January 2021
To Our Officers and Investors:
Enclosed you will find our report on the 2020 performance of the Nintai Investments LLC Composite Portfolio managed by Nintai Investments LLC. Returns reflect performance since October 31, 2017 when the company began operations.
2020 returns
Overall, we were quite pleased with the Nintai model portfolio which is used as the basis for investment selection and asset allocation. At year-end, Nintai Investments LLC had $12,610,600 in assets under management (AUM). At the beginning of 2020, the company had $6,411,300 in AUM.
Our 2020 performance surpassed all three major indexes which we track. The Nintai Composites portfolio generated a +28.47% (inclusive of fees) return versus a +18.40% return for the S&P 500 Index, a +19.96% return for the Russell 2000 and a +10.81% return for the MSCI ACWI ex-U.S. Index. Since September 2016, the Nintai Investments sleeve has outperformed the S&P 500 with an +19.82% annualized return versus an +12.16% annualized return for the S&P 500, a +8.89% annualized return for the Russell 2000 and a 7.11% annualized return for the MSCI ACWI ex U.S. index.
Portfolio changes
During 2020, we added one stock to the portfolio β (Investment partner access only). Nearly all additions were made in spring 2020 when the market suffered its Covid collapse. Other additions mostly reflect additions made to a single partner portfolio where substantial cash infusions are made each month. We do not add to positions to balance the portfolio in terms of industry, capitalization size, etc. Purchases and sales are made on valuation criteria alone.
ADD: Investment Partner Access Only
BUY: Investment Partner Access Only
SELL: Investment Partner Access Only
Winners and Losers
We had three stocks that drove the outperformance of the portfolio β Abiomed (ABMD, Financial), Veeva (VEEV, Financial), and Masimo (MASI, Financial). All three are essentially health care stocks (Veeva's vast majority of revenue comes from life sciences though it is a customer relationship management software provider). One of our net losers was also health care-based β Biogen (BIIB, Financial). The other stock leading the way in losses was energy-based Computer Modelling Group (TSX:CMG, Financial) (a perennial loser since purchasing it three years ago).
Abiomed (ABMD, Financial) up 94.3%
Abiomed has shot back from a very difficult CY 2019. The company was forced to rebut claims of high mortality figures with the Impella heart pump. Numbers were presented that seemed to show the company's data included in their FDA submission was inaccurate. This followed on the back of a series of studies carried out by the American Heart Association and presented at the Association's convention in November 2019. In the final analysis, the FDA agreed with ABMD's initial submission data and started a turnaround in the stock price with it reaching 114% above its low in April 2019.
We think the company remains an outstanding holding with the exception of its price to value ratio. We think it is currently trading at 151% its estimated intrinsic value. Going forward, we don't think investors should expect too much in regards to short-term returns. That said, Abiomed continues to run on all cylinders. Revenues and free cash flow have grown at a CAGR of roughly 30% and 48% over the past five-year period. Most recently, gross, FCF and EBITDA margins were 82.99%, 32.18% and 30.07% respectively on trailing 12-month figures.
We will continue to hold the company in our portfolios as we believe the company has a tremendous long-term future. If this should change (such as the price increasing even further from its estimated intrinsic value) we will certainly let our investors know.
Veeva (VEEV, Financial) up 91.1%
Veeva continues its remarkable performance of highly profitable growth. For the third quarter, subscription revenue and normalized EPS grew 34% and 29%, respectively, to $378 million and $0.78. The company continues to benefit from the life science industry's drive for efficiency while leveraging its strong (and improving) reputation across the various niche segments. The company also picked up a notable win from a top consumer company. As a result of the strong quarterly results, management increased its full-year guidance but tempered it with a conservative preliminary 2022 preview that will likely be adjusted upward with fourth-quarter results. We expect long-term growth to continue over the next decade or two. According to a Markets and Markets report, the global market for health care cloud computing is expected to grow from $28.1 billion in 2020 to $64.7 billion by 2025 at a CAGR of 18.1%.
After reviewing our assumptions on free cash flow growth and estimated profitability, we increased our estimated intrinsic value by 27%, bringing the value nearly par with the shares' current price. If the price should drop, we will likely add more to existing positions.
Masimo (MASI, Financial) up 70.3%
Total revenue for the 3rd quarter was roughly $280 million - a 21% YoY growth - which beat consensus. Management have guided $1.13 billion in top-line earnings, which is close to our estimates. With this increase, we increased our valuation by nearly 18%.
MASI announced on November 2 that it had agreed to acquire U.K.-based LiDCO (LDRUF) in a cash transaction for around $40 million. LiDCO sells non-invasive and minimally invasive haemodynamic monitoring equipment, alongside a suite of anaesthesia systems. These types of devices help physicians and surgeons monitor cardiac output and functionality during high-risk procedures and in critical illnesses. LiDCO has roughly 60% market share of the U.K. market. Over 80% of all NHS institutions use the company's technology in house. The company also exports products to several other markets. We value the haemodynamic market segment at roughly $880 million in 2020 with expected growth to $1.4 billion by 2026. We are big fans of the LiDCO acquisition and think they struck a bargain price. MASI's balance sheet is rock solid. We wouldn't be surprised if management put it to effective use over the coming periods, using the $660 million in cash from the fourth quarter to target higher margin companies and other complementary product lines.
Masimo shares are dramatically overpriced and we won't be adding to our current positions unless our valuation either dramatically increases or share prices drop considerably.
The two shares that made the largest negative impact on the portfolio was Computer Modelling Group and Biogen.
Computer Modelling Group (TSX:CMG, Financial) down -39.2% (down -20.3% over three years)
CMG has been a loser since we first purchased shares at the inception of the Nintai sleeve portfolio. Like many energy stocks over the past three years, a continual pressure on oil prices have ben a strong drag on companies in the energy sector. There certainly isn't much to brag about when it comes to CMG. Free cash flow is down 10% annually over the past five years. Revenue is down 2.5% annually over the same period. The company recently took on $30 million in debt. We are very close to pulling the trigger, taking our losses, and closing out the position.
Note: In January 2021, the company took on roughly $31 million in long-term debt. This action has firmed our decision to liquidate the position in the company, which we will begin in first-quarter 2021.
Biogen (BIIB, Financial) down -15.8%
The current Biogen was formed through the merger of Biogen (with its MS drug Avonex) and Idec (with its cancer drug Rituxan). This year the markets have been spooked by Rituxan going off patent (which expired in 2018) and the subsequent approval of biosimilars in 2019-20. Rituxan's new subcutaneous Rituxan along with their new antibody Gazyva will mean Biogen continues to be a player in oncology.
Multiple sclerosis is Biogen's main therapeutic area. Avonex and longer-acting Plegridy generate $2 billion in annual sales and remain the leading MS interferon drugs. Biogen also acquired full rights to MS antibody Tysabri (more than $1.5 billion in annual sales) from partner Elan. Oral MS drug Tecfidera ($4 billion annually) had a strong launch and continues to show solid safety and efficacy data. But - like all branded products - generics are coming online, which eat into Biogen's revenue growth and margins. One piece of good news: while pricing power and demand for Biogen's injectable MS portfolio are eroding in the face of new competition, Biogen receives substantial royalties on the biggest new competitor, Roche's Ocrevus.
Outside of MS, Biogen has strong human genetic validation for its neurology pipeline. Spinal muscular atrophy drug Spinraza (partnered with Ionis) is a $2 billion franchise, although competition from Novartis (gene therapy Zolgensma approved in May 2019) and Roche (oral drug Evrysdi) are beginning to erode U.S. Spinraza sales. Aducanumab has the largest potential, and could launch as the first disease-modifying Alzheimer's therapy by early 2021. While there is significant uncertainty surrounding the potential approval of aducanumab, we think the market also underestimates Biogen's remaining pipeline, which includes a continuing partnership with Ionis and drug candidates to treat conditions including stroke, Parkinson's, pain and ALS.
Portfolio characteristics
The current Abacus view as of December 2020 shows that the Nintai Composite Portfolio holdings are roughly 33% below in value to the S&P 500 and projected to grow earnings at a 28% greater rate than the S&P 500 over the next five years.
Combining these two gives us an Abacus Comparative Value (ACV) of +61. The ACV is a simple tool which tells us how the portfolio stacks up against the S&P 500 from both a valuation and an estimated earnings growth stand point. The number shows a portfolio much cheaper in value with much greater profitability and a sharply higher projected growth. We like to see the ACV above 25, thereby giving the portfolio the best chance at outperforming the general markets. We have not seen such a high ACV (+61) since the late 1990s. We believe the portfolio is well positioned for the future.
Portfolio industries
We remain highly focused in my industry and sector weightings. I currently have holdings in only five of the S&P 500's 11 categories β financial services, industrials, technology, consumer defensive and health care.
Final thoughts
2020 was one of the most remarkable years I've seen in my relatively short investment career. Interest rates on nearly $17 trillion of government debt trade at negative interest rates. A global pandemic has already killed 400,000 US citizens and β as of January 2021 β adds another 4,000 fatalities per day. The year also saw the U.S. president impeached (and impeached again in January 2021) but not convicted, only to see him lose the general election in November. This was followed by β what can only be called bizarre β behavior that culminated with a riot seeing the U.S. Capitol overrun by an uncontrolled mob. Yet β even with all that - 2020 marked the eleventh year of the U.S. bull market.
Frankly, many times this year we were at a loss for words to describe what we were seeing on TV or in the markets. That said, we focused on the only thing we know works β investing in high-quality companies led by outstanding capital allocators with rock solid balance sheets, deep competitive moats and high returns on capital and free cash flow. This has stood us in good stead over the past two decades and did well by us again in 2020. Will it continue to work going forward? We believe the Nintai portfolio is structured to take advantage of these high-quality companies in both a growing or contracting economy. Obviously, past returns are no guarantee of future performance, but we like our odds.
Reflecting on the events over the last 12 months has only strengthened our goals of wisely allocating capital and prudently managing risk while attempting to generate adequate returns. The sudden market correction in the spring of 2020 reinforced the feelings of responsibility we have in providing prudent and risk-averse investment advice. Every day we successfully meet our partners' investment goals, the team at Nintai feels a great sense of accomplishment and gratitude. Should you have any questions, please do not hesitate to contact me by phone or email.
Thomas Macpherson
603.512.5358
My best wishes for a safe, happy, and healthy 2021.
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