Refining the Coffee Can Portfolio: More Conviction, Less Noise
Exiting Australia, Doubling Down on China, and Strengthening the Core
Spring hasn’t come yet, but spring cleaning continues at the Coffee Can Portfolio.
I wrote recently about how I have been consolidating my positions—the last post covered exiting 20 tickers and rotating them all into existing ones. That process continued into February. At the end of that post, I highlighted a few stocks in the portfolio whose forward returns I was doubtful of.
After careful analysis, I decided to exit my Australian positions altogether—all four stocks: ASX:BKW, ASX:CGF, ASX:IRE, and ASX:DMP. I read through their half-yearly reports, and none stood out. It is possible that one or more of them might perform well over the next few years, but as investors, the key question is whether they offer a better aggregate return than the available alternatives. Given that, the Aussie positions have all been rotated into other APAC holdings—primarily my Chinese positions and Sumitomo Corporation of Japan. I also exited AMCR (listed in the US but headquartered in Australia) and reallocated that capital into Berkshire.
In another minor consolidation, I have exited my Unilever (LON:ULVR) and Legal & General (LON:LGEN) positions and rotated the monies into Bunzl, BAE systems and my London listed India ETF - LON:IIND.
China: Left for Dead but Delivering
China has largely been left for dead over the past two years. While I haven’t sold a single stock and have quietly been adding to my positions, the businesses themselves have been putting up impressive numbers. Skimming through Chinese quarterly reports tells some interesting stories:
Alibaba has been notching up strong quarterly profits, projected to book an EPS of ~HKD 8 per share this year, compared to HKD 3.41 and HKD 3.93 in the past two years1.
JD.com has reported EPS of ~HKD 10.19 in the first three quarters, compared to HKD 6.54 a year ago2.
NetEase has shown more moderate growth, increasing EPS from HKD 9.05 to HKD 9.19 over the past year3.
Tencent continues to post stable growth, with EPS of RMB 5.64 vs. RMB 5 a year ago4.
It seems both the Chinese economy and corporate earnings are stabilizing, yet valuations remain depressed due to the prevailing "China is uninvestable" narrative.
The bigger question is—what’s worse? Holding overvalued stocks in the US, the best-run and regulated market in the world, or holding cheap stocks in a market known for opacity and government interference? I’ve opted for the latter, but this is an extremely subjective decision that each investor should evaluate carefully. In my case, since the choice was to rotate out of Australia into China, the hurdle rate was much lower, making the decision easier.
The New Portfolio Structure
After this consolidation, my portfolio now falls into the following buckets:
📌 Anchor Stock 📌
Single stock—Berkshire, forming about a third of my portfolio.
🇮🇳 India 🌱
A collection of three ETFs—IIND, which I have written about earlier, and now adding BATS:SMIN and NASDAQ:INDY.
Indian stock markets have retreated about 20% from its all time high last summer. In fact the markets might correct a little bit further due to a combination of fundamental and technical reasons - retreat of foreign investors who measure returns in USD, swapping out of value stocks in the indices with growthy stocks leading to valuation blow ups, and a general clamp down on excessive F&O speculation by the regulators. This is fine and a welcome correction. It seems that the next 2-3 years should present a decent buying opportunity and I plan to add to my position through these ETFs on a regular basis.
🇨🇳 China 🐉
A collection of seven stocks I’ve previously written about. I continue to think these form a solid basket to capture potential upside.
💎 Other Value 💰
A small set of five tickers (8053.T, LON:BA, LON:BNZL, TSE:AEM, TSE:SJ) from around the world that I remain excited about.
🛡️ Hedges and Contrarian ETFs ⚔️
Gold remains my primary hedge against market volatility—this hedge has worked well so far.
🎲 Low Conviction 🤔
A collection of eight tickers (BME:ENG, BME:RED, EPA:SAN, ETR:FRE, SWX:NESN, SWX:NOVN, SWX:ROG, TSE:OTEX) where I either need to conduct further research to build conviction or find a way to divest.
In essence, I now hold high-conviction positions in 16 tickers, comprising ~90% of the portfolio. That’s a significant concentration shift from the 50 tickers I held late last year. I fully expect volatility to rise, but it should also result in a higher aggregate upside.
I'd rather have a lumpy 15% return over time than a smooth 12% return.
-Warren Buffett
Performance Review: Replacing Weak Links
A quick note on performance: The IRR of the exiting positions was an abysmal -4.03%, with an alpha of -17.16%. The two new entrants have been in my portfolio for a few years and enter with an IRR of 8.23% and an alpha of -5.72%. So, in effect, I’m replacing very poor performers with slightly less poor ones. However, both baskets still dilute the broader Coffee Can Portfolio (CCP), which has an IRR of 12.14% and an alpha of -1.12%.
Going forward, I will include past positions’ IRR when discussing performance—only that provides a true picture of how the portfolio has performed, accounting for past mistakes. Intellectual honesty is the least we bloggers can afford.
The Road Ahead
On the bright side, the portfolio's overall performance has significantly improved. The IRR now stands at 12.14%, up from 9.26% at the end of Q1’24, and alpha has narrowed from -4.95% to -1.12%. With the latest round of consolidation and the exit of poor performers, I remain hopeful that we can move from negative alpha to positive territory.
The external Coffee Can Portfolio sheet has been updated to reflect these changes, including the new composition and bucketing approach.
Onwards and Upwards—Happy Investing!
Disclaimer: I am not your financial advisor and bear no fiduciary responsibility. This post is only for educational and entertainment purposes. Do your own due diligence before investing in any securities.
Alibaba Latest Quarterly Result
JD.com Latest Quarterly Result
NetEase Latest Quarterly Result
Tencent Latest Quarterly Result