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Trading Diary

Trading Diary – 7 November 2019

We exited our position in Jumbo Interactive (JIN) this week. JIN has been our most profitable trade for 2019. We invested the capital released from this transaction into Redbubble Limited (RBL), another company in the Consumer Discretionary sector. 

Sell 

Jumbo Interactive (JIN)

We realised a profit of 102% on our holding in JIN as well as collected ~6% in dividends during our holding period.  

We bought Jumbo as it emerged from an 18-week base in late February. The stock was one of the strongest of the leaders during the market correction that took place during October 2018. As a result, it did not have to make up too much ground to capture new highs. Since emerging from this last base, the stock closed below its 100-day moving average on only one occasion. It quickly recovered and continued to advance. 

The advance appears to have now halted for the time being. High volume selling has taken the stock down below the low of its previous basing point. It has also fallen below the 100 day moving average and new demand does not seem sufficient for a quick recovery at this time. 

The stock is still fundamentally sound, with a large growth opportunity ahead. However, it has now become expensive based on traditional valuation metrics. It’s likely the stock will now form a trading range and move sideways for a while. This consolidation will give the company some time to demonstrate that the markets expectations are correctly calibrated. As a result we’ve exited our position at this time. 

Buy

Redbubble Limited (RBL)

Redbubble is a global marketplace, connecting independent artists with 3rd party fulfillers for on-demand production and distribution of unique products to end customers. 

Technicals

RBL looked like it was in an accumulation trading range for most of 2018. This period included a well supported $60m capital raising at $1.50. However concerns arising from changes to the Google search algorithm as well as the general weakness in the market caused the stock to sell down violently on heavy volume during the final quarter of the year. 

A quick recovery looked like it was underway along with the rest of the market. However again the stock sold down and tested the lows of previous selling climax. With the release of FY 2019 results at the end of July the stock gapped up above the high of the previous attempt at recovery. 

This gap-up kicked off what appears to be the beginning of a new uptrend. 

The market is providing solid support for the stock. Heavy volume is showing up to propel the stock upward on each successive upward wave. A lower volume corrective move has followed each of these upward waves. 

The stock gapped up again at the end of October upon the release of its 1Q 20 business update. This move continued in the same direction for another week taking the stock back to all time highs. 

The stock has now corrected back again on lower volume. This corrective move has taken the stock back to the high point of the 2018 trading range. This price level should now act as a point of support. 

We expect supply to emerge at these levels as trapped holders from 2018 look to exit. However, it appears that a new uptrend is underway. 

Fundamentals

Value

RBL is at the higher end of our allowable range in terms of traditional valuation metrics. The company is not yet profitable and as a result, it ranks in the 100th percentile for both PE and EV/EBIT. This ranking is likely to change over the next couple of years as the company transitions to profitability.  

Growth

The company has shown incredible revenue growth over the last few years and is expected to continue to do so. During FY 19 marketplace revenue grew by 34% to $257m. 

Gross profit margins are gradually rising as supply chain efficiencies continue. During 1Q 20 Gross profit margin was up 1.5% to 37.9%. 

Returns on assets are still tracking negative however have been consistently improving. Returns are expected to turn positive in the coming year. 

Asset turnover dropped slightly during FY 19, primarily resulting from the acquisition of Tee Public made during the year and the associated Goodwill that increased assets on the balance sheet.  

Financial Strength

The company is in the process of scaling to profitability. Free cash flow was negative during FY 19 however this is expected to change during the coming year. Also, the company raised $60m in new equity to fund the acquisition of Tee Public. 

The company is debt free and has $37.9m in cash in the bank. 

Narrative

Redbubble is the on-demand content supply market leader. This is a large and growing addressable market. The flywheel effect of the marketplace strengthens the company’s moat and leads to robust economics. Growth enables margin upside, opex leverage and positive cash flows. 

More and higher quality artists and content attracts loyal customers, which RBL can fulfill at ever increasing scale. Better customer experience attracts more loyal customers which leads to better quality artists and content joining the platform. And on it goes.

By Danny Sandler

Founder of Ocean Asset Management.