February 23, 2021

Will Schalke 04 stay alive until the next summer?









The performance of Schalke 04 in the German football league has been incredibly unsatisfying during this season. Hence, it wouldn't be a big surprise to see Schalke dropping out of the first league after this season. Obviously, a relegation from the first league would have major effects on the long-term financials of the club. However, I came across the fact that Schalke has a bond outstanding that is already due in June 2021. And precisely this bond may present a great opportunity. In total, the Fussballclub Gelsenkirchen-Schalke 04 e.V. has bonds with a nominal value of EURm 50 outstanding, of which EURm 15.9 mature on July 7, 2021 and EURm 34.1 mature in 2023. Inexplicably, both the SCHALKE 04 ANL. 16/21 and the SCHALKE 04 ANL. 16/23 have very similar annual yields to maturity. That is something I simply cannot understand, as the risk profiles of those two bonds could not be more different from each other.


SCHALKE 16/21 - The Idea

As with every bond investment, the upside is capped while the downside can be quite significant. Hence, it is crucial to understand, what the key risk determents are. There are two major questions one has to figure out: Will Schalke make it until the end of July? And will they have available funding to pay back the EURm 15.9 due plus the last interest payment, i.e. a total of approx. 17 million euros?

To begin with, bear in mind that the first question is actually not related to whether Schalke may drop out of the Bundesliga or not. The financial impact from that will only roll in after the bond has been paid back. Also, the management of the club stated that the financial planning for the current season is secured and they do not expect any difficulties in obtaining the license for the next season (neither for the first nor for the second league). More importantly, the CFO stated that she is even "convinced that Schalke could [financially] manage a year" in the second league. While I would not underwrite that statement, we have to remember again that this is completely irrelevant to the maturity of our particular bond.

Yet, the second question is even more important for assessing the situation. To do so, we have to put the discussed bond into the context of the whole financing structure. Schalke has been highly levered for many years and reported total liabilities of EURm 205 per 30.06.2020. It is expected that the amount had further increased to EURm 240 per 31.12.2020 as the club obtained a state guarantee of EURm 40 during the second half of the year. The bond due therefore only represents a paltry 7% of the total debt.

Moreover, Schalke has recently shown that they can raise funding of this magnitude at relatively short notice. For extending some sponsoring contracts early, the club received a down payment of approximately EURm 6. In addition, the assets of the soccer club should be mentioned. With the debt-free Veltins Arena (a sell-and-lease-back might be possible), the valuable marketing and catering rights, and a possible sale of the eSports division (Sport1 estimates the value to around EURm 20), the club has still some final trump cards in its hand.


Summary: The bond appears to be securely covered

In summary, I think it is extremely unlikely that Schalke will not repay the bond due in July in full. The amount due of 17 million is simply too small. Rather, I am convinced that the sum was already budgeted for when the club applied for the state guarantee. For Schalke, but also for all other stakeholders, such as banks, sponsors, the city of Gelsenkirchen, and now also the state of North Rhine-Westphalia, there is simply too much at stake to let Schalke slide into insolvency because of a "lumpy" 17 million euros. Especially since the bankruptcy costs would probably be already higher than the amount due.
I am fairly certain that the bond maturing soon is simply being taken into the fold and only a few investors have compared the different risk profiles of the two outstanding bonds. In addition, the liquidity in the securities is extremely thin, which is why it is absolutely advisable to order with a limit.

Disclaimer: I am long SCHALKE 04 ANL. 16/21

February 21, 2021

What I've been reading this week...



February 20, 2021

What is actually a proper investment?

Recently, a friend of mine reached out to me and asked me if I would use Fibonacci numbers when analyzing investments. As I answered him that Fibonacci as well as every other technical analysis tool may have their relevance for traders and speculators but should not be mistaken with fundamental analysis for proper investments, he asked me to define "a proper investment" for him. As this - especially in times of booming stock market - is a very interesting topic, I decided to publish an article about it.

What is an investment for me?


Every intelligent investment has one characteristic: Buying some future expected cashflows or assets for less than they are intrinsically worth. The actual ownership of an asset - be it a property, a company, or just a tiny share in a company - is what makes a transaction into an investment.  It is not for nothing that Warren Buffett once said: "If you don't want to own a stock for 10 years, you shouldn't own it for 10 minutes!" All other approaches, whether momentum trading, charting, or even the simple tracking of broad markets via index funds and ETFs, on the other hand, are not approaches to investment for me. At their core, these concepts are actually a bet that there will be someone later who will buy my financial investment back from me at a higher price. This is not to say that these approaches are worse or less suitable. On the contrary, I am convinced that for the majority of retail investors, a savings plan in a simple, globally diversified equity index fund is an excellent idea. It is the easiest way to participate in the development of the global economy. But it is not a fundamental investment strategy.

Why is this particularly important right now?


Being aware of what you are doing in the markets is always crucial. But in times of liquidity glut of central banks, games stonks, and constantly new SPACs, it is even more important to remember how you want to act. Many newcomers to the financial market have been able to earn a lot of money very easily in recent years and months. However, only the first real setback will show them whether they are up to their own strategy. AndrĂ© Kostolany used to divide stock market investors into two groups: The hard-nosed and the shaky. I cannot answer definitively whether more shares are held by hard-nosed or shaky investors. What I can do, however, is to adjust my strategy so that I never become a shaky investor myself. 

My "PE-like" approach to public equities


Over the years, I have developed a "private equity"-like approach. This means that I only buy shares in companies if I would also buy the whole company. And I always ask myself whether I would also buy the share if I could only enter into the investment in an off-market transaction - and therefore could also not sell it again at any time. If an idea doesn't pass this hurdle, it can never become a serious investment for me. In my opinion, the constant monitoring of real-time prices is actually rather counterproductive. It is not only a waste of time but also leads to short-circuit reactions. For me, the stock exchange is just a marketplace. I only visit it when I intend to buy or sell something. It's a great tool for that - but you have to be careful not to get caught up in the constant offers and the sentiments that come with them. The common sense saying "Only go to the mall if you really intend to buy something" can be easily transferred to the stock exchange. I try to pay attention to the stock exchange only when a prime asset is offered there at a reduced price. And otherwise, I prefer to spend my time discovering these first-class assets.

February 18, 2021

Yet another value investing blog?!

Welcome to my recently started personal investing blog! While I had the idea of writing about my activities on the stock market for years, I never found the time (and probably also not the courage) to actually start pushing out some ideas.

Why am doing this?

I would like to start by explaining why I am starting this blog and what I want to get out of it. First of all, I like the idea of publishing my thoughts so that everyone will be able to see what my investing ideas are. Also, I found myself talking with mutual people about the same ideas, and hence a new blog post might be a good starting point for a conversation that bears fruit. Last and not least, I want to create some kind of investing diary for myself. The huge advantage of doing this online is the fact that this may help me to continue in difficult times. As I had been following some very good investment blogs for some years now, I have to admit that I enjoyed reading them the most during difficult times.

What can you expect?

I will write here irregularly about investment ideas. My goal is to build up a kind of sample portfolio or watchlist here over time. This will naturally be very similar to my private portfolio but does not necessarily have to be the same. So it will certainly also happen that I will write about companies that I find very interesting, but at a given valuation not attractive enough to buy. From an investment philosophy, I would most likely describe myself as a (modern) value investor. This means that I am basically always on the hunt for exceptional companies and try to acquire them at a discount to their intrinsic value. I will also discuss special situations from time to time. These include merger arbitrage situations, restructurings, distressed opportunities, and back-end situations. Finally, it may occasionally occur that I found myself being keen on wild and speculative ideas and I won't miss the joy of sharing those with you. 

What can't you expect?

There is one thing that you cannot expect to get here: Recommendations on how and where to invest! Everything I will do here is my personal opinion and my personal thoughts. None of this should be taken as investment research. Therefore here for the first time in all clarity: Please do your own research! I cannot, may not, and do not want to give recommendations for any investments. I will only reflect on my own thoughts here. What you make of it, is completely up to you. Therefore, I want neither congratulations for good "tips" nor any reproaches for bad "tips"!

Who am I?

That doesn't really matter, as I don't want to create any attention for my person here. Nevertheless, a few words about me. I've been actively involved in the world's capital markets since 2013 and have seen just about every investment philosophy and speculation once (and tried most of them myself). However, after far too many initial mistakes, since 2015 I've been doing mostly quality investing, which means that I've been trying to buy shares in outstanding companies. Over the years, I have developed more and more and now call myself a modern value investor. I still look for outstanding business models. However, I now also look beyond the end of my nose and invest primarily in small and unknown companies and no longer only in high-quality blue chips as I did in the beginning. I also pay much more attention to valuation. My investment philosophy is therefore very much concerned with risks (my definition of risk is the permanent loss of capital) and only then with possible profits. Yes, I want companies with exceptional growth prospects. But I like them, even more, when the market doesn't see them (and therefore doesn't price them in) and I can get them for free. I could go on and on about my investment role models, but that would go beyond the scope of this article (and might also provide an opportunity for a future post). Thank you so much for your time! And welcome to my blog!