My lessons learned with the crash of Aryzta

I have already mentioned that one of our main positions is the Cobas International fund that has lost around 5% since its start. The main reason for this underperformance is its bet for Aryzta (ARYN).

Buy low and sell high or was it the other way around?

Cobas started buying shares when it traded around 30 CHF. After a fall, they explained the investment thesis in their annual conference. According to the valuation multiples, they were buying at a discount of at least 30%. And thought that the market would recognize Aryzta’s value in 18 or 24 months.

Stock price of Aryzta in 2018 until August 10

It was one of the main bets of the fund and therefore they were very confident about it. When it went down, they kept buying. And it kept going down. And they kept buying. And it kept going down.

And then a limitation appeared. No single stock can make up 10% or more of the fund. In other words, even if they are certain that they are going to earn a lot of money, they can’t bet more than 10% of the fund on it.

However, as the stock continued to fall it had a lower and lower weight in the fund, allowing them to buy again. On the other hand, the moment the price rises they will have to start selling to avoid exceeding 10% again.

The confidence that Cobas had on the company together with this limitation have caused many participants to consider investing on their own directly in Aryzta. I have to say that I have been tempted many times but I didn’t pulled the trigger.

Living this situation first-hand has allowed me to learn a lot without much consequence for our portfolio … as of today, because this story has only just begun.

Lessons learned from the Aryzta bump

1. The importance of the portfolio

When investing in individual stocks you have to know when to buy and when to sell. That is, when a company is cheap and when a company is reasonably valued (or even expensive). As if this were not enough, you have to manage the portfolio to avoid risks. In the case of Cobas, one of their main bets went wrong. I can’t think how it could have gone worse than it went. I think they can’t either. But despite this, the fund didn’t fall by even 10%. That is, there are many other stocks in the portfolio that have softened this fall.

2. It is impossible to know when it is done falling

I have followed the stock since the first drops. Around 25, the general idea was that it was very cheap. Credit Suisse came in, giving everyone confidence. Then it fell to 20. Many thought it was absurd. The price hit 15. The analysts reviewed it negatively (curiously, also Credit Suisse, go figure …). “At these prices everything bad that can happen is already discounted, from this point it can only go up”. It went down to 10. “Will it go bankrupt?” At this price it seemed that the bankruptcy was discounted but the company had cash flow and the banks would negotiate. It seemed impossible. Also Cobas was still in and being such a big bet they would have closely looked at the financial. The price went to 9. 20% of the price were shorts (people betting that the company will continue to down). “With all those funds betting against it … Coud it be that we got it wrong? Maybe it’s better to sell now before it goes to 5 “. Then Aryzta announced a capital expansion, reducing its potential to practically half.

The noise and irrationality of price movements create a lot of uncertainty. I’ve just called “irrationality”, but in reality it is also impossible to know if the movements are based on reasonable things or not.

3. Difficult times are slow

We have never been invested during a strong market downturn. The objective is to stay cool, hold all our positions and keep investing. Today it seems simple but until we live that situation we won’t know for sure.

If the entire fund had fallen by 60% and the rest of our portfolio had fallen by 20%, how calm would I be? It is hard to know. What I have seen when following Aryzta is that time goes by very slowly.

When I see past downturns in the graphs everything seems very fast. It is only one centimeter in the graph

Actually, that centimeter is equivalent to several months and they are very long. You never know when they will end. To this day it is not at all clear whether Aryzta will continue tgo down or not. And if it goes up, nobody knows how long it will take or how high it will go. It is much easier to endure 5 months knowing that it is 5 months than to endure 4 without knowing if it will be 4 or 10.

4. It is not as simple as it seems

At the Cobas conference where Aryzta’s investment was explained for the first time, I got the impression that it was an obvious investment. Bakeries increasingly use frozen pastry because it is becoming more and more similar to the one they used to make in their premises. Moreover, the baker can go to work at 7:00 am instead of 3:00 am. It seems super simple. It is not. Aryzta provides buns to McDonald’s, it has retail businesses like Fornetti (also through franchising, competing both options with the traditional bakers to whom it also sells), a chain of frozen stores in France, etc. Maybe the issue of the market share of frozen pastry is key but there are many more things. It is also not as easy as looking at accounts and comparing multiples, multiples are like that because the market thinks that the company is worse than others, not because they are inherently wrong.

At the Cobas conference where Aryzta’s investment was explained for the first time, I got the impression that it was an obvious investment. Bakeries increasingly use frozen pastry because it is becoming more and more similar to the one they used to make in their premises. Moreover, the baker can go to work at 7:00 am instead of 3:00 am. It seems super simple. It is not. Aryzta provides buns to McDonald’s, it has retail businesses like Fornetti (also through franchising, competing both options with the traditional bakers to whom it also sells), a chain of frozen stores in France, etc. Maybe the issue of the market share of frozen pastry is key but there are many more things. It is also not as easy as looking at accounts and comparing multiples, multiples are like that because the market thinks that the company is worse than others, not because they are inherently wrong.

Obviously, Cobas shouldn’t disclose the detailed investment thesis in a conference, if only because there is no physical time for them to flesh out all the details. But as an individual investor I take their explanations with a pinch of salt. Never as the full picture of the investment thesis. Of course, this applies to any investment thesis of any fund. Everything seems very easy until things go wrong and complexity manifests itself. And we may see many “geniuses” with obvious investments suffer in the next 2 or 3 years.

Photo credit: Pixabay

One Comment

  1. Frank Reiss

    Another important lessen for every portfolio manager should be never to take a risk that could destroy your fund and reputation. It’s hardly imaginable why the heck Parames took such a risk. He must have known that if the cap increase comes he cannot fully participate (because of the 10% rule, because he doesn’t have enough cash). That’s why he had to be against the cap increase and for a smaller one, that’s also the reason why he had to liquidate parts of its position right before the cap increase (just compare the September factsheet with its Aryzta holdings to the one at the End of October). He as many others how don’t know Aryzta long enough completely misjudged the reality by ignoring the balance sheet, of course a lot went wrong for Aryzta but already before Cobas bought its first position it was clear that a cap increase is inevitable. Pair that with a new management who has the same wrong picture and you have a cap increase with 90% dilution.

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