My longer time readers and members will be familiar with the Dutch company Flow Traders as it once was one of my stock ideas (my very first report I published since launching my blog). In late September 2023, now ten months ago, however, I closed this case at a small loss of –10% (including dividends). It was not an easy decision as this was more an unconventional stock idea (basically a hedge against a market crash). Looking back, this was absolutely the correct decision to cut the small loss, because it would be a bigger hole now…
Summary and key takeaways from today’s Weekly
– Flow Traders once had a very interesting and promising investment thesis.
– In times of market stress, they earn big money on high margins – a good chunk of that was always paid out in dividends later.
– However, the entire thesis has changed and the recent developments rather confirmed that I was right to close the case for good.
Having prepared for this Weekly, I was a bit reminded of a similar article I published half a year ago on 22 February 2024 with the headline “QUITTING AT A LOSS TO FREE UP CAPITAL AND THE MIND” (see here).
It was about my bad choice of German industrial conglomerate thyssenkrupp (ISIN: DE0007500001, Ticker: TKA) as a stock idea. After my thesis of a break-up to unlock hidden values didn’t play out, I pulled the brake at a loss of –25.8%. Painful, but absolutely correct, as the situation since then hasn’t gotten better and the stock is down another ~28% which would be in total a fat loss of almost 50% by now.
As a reminder and something I concluded on various occasions already, for long-term investment success it is absolutely necessary to cut the losses early enough, because the needed recovery gains will still be manageable.
With my realized loss, “only” a gain somewhere else of about a third is needed, which is realistic, even sometimes within less than a year. For example, in early July, I closed my case of Petrobras (ISIN: BRPETRACNPR6, Ticker. PBR.A) after eleven months at a total return of 30%. It is absolutely possible to balance out such a modest loss.
However, after losing half of invested capital as would be the case if I had held on, a double must be achieved – which is more difficult and almost guaranteed to take disproportionately longer. After more than 50%, you need to stretch yourself really hard.
That’s compounding to the downside – something many don’t understand.
And this is how I came to review once again my former idea of Flow Traders (ISIN: BMG3602E1084, Ticker: FLOW), a Dutch company acting as a so-called liquidity provider for trading instruments like ETFs and their derivates for cash, commodities or also cryptos (they call “CCC”) and bonds.
I closed this idea at a comparatively minor and mild loss of only 10% which is far from a big hole as just 11% bring this back up to par. However, my thesis and confidence level have taken a dramatic impairment, hence I could not justify to hold onto this any longer. It was blocking my mental capacities I wanted to use somewhere else.
Even though there was a temporary strong bounce-back after I closed the case, it has proven to be the absolutely right decision.
Last week, the company announced their half-year results, which sent the stock down 20% to new all-time lows. On top, the dividend, a pillar of my thesis, was suspended.
Let’s review this exotic and special case again and draw our conclusions.
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(1 / 6 closed at a loss which was a good decision)
(ten ideas closed so far)
both as per 31 July 2024 market close – since August 2022
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When the flow dried up
I’ve been covering the stock of Flow Traders since sometime in 2019, i.e. for five years.
What the Dutch company does is it acts as a so-called liquidity provider for exchange traded products (“ETPs”), i.e. the middleman bringing together buyers and sellers of ETFs for stocks and their derivatives for bonds, cash, commodities and cryptos.
The spread – the difference between the selling and buying price – is their revenue.
In times of calm bull markets or sideways periods, the business shall be doing okay, but nothing to freak out about. Often, volatility is low and trending lower. Spreads are low, either. Then you also have periods with little trading activity like summer holidays.
However, it gets interesting when markets correct or even tank. Then, due to fear and uncertainty, trading volumes shoot up and also spreads widen, creating a double-engine that propels sales, margins and earnings for this business up, as costs are relatively fixed. Usually, this was a business with good margins in less exciting times, but exceptional margins in highly volatile periods.
The thesis has been that Flow Traders is a good pick for a partial and contrarian portfolio hedge, as the company in times of market stress simply earns disproportionately more money.
You can download my Flow Traders report by clicking here – however, keep in mind, this case is closed!
Below, you can see from their last capital markets day in 2022 that in years of high turbulence, especially 2018 and 2020, EBITDA margins and net trading income (their revenue, not net income!) have been spiking along the volatility index VIX.
After such successful periods, they paid out hefty dividends.
For example, in 2020, when you bought the stock at the end of 2019 / beginning of 2020 at then fairly depressed prices of around and briefly even below 20 EUR (I did at my former employer), the subsequent dividend in spring of 2020 was 2.50 EUR and later in summer of the same year another 4 EUR per share – a return of 32.5%!
On top, the stock also appreciated by 75% and didn’t participate in the 2020 meltdown!
This was likely a once in a lifetime event.
However, it shows how this idea worked and was to work, though with less drama, in the future during more normal corrections. And without an expiration date compared to derivatives.
The problem is, volatility is pretty low and has been since then. There were temporary high spikes during 2022, but in normal times the business seems to have lost momentum. This is evidenced by the fact that they’re continuously losing market share in their biggest market Europe / EMEA – one of the reasons I decided to pull away.
Here’s a table I created using data from their published results showing the respective market shares (Flow Traders ETP value traded / ETP market value traded):
| year | EMEA | USA / Americas | Asia |
| Q4 2015 | 42% | 1.5% | 4.4% |
| Q4 2020 | 37% | 2.8% | 4.7% |
| half-year 2022 (after that I closed) | 34% | 1.9% | 6.4% |
| half-year 2024 | 25% | 1.9% | 1.7% |
While I am not so sure about the Asia data, as at some point Flow Traders started trading operations in China, this is not the deciding factor (they disclose their net trading income / revenue data only on an Asia ex China basis, but market data for both, with and without China).
While a diversification strategy does not need to be bad and if executed well, it can complement a portfolio and inject some more growth, this hasn’t been the case at Flow Traders.
It concerns me that their by far strongest market in past, has been melting away.
Below, you can see that this reshuffle brought also huge margin declines with it. Trading conditions have been tough as of lately, I know. But notice that the swings over the last ten years have seen lower lows – with 2023 and H1 2024 being new lows (FLOW became a publicly traded company in 2015).
I can remember that in 2017 and 2019, which both saw huge bull runs for equities, the VIX was temporarily even in the single digits in 2019 – a brutal environment for a company like Flow Traders.
Nonetheless, even back then, EBITDA margins have been higher than now.
With the latest earnings release last week, management announced a strategic shift to increase trading capital. This means, they know about their unfavorable position and try to make up for the compressed margins and market share decline via more volume.
However, first they suspended their dividend and second – and worse – they announced to use leverage from now on to ignite growth.
On the right chart below, you can see that they paid out 746 mn. EUR since Flow Traders has been a publicly traded company – that’s more than their current trading capital. It reads somehow that this capital has been wasted and shall now be reinvested into the business.
While it is debatable or could be even seen as a positive to sacrifice the dividend in the short term for longer term gains, I have problems with this move as it comes in a situation of weakness, not strength.
It somehow has a desperate taste to it for me.
This is likely the cause why the stock tanked by 20% subsequently – the market seems not to be trusting the management.
Below, you can see on the left the point where I closed the case and to the right the current reaction – this is a new all-time low for the stock, likewise not a sign of strength.
So we have until here losing market share, margins trending lower and the future use of debt / leverage.
What also led me to quit is their crypto engagement.
I have no clue about crypto and thus avoid it at all costs. For me, this is strange and opaque – I do not understand it. Also, I do not believe in this story that a Japanese invented this stuff, but nobody knows him, making all of this a big mystery.
Though it is true that margins can recover as soon as another bigger correction or even bear market some time in the future occurs, the thing is, I do not trust management.
There has been not only bad press about them, including some drunk rumbling on a team event, but the key positions went through changes. In my closing update to my members, I wrote:
Add to this some strange things on management’s floor – several departments, the long-time CEO leaving at the beginning of this year, a few months ago also the Chief Trading Officer – having been with the company since 2006 – leaving the (sinking?) ship without a plausible explanation for me.
Prior, there have also been some scandals about molestations and harassment during team events.
Looking at all of this unemotionally and with a free mind, it seems to indicate that something’s not right at this company.
All in all, I am happy to have closed this case, as the thesis has been altered dramatically.
Sometimes it’s just right to draw a line under it and move on.
My latest idea has a completely different profile. The company I discussed in my latest report for my members, is about to split itself up into several publicly traded companies. Together with its equity portfolio which alone covers the majority of the current equity valuation (!), this is a promising case with a realistic upside of 50% to even 100%.
Conclusion
Flow Traders once had a very interesting and promising investment thesis.
In times of market stress, they earn big money on high margins – a good chunk of that was always paid out in dividends later.
However, the entire thesis has changed and the recent developments rather confirmed that I was right to close the case for good.
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