Theme and Background
This chapter is the first part of Azvalor's quarterly letter to investors, primarily discussing investment performance and operational logic in the first quarter of 2023. The report emphasizes that market volatility should be viewed as an opportunity rather than a risk, and value investors should actively build positions when others are fearful.
Core Views
The author's core investment thesis is: Volatility creates buying opportunities, and market panic leads to forced selling, thereby providing entry points for excess returns for deep value investors. Counterintuitive judgments include:
- When the market is calmest and most "safe" (as measured by traditional risk indicators), valuations tend to be the most expensive, and long-term returns the worst.
- The author argues that other institutions are wrong to equate volatility with risk, while Azvalor arbitrages through counter-cyclical operations.
Key Arguments and Data
- First Quarter Performance: The Iberian portfolio posted an absolute return of -1.2%, outperforming the benchmark index (-2.8%). As of the letter's release, the portfolio had risen 4.6% year-to-date, continuing to outperform the benchmark.
- Portfolio Valuation: The author estimates the per-share equity value of the Iberian portfolio at 205 euros, implying a 46% upside.
- Trading Record: Multiple buy and sell transactions were executed in the first quarter, as detailed below:
| Operation Type |
Company Name |
Key Background |
| Partial Sale |
Mota, Técnicas Reunidas, Jerónimo Martins |
Reduced positions after significant share price increases |
| Full Sale |
Mas Móvil, Viscofan, Semapa |
Liquidated positions after significant share price increases |
| New Purchase |
OHL, Codere, Prisa |
Built positions after sharp price declines or special events |
| Increased Position |
Almirall, Acerinox |
Added to positions when shares became more attractive |
- OHL Case: The author bought for the first time after tracking the company for 20 years, entering after a share price decline of over 30%. Following the sale of its concession business, the group's net cash exceeded its market capitalization, with the market "giving away" its construction business for free. The author acknowledges that parts of the construction business (Spain, parts of the US) have clear value, while other parts (Latin America, Eastern Europe) have option value. However, given the business complexity, the position is limited to 2%.
- Codere Case: Capitalized on low market attention to acquire quality assets at a reasonable price.
- Prisa Case: Bought after a capital increase significantly reduced financial risk, bullish on its Santillana business's exposure in Brazil (which had just emerged from a multi-year severe recession and entered a positive economic cycle).
Companies/Assets Involved
- OHL: New purchase, position at 2%. Bullish rationale: Net cash exceeds market cap, construction business undervalued by the market. Risks: Business complexity, management changes.
- Codere: New purchase. Bullish rationale: Good asset quality, attractive geographic exposure, reasonable price.
- Prisa: New purchase. Bullish rationale: Reduced financial risk after capital increase, Santillana business benefits from Brazil's economic recovery.
- Mota, Técnicas Reunidas, Jerónimo Martins: Partial sale. Bearish rationale: Share prices have risen significantly, taking profits.
- Mas Móvil, Viscofan, Semapa: Full sale. Bearish rationale: Share prices have risen significantly, liquidating positions.
- Almirall, Acerinox: Increased positions. Bullish rationale: Shares have become more attractive.
Investment Insights
- Counter-cyclical operations are core: Investors should actively research and build positions during market panic and sharp price declines (e.g., OHL down over 30%), rather than avoiding them.
- Focus on special situation opportunities: Events such as capital increases (Prisa), net cash exceeding market cap after business sales (OHL), and low market attention (Codere) often create undervalued entry points.
- Position sizing and risk awareness: Even when bullish, limit positions in complex businesses (e.g., OHL at 2%) to avoid excessive exposure to uncertainty.
Theme and Background
This chapter focuses on the operational logic and performance of the Azvalor Internacional portfolio. The author refutes the external view that simplistically categorizes it as a "commodities fund," emphasizing that its core is a "bottom-up" value investing strategy, which generates excess returns through stock selection rather than industry classification. The backdrop for the current strategy's effectiveness is heightened market volatility and diverging individual stock returns.
Core Thesis
The author's core investment argument is: The portfolio should not be defined by industry classification, but rather by the independent value and margin of safety of individual stocks. Even if the portfolio has a high weighting in commodity stocks, its essence remains holding a few severely undervalued companies. The author believes the market has begun to reflect the portfolio's value, but there is still significant upside potential (potential gains exceeding 100%).
Counter-Intuitive / Consensus-Beating Judgments:
- The market generally views Azvalor as a "commodities fund," but the author argues this is incorrect because individual stock performance within the same industry can vary dramatically (e.g., the weekly performance of coal stocks Consol Energy and Arch Coal was diametrically opposite).
- The author believes that a high-volatility, low-correlation market environment actually benefits this strategy, as the "dispersion of returns" among individual stocks widens, creating opportunities for value investors.
Key Arguments and Data
- Performance: The international portfolio fell 5% in the first quarter, slightly underperforming its benchmark; however, year-to-date (as of the report), it has risen 5.1%, significantly outperforming the benchmark.
- Portfolio Concentration: Holds 38 companies, with the top 15 positions accounting for 74% of the portfolio.
- Valuation and Potential Return: The portfolio's estimated value has risen to €250 per share, implying a potential upside of over 100%.
- Dispersion of Individual Stock Returns (Key Data): The table below shows the return difference between the best- and worst-performing stocks within various industries from May 2016 to May 2018, demonstrating the misleading nature of industry classification.
| Industry |
Best Performing Stock |
Return |
Worst Performing Stock |
Return |
Difference |
| Telecom |
Más Móvil |
Significant Gain |
British Telecom |
Significant Decline |
~500% |
| Banking |
HSBC |
Relatively Stable |
Banco Popular |
Plunge |
Massive |
| Coal |
Consol Energy |
+25% in a Week |
Arch Coal |
-20% in a Week |
45% |
- Operational Case: During the market volatility in February, the author sold Shutterfly and Trip Advisor on their rallies, reallocating capital to undervalued stocks such as Ensco, Transocean, Diamond Offshore, and Hudson’s Bay.
Companies/Assets Involved
- Buenaventura / Grupo Mexico: The author believes that if copper prices remain high, these two companies have far greater potential than Antofagasta (bullish).
- Consol Energy: A US coal stock that rose 25% in a single week, while competitor Arch Coal fell over 20% in the same period (bullish, used as an example of stock-picking ability).
- Shutterfly / Trip Advisor: Rose against the trend during the February market sell-off and were sold for profit by the author (position reduced).
- Ensco / Transocean / Diamond Offshore / Hudson’s Bay: New positions bought at low prices during the February volatility (bullish, long-term holds).
- Cameco: A uranium mining company; the author acknowledges its stock price is highly correlated with the uranium price but still requires in-depth analysis (neutral to bullish, dependent on uranium price judgment).
Investment Implications
- Beware of Industry Classification Traps: Investors should not allocate capital based solely on industry labels (e.g., "commodities," "telecom"). Return differences between stocks within the same industry can amount to hundreds of percentage points. In-depth analysis of each company's independent fundamentals is essential.
- Leverage Volatility: Market panics that lead to mispricing of individual stocks present opportunities to build positions. The author's strategy of selling strong stocks and buying weak ones during the February volatility exemplifies "contrarian investing."
- Focus on Return Dispersion: In a high-volatility, low-correlation market environment, individual stock performance diverges more sharply. Value investors should concentrate on finding "dispersion opportunities"—stocks that are mispriced by the market and decoupled from their peers.
- Portfolio Concentration and Margin of Safety: The author holds a highly concentrated portfolio (top 15 positions account for 74%) and emphasizes that the portfolio's estimated value far exceeds its current price (potential upside >100%). This suggests that a deep-value strategy requires high concentration and rigorous calculation of the margin of safety.