting minutes, hours, days or weeks.

 

However, if you are an investor, with a runway of 10 years or more, the past month’s tumultuous ride is nothing but a small blimp in the overall scheme of things. In fact, 1 month out of 10 years is just 1/12 x 10 = 0.83%, and this percentage will go smaller if you increase your runway by 15, 20, 25 or even 30 years (the latter being the typical employment duration for most ordinary folks like you and me). So, if 0.83% of your investment span had experienced the rush, I am not sure if your heart can take it for the remaining 99.17% of the time.

 

Whether you are an active or passive investor, let us not occupy ourselves with the feelings of highs and lows, and instead take the news in our stride and focus on the longer term. Provided you had chosen the correct investment philosophy and methodology, which includes diversification across different asset classes, regions/countries, sectors/industries and companies, and do proper rebalancing according to your age and/or your risk appetite, everything will be fine when the time comes.

 

Keep calm and stay invested.

Eh Aye…

Two English vowels had gotten a lot of fame these few months. Ever since the Chat GPT phenomenon in late 2022, this domain had gotten the attention from students, technopreneurs, and of course, investors.

So, what are the letters? Chances are that you had already guessed them: AI, or artificial intelligence.

 

I had written a piece about AI here with regards to Alphabet’s (or Google’s) response to Chat GPT, and true enough, after suffering initial setbacks to their version Bard, they came roaring back.

 

While AI was nothing new and had been around for decades, the explosion of it beyond just chats and searches is making waves around. The first to be seen was in the arts scene, where there were a lot of AI applications generating graphics and pictures which, for some of them, came across as very real-life. There was even talk about AI replacing some professional jobs, where the practitioners spent years getting the necessary academic qualifications to do them, and this is a nasty bummer to those who may be potentially affected. And now we have had heard of people trying to use AI to carry out their investment decisions.

 

Short of a Skynet or Matrix scenario happening (which I am very afraid of deep down in my mind), the permeation of AI is happening, or going to happen, now, but for this post I am not going to talk about the societal and ethical dimensions of it. Rather, being an investment-related blog, I am going to offer my views from an investor point of view.

 

Associative Investing

 

Let me introduce another AI into the fray: associative investing¹. This A.I. (using this to distinguish from artificial intelligence) is useful in where and how to invest in AI. AI is just a theme, and there are many things and components that support this, and things that benefit from its downstream. One glaring area would be the big companies that utilises AI themselves, with Alphabet and Microsoft being the obvious examples. Another is the chip industry, and to name one of them: Nvidia, whose CEO had just stated a few hours ago that chip manufacturing is an “ideal application” for AI computing². And definitely, we have to include self-driving technologies, which AI plays a big role.

 

Using A.I. is easy; just take an A4-sized paper, draw out mind maps or relationship lines of things that are directly or indirectly related to AI, and you can see where you can further explore the various regions/countries, sectors/industries and companies, and exploit your investment capital.

 

Exchange Traded Funds

 

If drawing hubs and spokes is not your cup of tea, there is still the encompassing method of investing into AI as a whole, and that is via exchange traded funds, or ETFs. There are a few such ETFs available in the market, with most of them listed in the United States. Although the ETF providers had cobbled up AI-related counters in their funds, further research on them such as the indices that they follow, the expense ratios, etc., is necessary as to determine which one(s) is suitable for your investment portfolio.

 

Disclosure

 

The Bedokian is invested in Alphabet directly, and Microsoft and Nvidia indirectly via a S&P 500 exchange traded fund.

 

Disclaimer

 

1 – The Bedokian Portfolio (2^nd Ed), p137-138.

 

2 – Caulfield, Brian. Chip Manufacturing ‘Ideal Application’ for AI, NVIDIA CEO Says. Nvidia Blog. 16 May 2023. https://blogs.nvidia.com/blog/2023/05/16/itf-world-2023/ (accessed 16 May 2023).

Suntec REIT And Apple: Results And Looking Forward

Recently two of our holdings, Suntec REIT and Apple, had reported their quarterly results. The reason why I had selected these two is because of the mixed reactions to the published figures. Let us take a brief look at each of the counters. 

Suntec REIT

 

In a recent announcement, Suntec REIT had recorded a 27.4% decline in distribution per unit (DPU, or dividend in REIT speak) for the first quarter of 2023¹. The reasons cited were higher financing costs, weaker Australian Dollar and Pound Sterling against the Singapore Dollar vis a vis the REIT’s properties in Australia and the United Kingdom, and a lower joint venture income from Marina Bay Financial Centre. This is despite the rise in gross revenue and net property income (NPI) mainly contributed by Suntec City itself. In fact, Suntec REIT had also reported a fall in DPU for the second half of 2022, stating a sharp increase in financing costs for the reason, again regardless to the increase of gross revenue and NPI².

 

From these two pieces of news, the main culprit for the lowering of DPU is financing costs, which is a given due to the rising interest rates that happened within the last 12 months or so, and of course foreign exchange risks.

 

Apple

 

Apple had beaten estimates to its quarterly results³: earnings per share +USD 0.09 at USD 1.52, revenue +USD 1.88 billion at USD 94.84 billion and gross margin +0.2% at 44.3%. However, if we looked below the revenue figures, revenues from the sale of Macs, iPad and services were below expectations, with other products and in particular the iPhone sales carrying the team.

 

Another point to note is that the year-on-year revenues for the current and last quarter had fallen 5%⁴ and 3%⁵, respectively. The CFO for Apple also mentioned that the next quarter results would be similar “…assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter”³. 

 

The Past, The Present And The Future

 

Quarterly results are about the numbers that were achieved and realised during the last three months, which the timeframe is known as the past. We knew that past results are not indicative of future performance, so the relative not-so-good news may not mean as such when the next quarter(s) arrives. Driven by high interest rates, which increased financing costs (and affecting Suntec REIT) and the possibility of a recession (and somewhat affecting Apple), present signs and indicators are pointing to some doom and gloom approaching from the horizon, despite knowing that we truly cannot tell the future.

 

On the flip side, the recent announcement by the Federal Reserve (Fed) had hinted to a pause on further interest rate increases⁶. The Fed, while combating inflation by accelerating interest rates which would likely cause a recession, would want to have a “soft landing”, i.e., a less painful recession or possibly avoiding it altogether. If this do happen, it would be a reversal of the “doom and gloom” mentioned in the last paragraph.

 

So, in conclusion, the markets and economy could go either way.

 

Individual Counter Perspectives

 

With the total opening of borders and mass easing of pandemic restrictions, NPI from Suntec City, the crown jewel of Suntec REIT, is increasing with the return of tourists, shoppers, convention visitors and office workers. In the first quarter of 2023, Singapore had welcomed 2.9 million visitors, according to the Singapore Tourism Board (STB). In addition, STB had highlighted it will work with stakeholders on six key areas, one of which is to be a leading MICE (meetings, incentives, conventions and exhibitions) destination⁷, in which Suntec REIT would be a direct beneficiary.

 

As for Apple, no one could beat its ecosystem of products and services. Recently, they had, together with Goldman Sachs, launched a savings account that offered a high yield of 4.15% to Apple Card users. Under the stewardship of its pragmatic CEO, Apple, though large, is nimble enough to maneuver itself through different regions in terms of production and revenue sources, with India being the next big place.

 

Whichever way the economy is heading, we would slowly increase our holdings if the prices are going down, or to enjoy better returns (dividends, DPU and capital) in the immediate future quarters if the prices are going up.

 

1 – Tan, Felicia. Suntec REIT reports 27.4% lower DPU of 1.737 cents in 1QFY2023. The Edge. 26 Apr 2023. https://www.theedgesingapore.com/capital/results/suntec-reit-reports-274-lower-dpu-1737-cents-1qfy2023 (accessed 7 May 2023)

 

2 – Tan, Janice. Suntec Reit’s H2 DPU falls 9.7% to $0.04074 as financing costs rise. The Business Times. 20 Jan 2023. https://www.businesstimes.com.sg/companies-markets/suntec-reits-h2-dpu-falls-97-s004074-financing-costs-rise (accessed 7 May 2023)

 

3 – Leswing, Kif. Apple reports better-than-expected quarter driven by iPhone sales. CNBC. 4 May 2023. https://www.cnbc.com/2023/05/04/apple-aapl-earnings-report-q2-2023.html (accessed 7 May 2023)

 

4 – Apple reports first quarter results. Apple. 2 Feb 2023. https://www.apple.com/newsroom/2023/02/apple-reports-first-quarter-results/ (accessed 7 May 2023)

 

5 – Apple reports second quarter results. Apple. 4 May 2023. https://www.apple.com/newsroom/2023/05/apple-reports-second-quarter-results/ (accessed 7 May 2023)

 

6 – Schneider, Howard and Saphir, Ann. Fed raises rates, opens door to pause in tightening cycle. Reuters. 4 May 2023. https://www.reuters.com/markets/us/fed-likely-hike-rates-hint-pause-tightening-cycle-2023-05-03/ (accessed 7 May 2023).

 

7 – Raguraman, Anjali. Singapore welcomed 2.9 million visitors in Q1, two-thirds of pre-pandemic numbers. The Straits Times. 7 Apr 2023. https://www.straitstimes.com/singapore/consumer/s-pore-welcomed-29-million-visitors-in-q1-2023-about-two-thirds-of-pre-covid-19-numbers (accessed 7 May 2023)

Buy At A Low, Sell At A High, Then Repeat

Buy low, sell high, make a profit, then repeat.

This is a given. However, a couple of people whom I know had given the recommendation of doing this to the counters which I had planned to hold for the long term.

 

The proposition is simple: let’s take Apple shares for example. Assuming my entry price was USD 100 way back and knowing the Federal Reserve would likely raise interest rates in 2022 (and cause markets to go down), I would sell it at, say, USD 160 at around end January 2022. Then, when the market goes down in June 2022, I would scoop them up at USD 140 and hold them, until the rally in August 2022, where I would sell them again at USD 170. Again, I will buy in at USD 140 sometime in November 2022. In all, I will have a realised gain of USD 90 [(160 – 100) + (170 – 140)] per share, instead of just holding it and gaining nothing without selling.

 

Even netting off dividends (close to USD 1 per share during the abovementioned period) and transaction costs (negligible if using discount brokerages and the number of shares is relatively large), you would still make around USD 80-ish per share. Translating that to just 100 Apple shares, that will be around USD 8,000-ish. That is a substantial injection of capital that can be deployed elsewhere.

 

It is a simple and convincing strategy, and a tempting one, too, for me as a buy-and-hold investor. Imagine with the profits, I can get additional dividend-generating counters to do the compounding effect further and grow the portfolio at a faster pace. How about giving this a shot?

 

Price Movements Are Unpredictable

 

The example above is cited on hindsight, and hindsight is 20/20. If the Apple shares were sold at USD 170 in August 2022, and if it continued to go up, you would have lost the opportunity to buy back. Even if it did go down, it could be at a new low (not USD 140 but perhaps USD 180), and you would be forking out an extra USD 10 for each share to re-enter (provided you still want to stay vested in Apple).

 

Price movements are unpredictable. Using technical analysis (which I am not good at) and/or “guestimate” by using current information and indicators (which I am below average at) does not guarantee a set price. Sometimes there may be circumstances and factors which are unexpected and/or overlooked, and they could throw a spanner in our forecasts.

 

And lastly, the adage about prices holds somewhat true, which is “high can go higher; low can go lower”.

 

What To Do With The Gains And Capital

 

The USD 8,000-ish gain stated in the example, plus the initial capital, would need to be deployed somewhere, else the purpose is defeated if this amount is sitting idly waiting for the next entry to Apple. This is why it is important to have a “wishlist” of securities to go into once additional funding is received; they could be new counters which you had recently prospected, or existing holdings that are suitable for entry, or maybe just split the amount into periodic investment into ETFs, or a combination of those mentioned. 

 

This is related to another concern: what if the capital from the sale of Apple is already vested, and Apple has reached the price for reentry? If you do not have available capital, in a way you are prevented from getting back in. It is an oxymoron to sell away the already vested capital to reinvest, especially if the newly vested securities are doing too well to be pulled out, or it is not due for withdrawal (e.g., parked in term treasuries and bonds).

 

Conclusion

                             

Despite my concerns above, I am not critical to this idea; after all, ideas in the investing and trading world are worth knowing and learn from. It is just that whether you would want to adopt this into your own investment methodology.

 

May the Fourth be with you.

Disclosure

 

The Bedokian is vested in Apple.