Today, I’m writing about one of my (former) best stock ideas which didn’t play out as initially thought. Besides describing the case and the reason that led me to throw in the towel, I also want to use it to show why it’s important to regularly go over one’s portfolio and to cut the weeds.

Summary and key takeaways from today’s Weekly
– As an investor, being always right is not possible.
– What is possible, though, is to limited the losses and to move on. The more you lose, the more you need to gain back. There’s a sweat spot where to cut losses.
– Freeing up capital is one thing, but freeing up one’s mind another one. I take a look back at my thyssenkrupp adventure that did not play out well.

The topic of today’s write-up is the former German industrial powerhouse thyssenkrupp (ISIN: DE0007500001, Ticker: TKA).

About a year ago, I sent out a research report exclusively to my Premium members.

By this time, I thought it could be a good special situation and deeply undervalued break-up scenario. Many things pointed in this direction and there was a short period where the stock went up, seemingly in anticipation that finally something’s moving in this direction.

It was only short-lived, though.

However, there is always something to learn from each and every experience. Sometimes even more from the bad ones. At least, I do believe it is this way.

The loss will also be earned back somewhere else, in case one manages to find the exit in time.

Today’s weekly will be slightly different than usually. I’ll go through my initial investment case and at the end, you’ll find free download links to my initial report as well as my closing update which my members received a week ago.

The average total return of my best stock ideas is +13.9%, beating the S&P500 and the iShares MSCI World ETF.

^{as per 21 February 2024 market close – since August 2022}

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

Happy to have pulled the plug, though a bit late

Before I get to the main point, I must admit that somehow I cannot warm up to German stocks.

This might sound strange as I am living here, but I haven’t had a good hand for picking them in the past. Of course this is not the reason, but a peculiarity I noticed. I intend to break this unlucky trend at some point in the future.

But for now, it is what it is.

By the way, my other German idea, DHL Group (ISIN: DE0005552004, Ticker: DHL, formerly Deutsche Post DHL) did way better with a total return of +12.6% as of closing in just a few months and way ahead of the benchmarks. My thesis was that they could acquire the crown jewel of the struggling state-owned Deutsche Bahn on the cheap, as the latter is over-indebted (see my corresponding weekly here).

However, that case did not really play out and in addition a mix of worsening economic conditions together with weak results from competitors led me to close that case in precaution last summer. Even though DB Schenker is officially up for sale and DHL’s stock is almost exactly where I closed the case, it was the right decision to close it, because DHL is a cyclical business with downside risks in a weakening economy.

Though not at a loss, it didn’t work out as thought.

About a year ago and after the phenomenally strong year 2022, my thesis was not that thyssenkrupp’s main business is something special to justify an investment. It’s a low-margin and highly cyclical business with a high dependence on the German and European economies.

However, I thought to have found a great asymmetrical special situation.

It did not play out as expected, though.

Long story short, the stock got massively hammered. The iron is not hot anymore and the experience was a painful one.

It is actually the stock with the single worst performance of all my ideas, active and closed and over both memberships.

Until the dawn of the financial crisis now more than 15 years ago, thyssenkrupp had good times and its stock reached its all-time high. Then came the Great Recession.

Subsequently, the stock did not even come close to its former high again.

The main reason was that the old management did colossal mistakes with trying to expand overseas. They built production facilities in the USA and Brazil which became gigantic failures with cost-overruns. Both caused huge write-offs and finally got sold for a fraction of their costs.

A huge damage to the once proud company.

The company was once in Germany’s top league, the Dax index.

As its stock continued to decline, it had to leave the index. As if this weren’t enough, TKA was on the verge of bankruptcy, even. It had serious issues and was forced to sell it crown-jewel, the elevator unit. This strongly improved the financial health and the balance sheet, but the business was weakened and became more cyclical.

With a new management team and the ambition to create a holding of independent and self-steering units, some hope came up. Then came 2020 and the subsequent years which caused a rollercoaster ride, first massively down, then strongly up due to spiked steel prices and then and until today the elevator down again.

What I thought would eventually happen – and it still can happen – is that thyssenkrupp will be broken up (without calling it officially this way due to the strong union and socialist views).

thyssenkrupp has among its several units which is regularly reorganizes the marine division. It is one of the world’s leading submarine and naval tech enterprises. Due to legacy low-margin contracts, it barely did contribute to the bottom line in the recent past, but its order book is not just full, but having the size several times its recent sales.

In recent times, this unit’s value has rather increased.

Officially, it didn’t really fit into the conglomerate and management also said that it wanted to separate from military activities.

A separation is almost a given, though the exact realization is unclear. Will the government buy a stake? What about external investors? Tough for a strategic key asset. But without a doubt, this division has a value that can be even more than the whole holding company.

thyssenkrupp in total had a market cap of around 4 bn. EUR as of my report and net cash holdings of more than 3 bn. EUR – unheard of for an asset-heavy and old-school industrial business. However, on the other side of things, there are huge pension deficits also in the billions and problems with a second unit.

The other moving part and also the problem child is the steel division which is forced to undergo a green refurbishment that costs billions.

Despite a financial aid package of the size of two bn. EUR granted, this likely does not solve the worries. The problem is that thyssenkrupp will likely become even less competitive than it already is due to higher and increasing production costs. Also, the question about future supply of the needed green hydrogen is still not finally answered.

Understandable that the wish for a separation came up.

Lo and behold, this division was also numerous times said to be put on its own feet. A final stand-alone solution hasn’t been found until today. Potential rumored buyers like Tata Steel from India backed off (if that’s true) and also discussions about a joint venture with the Czech billionaire Křetínský haven’t been successful so far.

I still think that some sort of break-up will finally happen.

Though management’s goals do not need to necessarily be realized, there is a need to do something. However, with the exception of a short-lived jump higher last summer when a new CEO was announced, the stock trended lower and lower.

The market didn’t buy the story, as it seems.

Below, you can see the evolution on the chart. First, a spike higher followed by a strong move down, then up again and a prolonged sideways balancing act. Then the washout in two episodes, a longer one and the second brutal one.

With the latest earnings release recently, the stock reacted negatively with a drop of 10%. After I closed this story to limit the damage and to avoid more losses, the stock was hit again and it trades currently almost another 10% lower, temporarily below 4.50 EUR even (closing was at 4.94 EUR).

One could say that this was it. Panic-selling as the final washout of weak hands.

Honestly, I do not think that this was it. What now finally led me to the decision to turn off the stove was that the economic environment is substantially worsening. Germany is officially in a recession.

As the company is under heavy influence from politics and its strong union, negotiations could endure almost forever. In the meantime, a potentially stronger recession won’t wait for the discussions to find an agreement. Also, any agreement does not have to be in the best interest of shareholders.

In hindsight, I think I somewhat underestimated this risk.

As the stock was down by 25.7% since my initial report , I decided to close the case to avoid further damage.

In the past, I have written about cutting losses and moving on.

Freeing up of capital for other and better opportunities is obvious.

But it also frees up the mind not to having to think and deal with a loser in the portfolio that definitely at some point starts to drag also on the nerves. I do not want to be distracted by such a low-performer.

Even though a final break-up of thyssenkrupp could come or at least a sale of the marine division which I think is more realistic and quicker to apply than that of the steel division, there’s no guarantee the –25.7% does not drop further into a –50% position until then.

As a reminder, having lost 50% requires a subsequent double or 100% gain – just to come back to zero! This is not something I reach out for. By having cut the loss at a quarter, one needs “only” to find somewhere +33% and we’re out of the woods again.

This is easier and way more realistic.

At –20%, one needs +25%. At –25%, still a doable +33%. But by being down 30%, the potential gain climbs to +42% already and –33% requires +50%. A position that halved, needs a double. It becomes ever more extreme the higher the losses.

There’s no perfect answer to that, but from a practical standpoint, I’d say that if the thesis is not firm anymore, losses should be cut between 25–30% to avoid further damage. What should not be done is hanging on and waiting for a comeback to reach break-even, only not to have to admit a mistake.

Of my in total 20 research reports over both my memberships, with yesterday’s closings I have:

• 5 positions with more than +30%
• 4 with at least +40%
• one already closed case at exactly +35%

Above, you can see the covers of three of my such ideas (the first two are Premium reports, the latter Premium PLUS).

As promised, here you can download for free the initial report and my final closing update about thyssenkrupp to see how my exclusive reports and updates for my members look like. They all have the same format, twelve pages per report and 1–2 pages per update.

For the initial report, click here.

For the final closing update, click here.

Conclusion

As an investor, being always right is not possible.

What is possible, though, is to limited the losses and to move on. The more you lose, the more you need to gain back. There’s a sweat spot where to cut losses.

Freeing up capital is one thing, but freeing up one’s mind another one. I take a look back at my thyssenkrupp adventure that did not play out well.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.

Premium PLUS Members also get access to all Premium publications.