It seems that everyone has a blog these days. Once a year, we must stop everything, tally up the scores and see who got it right. Besides, what’s the point of going through all this effort, if you cannot point to your record of continuously nailing major trends and investment themes. Even when I get one wrong, there’s a learning process involved in admitting the mistake and avoiding future ones. With that preamble out of the way, let’s dive into the 2022 Position Review.
*Normally I publish the review a bit closer to the last day of the trading year, but I’m headed out to Sicily and then Malta for a well-deserved vacation. Don’t worry, I’ll post plenty of vacation pics…
Historically, the year-end review has focused on individual stock tickers, but over the past year and change, I’ve been migrating this blog to focus more on the big picture trends, while KEDM picks up the tickers themselves (or at least the ones that aren’t small caps). With that in mind, let’s dig into the trends, before doing a recap on some legacy positions held over from prior years.
From a performance standpoint, 2022 was something of a listless year after two big years (2020 & 2021) for the home team. For whatever reason, the themes on my books simply didn’t trend; meanwhile I failed to properly capitalize on the trends that dominated the year. That said, 2022 was a painful year for many and a slight positive return certainly feels like a win—especially as I frequently run my book well over 100% net long.
In my mind, there are times like 2020 and 2021 when they literally give the money away, and then there are times when it becomes harder. The pros know the difference between the two and when it gets difficult, they pull back on exposure, score small wins, and wait for the easy times to return. Meanwhile, the amateurs get chewed up during the hard years and have no capital left for when it gets easy again. As the Fed became increasingly dominant in 2022, I continued pulling back on the exposure and risk side. Those who’ve followed this blog for some time know that I’m fast to ramp up market exposure if the narrative changes. Until then, my goal has been to avoid doing anything stupid, slowly stack my chips, and make it through to the other side for when things get easy again.
Fortunately, my roadmap for 2022 saved me from a whole lot of trouble. Admittedly, it was an incredibly contrarian and ballsy call (precisely the type of call that you’ve come to expect from this blog). I challenged orthodoxy by pointing out that after a decade of out-performance, Ponzi Schemes would have a rough year. That undertow would eventually drag down the Tiger-40 list of slightly more “real” businesses, and finally the rot would creep up into the “compounders” that a generation of investors had learned to buy without any regard for valuation metrics. I’m proud to say that I positively nailed this call.
Looking back on that call, I cannot believe how incredibly contrarian it was to say that investing in frauds would be a bad idea. In retrospect, this should have been obvious to everyone, but a decade of outperformance made everyone forget this simple fact. Unfortunately, the other side of my pair trade (value stocks) didn’t perform as well as I had expected. Many of them are up on the year, just not up as much as I had hoped. This is likely caused by an anticipated economic slowdown, due to rapidly increasing interest rates. One could say that the market is looking through a period of over-earning and penalizing their share prices—despite many of these companies trading at low single-digit earnings multiples on full-cycle earnings. While my exposure remains subdued, I have an amazing shopping list of near-monopoly value names to purchase when The Pause comes, if it becomes obvious that the long end doesn’t completely panic. I’ve spent much of the year building on this list, but have done little besides continue to learn the names better.
Turning to other themes, my strongest held view is that 2023 is the year of oil crushing all other CUSIPs. I know I made the case in early 2022 for a similar outcome, but sometimes things just don’t play out on my schedule. In the months since then, there has been minimal spending growth on exploration, while global demand has continued to rebound and grow. The postponement of my theme was mainly caused by the unexpected purge of SPR inventory, along with China going offline due to germs. These two trends seem destined to reverse during 2023. Meanwhile, Russian oil production is permanently impaired and likely in free-fall. When I tally these three components, I come to a mind-numbing swing of nearly 5 million bbl/d. Now, I know the swing cannot actually be this large—mainly because demand will suffer given the magnitude of the swing. However, demand will only suffer at triple digit oil prices.
While I was off on the price of oil, my energy investments mostly appreciated. I haven’t spoken about offshore oilfield services on these pages, but a pretty good chunk of my exposure is through Valaris (VAL – USA) and Tidewater (TDW – USA) and they’ve both been stalwarts in my portfolio during 2022. Given their valuations, I suspect that they’ll continue to lead the energy markets higher. Of course, I also had an overweighted position in oil futures and futures options, and these did not appreciate as much as hoped, but maybe they’re just deferring my gratification until oil murders every other CUSIP. Once again, I think it’s important to repeat that if you haven’t stress-tested your portfolio for oil prices north of $200, you’re going to suffer dearly when that should come to pass.
My other core theme was a continuation of the housing strength witnessed during 2020 and 2021. On this score, I was wrong. Housing is now starting to roll over as interest rates take a bite out of affordability. I’ve since tossed my housing supply names, though they trade north of where I mentioned them. While I remain bullish, I’m going to wait for construction activity to bottom and begin its recovery. The demand is there, but not with current interest rates. As an inflection investor, I like to joke that the best inflections are the ones where I get the thesis horribly wrong, yet make some small money anyway, as I was disciplined on valuation. I know I won’t win them all, but not losing when the thesis is wrong, is a different sort of victory that isn’t spoken enough about.
With that waltz through the big picture completed, let’s go through all the positions I’ve publicly carried over from 2021.
Positions mentioned in alphabetical order and % change is from the closing price on 12/31/2021 and the closing price on the last trading day before mentioned or closed. All data is accurate as of the close on December 23, 2022.
Cornerstone Brands (CNR – USA) +38% until closed in 2022 and 232% since the original post
Cornerstone was the scene of a bold robbery as Private Equity lifted it from my hands, right as the demand for building components peaked. Sometimes, I just get lucky as I would have likely held through the pullback. In any case, I caught the recovery in housing components well, played it large, rode through a lot of volatility and exited with a really great return. Don’t cry too hard for the Private Equity boys, they’re going to absolutely bank on this one too, as they bought it simply too cheaply.
Lee Enterprises (LEE – USA) -49% in 2022 and -37% since the original post
During 2022, LEE continued to put up strong performance on the digital front with digital revenue increasing by 27% over the prior year and digital now represents a third of total revenue. Even more impressively, in the fourth quarter, digital represented 55% of total advertising revenue. Meanwhile, digital subscribers grew by 32% over the year. LEE is increasingly a digitally native business, especially when one looks at the adjusted EBITA number. Meanwhile, it trades at roughly one times adjusted EBITDA on an equity basis—which seems ludicrous for a rapidly growing digital business.
Of course, there’s a reason that it trades cheaply; the debt level is high, debt paydown was minimal and EBITDA didn’t convert to cash flow due to one-time charges. My expectation is that these one-time charges continue as the business pivots into the digital world and cash flow will suffer for the next year or two. As an investor, I’m content to look past this muddled performance, with the hope that things normalize at an attractive cash flow number at some future date. Given current growth on the digital side, this should end up as a much more profitable business in the digital format, when compared to the prior print format and we know that the market loves to put high multiples on cash-generative subscription businesses with rapid growth.
While the share price at LEE has not been rewarding during 2022, I’m content with how it’s all panning out.
Oil Futures, Futures Options and Futures Call Spreads
There was surprisingly little movement in these positions during the year—primarily as the ’23 and ’25 curves stayed rather inert. Near year-end, I did use the decline in the spread between front-month and ’25 futures to swap my ‘25 futures for the Brent Oil ETF (BNO – USO) as I wanted to diversify from WTI, gain some roll yield (which has since become a contango) and get more exposure to the front of the curve as that’s likely to be where the action is going forward. I also picked up some shorter-dated futures positions near the lows in December as I sought to max out my energy exposure. As a consequence of these adjustments, the size of my oil position grew rather dramatically.
Russian Positions (RSX – USA and others)
As a contrarian, I often run into a burning building as others flee. Usually this works, sometimes it doesn’t. In terms of my Russian positions, it’s still unclear how they will play out. On one hand, I have massive unrealized gains based on the current marks on the MOEX. On the other hand, I cannot realize these gains and it isn’t clear when or if I ever will be allowed to realize these gains. I’ve marked these positions to zero and like many other investors, I’m going to wait and see how they play out. While this isn’t my proudest investment, I have a sneaking suspicion that my overall IRR will be quite attractive over time—with plenty of risk along the way.
Sandridge Energy (SD – USA) -7% until closed since the original post
Sandridge is a good example of why my best advantage as an investor is my ability to average down as something gets cheaper. I had to average down on Sandridge, multiple times, but eventually I ended up with a large position at a great price and on the recovery in energy equities, I had a nice big gain on my SD position. Admittedly, it was a long road to get to that big win and I unfortunately show a small loss from when I first wrote about SD.
St. Joe (JOE – USA) -26% in 2022 and 82% since original post
My JOE position was one of my largest disappointments during 2022. While the company continues to execute and create value for shareholders, investors ignored this fact and sold the shares off anyway. I’m baffled by this performance, especially given the growth in population and home values in their core Bay and Walton Counties. In any case, I used the recent weakness to increase my position rather dramatically below $40. While investors are likely to continue shunning anything exposed to the housing sector, I’m perfectly content to wait things out, knowing the inherent value of what I own. There’s a whole lot of torque in JOE. It’s just a question of when this one finally gets noticed.
Sprott Physical Uranium Trust (U-U – Canada) +8% in 2022 and 25% (both in Canadian Dollars) from original post
SPUT remains my largest single ticker position. The uranium macro continues to improve, and stockpiles continue to drain. I believe that 2023 is the year when all of this finally matters, and the uranium price begins to levitate. As far as I’m concerned, SPUT is the reincarnation of GBTC, and will become a highly reflexive situation as traders begin to chase the price higher, especially as the liquidity in the spot market continues to dissipate. I’ll have more to say about SPUT in January, but let’s just say I think that 2023 is the year when I get paid on this one. While uranium should not be correlated with oil, I have a suspicion that as oil recovers, ESG-focused investors will rediscover uranium as a substitute. Could uranium become oddly correlated with oil during 2023?
In summary, 2022 was a year where I avoided landmines, and survived to fight another day. I’m excited for the time when I can flex up my exposure, but I’m not going to rush things. For now, I want to stay conservative, stick to low-risk setups and stay highly liquid. I think that 2023 will be difficult for longs, especially as oil crushes everything else. There will be a time to take advantage of that pain, maybe even swapping some barrels for beaten down non-oil names, but this is all into the future…
For now, I want to wish everyone a Happy New Year and the best of luck in 2023.
Disclosure: Funds that I control are long LEE, various synthetic long oil positions, various Russian positions, JOE, U-U CN.