On Breakouts

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Let me cut to the chase, I can read a chart, but I would almost never invest based on a chart. In fact, I’ve always been baffled by who it is that buys a “breakout.” Seriously, why pay more than yesterday’s price, when you could have bought it yesterday for less?? What is it that makes investors so excited to pay up??

Like many psychological riddles in the finance game, I’ve simply come to accept that there are many ways to do things. Sure, my way seems to work better if you want to make a pile of money, but buying breakouts does seem to improve your IRR, as it truncates the period of ownership down to the moment when something appears to be “happening.”

I bring all of this up because a few months back, I was on a panel with several other investors and the topic of uranium came up. Oddly, these investors were quite dismissive of uranium.

I’m paraphrasing but this was the general tone, “But Kuppy, we all heard this uranium story 5 or 7 years ago. There are guys on twitter who’ve been going on about uranium for nearly a decade. Careers have been wasted while waiting for this to “work.” If it hasn’t gone up yet, why would it go up now??”

Of course, I gave my explanation of why now matters, with a focus on what I believe are accelerating deficits, how underfeeding appears to have swung to overfeeding, and why SPUT sequestering pounds is potentially quite reflexive. To which, they all sorta shrugged and said (again paraphrasing), “if it starts working, we’ll just buy the breakout.”

It was at that moment that I suddenly understood who it was that enjoyed paying up for an asset. You see, many investors have very little confidence in their own work. They’d much rather rely on others who are chasing an object in motion to validate that the time has come.

Now, as a portfolio manager, sometimes I’m forced to pay up, sometimes it’s just so compelling that I choose to chase an object that’s already in motion. There’s nothing wrong with that, but I only pay up because I couldn’t get enough shares when it was cheaper. It’s never because I waited for the price to appreciate. Naturally, I’d much rather slowly accumulate on dips and that’s usually how I build positions. If I waited for the price to rise before piling in, I’d surrender my edge. Why give up 20% or 30% or more in terms of entry price just to have someone else validate my work?? In the hedge fund industry, that level of slippage is considered a pretty decent year. Why would I forfeit that performance to someone else??

Returning to uranium, I feel strongly that there’s a cohort of investors that vaguely know the uranium story, and they’ve been bored to death by it. Some have fished around in the pond and left to go find better opportunities. They’re out there, but they’re waiting for some sort of validation that the market has actually grown tight and we’re into the “price-discovery phase.” These investors plan to play the “breakout.”

Meanwhile, the price of uranium has ground higher during the past few weeks. Excluding a brief spike when Russia invaded Ukraine, the uranium spot price has been making multi-year highs almost daily. SPUT finally woke up over the past few days. I’m pretty confident that there are hordes of “breakout investors” out there; but which breakout are they watching? Is it the spot uranium market at $60 or $65 or some other magical number? Is it SPUT at $18 or $20 or some other magical number?? I can draw lines with my crayon, but I don’t know what it is that sets these guys off. All I know is that the market is tiny, and it doesn’t take much capital to move it. If a few big shooters show up, it’s likely going to impact pricing. If a few of them chase, I think there’s going to be real price discovery.

If $20 on SPUT is the magical level, will some of the smarter “breakout investors” start buying at $19 so that they’re positioned?? What about the high $18s?? If that’s the case, it’s almost as if there is a gravitational pull higher as the price rises. What is the magical tipping point that sets the breakout investors in motion??

Once again, I’ve genuinely wondered about the mindset and mentality of investors who only buy when something is going up. I’m a value investor, for the past year and change, I’ve added to my uranium exposure on dips. I like to buy things as cheaply as possible, as price means everything to me. Then there are those for whom price means nothing, yet momentum means everything. I often feel like we’re playing different games while using the same chess pieces. However, I know that those guys are out there and they’re waiting to pounce. For this reason, I genuinely wonder if there’s an air-pocket above the magic breakout levels of roughly $65 in spot and $20 in SPUT.

I’ve been waiting for over a year for uranium to get back in motion. Based on my research, which may be challenged, the physical market has tightened up. Underfeeding has swung to overfeeding and the deficits are getting worse due to the overfeeding. Widely followed metrics like SWU and conversion cost are flashing bright red, and it feels like something is about to break in the whole uranium ecosystem. Often, in an insular industry like uranium, it’s hard to discern what is rumor, as opposed to fact. I do my best, but in the end, price doesn’t lie. Price is now trending higher. The buyers are having the upper hand here. Meanwhile, I think the breakout boys are on the sidelines, praying for their opportunity to pay up and then chase. I don’t understand why they do it the way they do it, they probably don’t either, but that’s just what they do. Once the chase starts, I don’t think it stops. I figure that the second half of 2023 is when the fun part starts. I’m pretty damn maxed out when it comes to uranium.

Disclosure: Funds that I control are long various uranium related assets.

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