2022 Portfolio review: A tribute to the Chaos Giraffe
When you can compare your 2022 returns to the Vancouver Canucks, that's not good
I live in the GTA but I’ve become fascinated by Vancouver Canucks Twitter and the fan despair.
Their team is mediocre: Not bad enough to draft elite young talent 1-1. Also not good enough to make the playoffs.
Every year fans beg the team to rebuild. Every year management and ownership just dig the hole a little deeper by trading assets, spending badly, ignoring reality and not making hard decisions.
The individual components of the roster are not bad in isolation, but as a collective unit they’re overpaid and expected to perform roles they are not capable of. Based on past performance, management will not admit mistakes and begin the process of trading, buying out, or otherwise tax-loss selling, to make the necessary room for roster upgrades.
“This team doesn’t want to rebuild. The word is anathema at every level of the organization — in the ownership suite, in the hockey operations offices above Griffiths Way, in the coaches office and in the locker room. Club leadership’s intention is to look toward the future by adding younger current NHLers rather than riding triumphantly into the great emerging tank battle for Connor Bedard.” — Thomas Drance, The Athletic
An NHL hard cap has a lot of parallels to portfolio management for the individual investor.
Striking a balance between cash on hand for new ideas and being fully invested
A finite amount of dollars and ‘roster space’ means a stock usually has to come out (Conor Garland? Tyler Myers?) if a new one is coming in
Diminishing returns beyond ~20 names
Portfolio diversification and optimization (Picking correctly between Horvat and Miller)
The bulk of your money should be concentrated in your best ideas (Pettersson extension)
The draft functions as a pipeline for cheap investment options that can outperform for years before you have to sell them. This pipeline makes it more palatable to dump overvalued names, not pay up for mediocre companies, or avoid paying anyone with the nickname Chaos Giraffe $6-million.
My goal for 2023 is to not run my portfolio like the Vancouver Canucks build their roster. Fewer names. Better quality. I need less Chaos Giraffe in my trading account this year. Onto the post-mortem for all the non-mining stocks I mentioned on Twitter last year. (You can read my mining autopsy here)
Oil and Gas
Long positions
MEG Energy (MEG.TO)
PetroBras (PBR)
Permian Basin Trust (PBT)
Spartan Delta (SDE.TO)
Source Rock Royalties (SRR.V)
PHX Minerals (PHX)
Mongolia Growth Group (YAK.V)
Athabasca Minerals (AMI.V)
I don’t have any differentiated commentary on oil and gas then you can find elsewhere - just an opinion on the price of Brent in 36 months. MEG, PBR and PBT are relatively new positions that are cheap and can be held for years if the bull thesis plays out. Source Rock is a tiny position in an illiquid stock, it’s on this list just to be thorough.
A note on company debt
I do like my commodity exposure with some balance sheet leverage. If you catch the turn correctly, rising commodity prices will pay down debt quickly, giving you an increase in the enterprise value and multiple expansion at the same time as dividends and buybacks begin. I’m just running a less extreme version of my 2019-2021 Baytex/Antero playbook as many times as I can.
MEG has already said it will return capital to shareholders next year when it fully pays off its debt. Spartan Delta issued a special dividend in December after paying its bank debt. SDE and PHX have already become multi-baggers. I think there’s more upside and the rest of my oil names have the potential to join them. I’d be disappointed if this entire basket doesn’t provide 300%+ returns.
Athabasca Minerals and Mongolia Growth Group
Two of these names aren’t like the others. They’re also the only losers in this bucket. Mongolia Growth Group (-18%) has turned into an investment vehicle for hedge fund manager and oil bull Harris Kupperman. Think of YAK.V as a leveraged oil proxy. The bulk of the company’s cash is invested in long-dated oil futures. Kupperman has also built a profitable investment service that covers corporate G&A, so YAK shouldn’t turn into a melting ice cube while I wait.
I leaned into the tax loss selling in Athabasca Minerals (-14%) and doubled my position. The company has been around for years burning investors with unrealistic promises and bad execution. They seem to have broken the cycle by pivoting the business from aggregates to frac sand. The new CEO also has the backing of the primary shareholder. I’ve read every public company conference call I could find on frac sand pricing and demand. There just isn’t enough supply to go around. If the company has hit an operational inflection point, AMI could rocket well past 60 cents in 2023.
In and out
Verde Agritech, Pieridae Energy and PetroTal were all in and then out of the portfolio in less than six weeks.
My initial assessment of the cycle was correct as they’re all much lower now. This was also part of an effort to concentrate my money in fewer names with better quality. I will keep Verde on the watchlist of it continues to drop, but I don’t see myself bothering with more O&G names at this point.
2022 wasn’t the year for small caps
This trade didn’t age well …
The hair came back to wreck me. I took my lumps and sold Smart Employee Benefits, EnWave and K.B. Recycling. WeCommerce isn’t mentioned above, but that’s another company sold at a loss that didn’t execute. I’m willing to sit on losses with Voxtur and Network for the time being. I think the big winner that eventually emerges from this pile is Quarterhill and that’s where I put the remaining funds. Quarterhill is looking to sell its patent portfolio. SOTP analysis is always suspect, but at an estimated value of $250-million, the former Wi-Lan is worth more than the current market cap of the entire company. You also get a 3% dividend.
Odds and Ends
Winners
Sold DAVIDsTEA (DTEA) around $2.50 in April to finance my oil and gas purchases. The bottom seems to have fallen out shortly afterwards.
BBQ Holdings (BBQ) was taken out in the dead of summer by MTY Group for $17.25 a share. A very good return for something held for less than a month. A 50% gain that should have been a 5x return.
Losers
No concerns with any of these stocks. Hurry up and wait while I collect my dividends.
Genesis Land Development (GDC.TO) is basically flat. Picked up most of my shares at $2 in a 2021 rights offering. Sun Communities (SUI) is also unchanged.
CVR Partners (UAN) is down around 15%.
Considering Kaspi (KSPI.IL) is based in Kazakhstan and expanded into Ukraine just before the invasion, I’m actually surprised the sentiment around this stock isn’t worse.
December purchases
Too soon to tell how these will work out:
Bancolombia (CIB)
Grupo Aval (AVAL)
Politics will drive returns here. Interesting note: Scotiabank has operations in Colombia and they don’t seem to be able to compete with the top players in the market.
Useful links
These Purpose Investments cash ETFs are all yielding over 2% these days.
Forced selling is coming to the Toronto condo market.
Tax brackets are changing in 2023.
Illiquid investments in a liquid wrapper don’t seem to work very well.
If you got to the end, thank you for reading. Feedback is always appreciated. No giraffes were harmed in the writing of this post.
Appreciate the unadulterated honesty and I’m a fan of your twitter and now substack posts. Wish you a great 2023.
This is great reflection and transparency. Really appreciate it!