Fishtown Capital Q1 Holdings Update (NYSEARCA:SPY)
I entered 2022 in bullish energy and cautious technology while maintaining an overall defensive posture with plenty of money. I’m even more defensive now.
At the end of last year, the Fed was signaling higher interest rates and a end to QE. Now they’re shouting it from the rooftops. I think everyone should listen.
Q1 performance and 2022 outlook
I was at +24.8% versus -4.6% for the S&P 500 (SPY), mainly due to the strength of Cenovus (CVE) and the luck of having bailed out many of my purchases at the start of the Russia/Ukraine situation.
I’m extremely cautious right now and my cash position has gone from 24% to 30%. I believe there are times in the market when the risk/reward ratio is very favorable, like last year, and other times when the risk/reward ratio is unfavorable, like right now.
Over the past week, I think the Fed has signaled louder than ever that it needs lower inflation. They seem to be abandoning, at least temporarily, what I consider to be their other unofficial mandate, which goes hand in hand with the official dual mandate of full employment and price stability. This 3rd unofficial term is high asset prices.
Short-term rates go much higher. Open market operations range from injecting $80 billion a month to withdrawing $95 billion a month.
There are still things to like: the job market is extremely strong, housing is still hot despite higher interest rates and I think the supply chain will start to improve soon. But inflation, especially in food and fuel, will eventually cause pain. I’m keeping a close eye on demand destruction from higher oil prices (I think so far it’s mild.)
The Fed is strongly signaling that it needs to cool the market, but the S&P500 is barely 5% off its all-time high.
For me, the risk/reward ratio here is poor. The Fed backstop is gone for now. So I’m on the defensive.
For those reading this and thinking “you can’t time the market!”, well, I disagree.
Bank of NY Mellon (BK) – Position 5% – Open around $51
Re-entered this position around $51 after selling at $60.
Slightly underwater as BK fell with the rest of the benches. I believe they could make $5+ this year and $6+ next year depending on interest rates. Share buybacks should help in the second quarter. I’m realistic it could drop further with the broader market, so I’m not super bullish, but I like the risk/reward ratio.
CVR Partners (UAN) – Wrote $115 April and May put options for around $17 when the stock was at $105.
Special situation fertilizer producer that I had the opportunity to enter mid-March around $105. I wanted to buy this outright, but the juicy option premiums and my propensity to get in cheap got the better of me. At the time, I thought there might be a quicker resolution to the Russian-Ukrainian situation, which prompted my caution.
These puts will probably expire worthless for a significant gain, but I would have done a lot more just by being straightforward and buying the units.
Citigroup (C) – Closed around $63 for a small profit
In my last update, I noted that sentiment in banks can change quickly. Sentiment was turning bullish heading into the first quarter, as higher interest rates are good for banks. But the sentiment quickly turned with the situation in Russia and I was lucky to come out with a profit here. The shares have since fallen.
If the stocks fall a lot more from here, I can go home. Sentiment in banks is lackluster and seems to price the chances of a recession at 100%, and the discount to tangible book value is high.
PaySign (COUNTRY) – Closed around $2
My 2nd most optimistic position entering 2022 and written as Paysign: my top bounce pick for 2022. I was disappointed with Paysign’s Q1 results and FY22 guide. Pharmaceuticals growth did not pick up as I expected and plasma forecasts were disappointing as I thought this environment would be very favorable.
Microcapbros, another SA author, who was also an optimist and wrote Paysign: The Plasma Toll Booth, warned that the duopoly between Paysign and Wirecard is being challenged with Bank of America (BAC) entering the space. After the FY22 guide, I fear that Bank of America will undermine PaySign and gain accounts.
My thesis here broke, so I sold. Another big win up 30% quarter on quarter as the broader market was down. That said, it was up 60% for me at one point.
BMW (OTCPK:BMWYY) – Closed at $31.20
I still like my thesis on this and think the company is a winner, but I reacted quickly to the situation in Russia and sold for a small loss. It’s disappointing because the position had increased by 15% for me.
ZIM Integrated Shipping (ZIM) – sold at $69 after dividend (equivalent to $86.)
Since my year-end update, ZIM had risen from $57 to $86 thanks to a particularly strong FY22 forecast. It was a double in 6 months for me. I sold mainly because I thought all the good news was fully priced in and their lease renewals would come at much higher prices. With the shares doubling, I felt the margin of safety had narrowed.
I would re-enter that or buy Danaos (DAC), which has a huge stake in ZIM, if the stock drops further and shipping rates hold steady or improve.
Way more than I would like, but I’m playing defensive right now.
Cenovus Energy (30%)
My top position in 2022, set at an average price of $9. I did not add; the increase in position size is a result of the rise in the stock price.
I thought fourth quarter earnings were good and I’m not concerned about hedging losses. Sometimes oil companies can’t win – if they hedge and the price of oil goes up, they’re stupid, if they don’t hedge and the price goes down, they’re reckless.
ConocoPhillips (COP) has sold off a 15% stake in Cenovus over the past 5 quarters, with the final sale likely completed in March. Cenovus will approach its final net debt target of $6 billion this quarter. From there, all of their excess cash flow should be directed to buybacks and a higher dividend, both of which should support the stock price.
Based on my estimates and the current strip price, Cenovus ends the year with almost no net debt and is trading at 3-3.5 times next year’s free cash flow. It’s just too cheap, with too many catalysts, and I think it will be significantly re-priced by the end of the year.
At 30% of my liquid net worth, risk management is completely irrelevant to me here, and I don’t care.
Berkshire Hathaway (14%)
Berkshire Hathaway (BRK.A) (BRK.B) is an anchor in my portfolio and I consider it an extremely safe security, although not as cheap as the last year.
I was considering adding to Berkshire for the first time in a long time using deep money calls for inexpensive leverage, but never pulled the trigger. It was a failure, especially considering how much money I have.
H&R Block (8%)
A big winner in 2021 for me and a silent outperformance in 2022 with stocks approaching $27. I haven’t sold any and I still think it’s a buy. It has declined as a percentage of my portfolio while other names have grown faster.
Forward P/E of around 9, yield of 4.1% while buying back 5-6% of outstanding shares each year for a recession-proof company. They issued $500 million of 2.5% 2028 notes at a terrific time last year and will withdraw $500 million of 5.5% notes in November, saving $15 million a year in interest in 2023 .
They still worry about their expense structure and business strategy, but the core business remains solid and inexpensive. In this environment, Why not.
Energy transfer (9%) – Added 35% to my position at $9.80
I finally wrote my bullish thesis for Energy Transfer (ET) in Energy Transfer Stock: Reasons to Buy Now as Oil Hits a 7-Year High.
I think it’s even more compelling than when I wrote it in early February. Domestic energy security will become popular again, especially if Republicans take over both houses in November, which I expect.
I’m still considering adding here, and I almost certainly would if I didn’t already have so much money at Cenovus.
Banks: JPMorgan (5%)
In my last update I said
I’m bullish, but not hugely bullish for banks for 2022. While higher interest rates are a plus, it’s only a plus if the economy stays strong, and I think there’s a broader risk here with the withdrawal of stimulus.
This concern and the Russian conflict soured me on the banks, so I sold Citigroup. My cost basis on JP Morgan is $80, which is why I held. Every time I own something because I don’t want to pay taxes on it, I regret it.
In my last update I said
My portfolio is generally rich in high value-added stocks, but more than ever this year. In 2022, I want to own established businesses that have pricing power and can benefit from (or at least can respond to) inflation. I think energy is outperforming the broader market and I’m cautious on technology, especially for companies whose profits are years away.
It was a great call and I still feel the same. I believe now is the time to play defense, and I do, while building a watch list.
The only reason I’m not adding hedges at this point is because of the November election. If the market is still strong in the fall, I might start adding them.
Stay safe there!