We don’t have one big story that’s catching my eye today, so I’ll do some catching up and musing for you. We’re heading into a slow week, so it’s likely there won’t be many new articles during Thanksgiving week — other than our annual “Turkey of the Year” reveal, of course.
I often get asked what my biggest worry is… and that’s probably inflation, if only because the Fed has been trying to manufacture it for soooo long now. I worry about inflation sneaking in, causing interest rates to rise faster, and destroying over-levered sectors of the economy like real estate.
But there’s really no sign of that actually happening in the US, and everything seems quite copacetic with the slow pace of interest rate increases and the flattening yield curve… the bigger risk immediately, I suppose, is that China might again try to slow its overheated and debt-fueled real estate market — they didn’t do anything super-restrictive heading into the Party Congress, because that’s the time when they want to emphasize sunshine and rainbows, but now that Xi is essentially set as “beloved ruler for life” if he so chooses, they could start to poke some holes in the debt-fueled excess. That would be good for the economy in the long run, I expect, but bad for the global markets in the near term — you can sometimes see a pretty good reflection of those shifting sentiments about “what’s China gonna do next?” in the copper price, and thats been pretty bouncy of late but I have absolutely no idea which direction it will turn.
As I wrote this week, Marin Katusa’s betting big on copper — I haven’t been tempted to go big into any primary copper producers yet personally, but I do note that the counter-cyclical investors in my portfolio have also gone into copper over the past couple years in anticipation of this recovery… primarily Altius Minerals (ALS.TO, ATUSF), which now gets more royalty revenue from copper than from any other commodity.
Altius made its largest copper royalty deal, with Yamana’s large, low cost and well-established Chapada Mine, back in March of 2016 when copper prices were around $2 a pound… when the deal was signed for roughly C$60 million, it made sense given the projected C$8-9 million in EBITDA that Altius expected from the mine for at least 17 years (and likely 30+, given the mine’s continuing expansion potential). As of the last quarter, with prices only averaging $2.70 or so, that was already up to what would be an annualized royalty of something like C$14 million.
So a year and a half in, we already see the benefits of being a counter-cyclical investor — commit money to projects when they are not popular, and reap the rewards for perhaps decades if the cycle turns (as they almost always have, at least over the past 15 years or so). That certainly doesn’t always work — the Alberta coal royalties Altius bought, for example, experienced a big writedown because those mines won’t produce for as long as anticipated thanks to new regulatory restrictions (though that royalty acquisition will likely still pay for itself eventually, particularly because of the 100+ year mine life of some of the included potash royalties, the regulatory crackdown means Altius significantly overpaid). That’s a risk I’m willing to take with these folks, which is why I keep adding small bits to my Altius position every now and then, and why I like it as my portfolio’s lower-risk exposure to base metals and other less glamorous commodities — copper, potash, iron ore, and whatever else they find with their prospect generation businesses. If China’s industrialization surges and copper and iron ore recover, Altius will be a huge beneficiary over a long period of time… if not, they won’t go out of business (but they might well trail the market, as they’ve done for several years running).
Will a bear market sneak up on us as we head into the end of the year? I’m not crazy enough to try to predict when the good times will stop rolling… but generally, when we’re going into the final six weeks of the year, the sensible investor lets that seasonally strong period work for him. Look for some tax losses you might want to take, look for any possible bargains that might appear because other people are taking tax losses and selling indiscriminately, but let that November and December optimism and that tendency to have a “Santa Claus rally” and a big influx of new cash into the market in January work for you.
So I keep telling myself, “don’t sell just to sell” … even though I’m feeling (as you probably are) that the market is too richly valued and is a little “stretched.” Try to hold on to things even if it’s a little scary — we all know things seem expensive, but they’ve seemed expensive for several years… and this is certainly not an egregious and unsustainable or unjustifiable bubble like we saw with tech stocks in 2000… if the averages work out at all, odds are that you’ll do better if you wait for things to fall apart a little bit before you get aggressive about protecting yourself.
That’s not to say that you should go “all in” and buy with both fists here — I have no idea what you should do, I don’t know whether you need more money to help your kids pay for college in a couple years, or if you’ve been retired for 20 years and need to be more conservative, or whether you’re living large in your 30s and seeing your salary go up 20% a year and delight in taking risks. For me, a getting-dang-close-to-50 guy with kids and a family and plenty of earning years left in my quiver (I hope), I’m staying almost fully invested… and have levered up on some growth names, particularly with options to limit my capital exposure, but am also keeping that 6-7% or so cash cushion because I keep hoping to see some bargains come my way if the market takes that 20% hit that seems so long overdue.
It is important to try to plan and visualize what you will do if the market behaves completely opposite of your expectation, and to have a strategy for buying in a downturn (like a “wish list”) or selling at stop loss trigger points for some of your holdings… as I try to repeat every chance I get, beware the cool comfort of certainty.
If you feel certain that the market is going to fall by 50% next month, then sure, speculate on that a little with your gambling money… but you’re almost certainly going to be wrong. If you feel certain that Bitcoin will go to $100,000, sure, bet on it with the money you don’t tell your spouse about and cross your fingers… but you’ll probably be wrong, so don’t bet your retirement or your mortgage unless you love living on the edge and taking risks.
The world has been set up now to reflect only our own desires and fears back to us. It is ever more easy, despite the open and exciting world of free and instant communication, to go through life without truly seeing a perspective that’s opposed to yours… and even though most of us consider ourselves to be wise and open-minded (and above average in all other ways, of course), if we see only things we agree with (thanks, Facebook and balkanized politics!), then it is frighteningly easy to slowly and quietly become certain about things that aren’t really true (or rational, or supported by evidence).
That goes for politics, most obviously, but it goes for investing, too — if your eye gravitates only to the stories about financial and social collapse and to the predictions about a new gold standard, then you’ll keep getting more and more of those stories, and they’ll squeeze out other stories, and after a while the conspiracists and panic peddlers will seem like the normal ones, and it will make sense to you to sell your house and cash in your 401(k) and buy gold coins and go live on a farm in Iowa even though you love your home and your job and your neighbors in Queens.
Echo chambers make us all more foolish — so if you’re tempted to sell everything and buy gold coins and hide in the basement, go out of your way to read some articles about amazing growth companies and strong emerging consumer economies… and if you think Amazon’s going to $5,000 a share and you can’t go wrong by levering up on all the hot new tech and biotech names that catch your eye, spend a few minutes listening to the gold coin crowd. Just about everyone is right every once in a while, it behooves us all to be open to the idea that our basic perception of the likely trend for the world and the economy is wrong.
So… enough with my big picture blather and hand-wringing… what’s up with the stocks in the Real Money Portfolio?
Yatra (YTRA), our little Indian Online Travel Agency (OTA) had a solid quarter — they beat the few estimates that are out there and showed good growth. There’s not much coverage still, and the company is still quite small and the Indian travel sector is obviously highly volatile. I don’t see anything in the quarter to make me change my opinion on Yatra — my position in Yatra Warrants (YTROF) is essentially a “free rider” now, after I took my initial investment off the table a while back, so I give it some extra latitude (the warrants would have hit a stop loss recently, if you used a standard stop — which is dangerous with very-volatile warrants — but I did not sell). Yatra is much smaller than the dominant MakeMyTrip (MMYT) in the online travel space in India, but it has a strong user base, growing revenue, and a strong relationship with a huge network of hotels — I expect it will either keep growing rapidly with the Indian market, or it will be taken over by a large, global player looking for a presence in India. Either way, holding warrants with another four years to go until expiration gives a lot of upside potential — but the warrants have not yet “given up” to the same degree that the shares have, so if you like the stock it might be that you can pick up a position more cheaply by waiting for a washout… or looking to see if traders harvest their stop losses in Indian stocks as we head into the end of the year.
The Trade Desk (TTD) has been a very weak stock since I took my little exploratory position just a month or so ago — and they decided to add insult to injury and did a stock offering this week, after the stock had taken a hit on earnings, so it fell a bit further still. That doesn’t change my opinion, I’m still thinking about this one and waiting to see how things shake out a little more — it’s challenging to build positions in growth stocks because they don’t ever seem like they’re cheap, even after falling 20-25% TTD is expensive based on most standard valuation metrics, but I’ll be watching this over the next few weeks and reconsidering to see whether I want to harvest my small tax loss or buy more. The price is not ludicrous, the shares trade for just over 30X next year’s expected earnings, but we probably have time to think it over since no one appears to be feeling lusty about raising estimates for TTD after they downplayed their immediate growth prospects.
Singles Day, the “we didn’t have a consumer mania holiday, so we had to make one up” festival popularized by Alibaba (BABA) and fully embraced by JD.com (JD) and, presumably, all the other retailers in the Middle Kingdom, was another recordbreaker for the ecommerce leaders… but it didn’t do all that much for their shares. JD also reported earnings, which again showed stupendous growth in revenue and earnings (and infrastructure investment, they now have 405 warehouses in China), and had another nice pop to get the stock back above $40. I have positions in the Real Money Portfolio in both JD and BABA through options, mostly 2019 options. Quite quickly after JD’s surge, the Morgan Stanley analyst came in with cautious comments about the valuation (which is, we must admit, absurd — though not necessarily more absurd than similar “growth” stocks), and the gains were partially surrendered.
That’s been the story of the week for the growth stocks in a “macro” up and down few days — China gives, Congress takes away with fear that tax cuts won’t come, China takes away with rising interest rates, Congress gives with progress on the tax cuts… it’s enough to give you a little whiplash, which is a good reason to avoid watching those daily fluctuations in the market and keep your eye on the horizon.
I’m happy having a basket of options positions on these kinds of rapid growth stocks, mostly because, although they look expensive, I think there’s a good chance to benefit from the fact that Wall Street analysts just can’t model for and trust the kind of growth these stocks have been showing (and may well continue to show). Analysts look at numbers all day and believe that big multibillion-dollar companies shouldn’t be able to grow 10X faster than the market, that’s been the constant fuel behind Amazon and Facebook and NVIDIA, too, the unwillingness of the Wall Street analyst to believe in what seems like fairy tale growth… coupled with those fairy tales coming true.
Evidence Tencent (0700.HK, TCEHY), which I still (somewhat bitterly) do not own, either directly or through the Naspers (NPSNY) shares that I put on the watchlist a little while ago — they had another big “beat” of a quarter and are showing not much more sign of slowing down than is the also-massive Alibaba, though the shares “only” went up a few percent because analysts continue to fear that $500 billion valuation for a stock with a PE well above 50. And who can blame them, really, it sounds absurd… though if Tencent or Alibaba broke up into four or five companies each to reflect their major divisions, all of those fast-growing little pieces would certainly trade at very high valuations.
It’s important not to go “all in” on growth stocks at what might someday soon be the zenith of the bull market, with valuations that keep getting more and more elevated, but we’ve not seen the likes of these massive growth stocks like Facebook, Alphabet, Alibaba, Tencent, Amazon and the others before — and, since they’re also among the largest companies in the world, they also get a huge amount of all the new energy that goes into the market… market-cap weighting means that every “passive” ETF dollar that goes into the market — and it seems that so many of those incoming dollars are passive — adds more buying pressure to the biggest companies. That could be awfully scary for the big companies when the passive money flows out next time investors flee the market, but right now the big growth names have defensible valuations, huge and growing markets with no sign of saturation, and they’re breaking the valuation rules. So be it, let’s enjoy the ride while it lasts… and make sure positions are not too big or too levered if sentiment turns against them in the days to come.
And in case you’re wondering, things can go up far, far, far more than you might expect, even when they’re already expensive… all you need is investor confidence and “buy in” that accepts the company’s plan and strategy. Amazon (AMZN), of course, has always been way too expensive to make sense, and trades at a forward PE of 140 or so now because investors think being dominant is more important than making a profit. If the faster-growing (and arguably more dominant) Alibaba traded at that same valuation, the shares (now at $185) would be closer to $900. If JD (now $40) traded at Amazon’s valuation, it would be at about $120. That’s dangerous thinking, investors aren’t likely to give another stock the same latitude they’ve given to Jeff Bezos… but it does present another perspective that allows us to accept that BABA and JD can each go much higher if the Chinese economy continues to grow (and, yes, if Chinese consumers continue to buy themselves gifts on singles day).
Other news? Delphi (DLPH) surged for a brief while after the board approved the spinoff this week — that I don’t get, as far as I can tell there wasn’t any meaningful reason why they wouldn’t approve it, the board is not a passenger here, they’ve been involved in Delphi’s major restructuring since the beginning.
I don’t mind the stock going up on the news (though it also gave up some of those gains by the end of the week), and I expect this to be a medium-term holding of a year or two as they benefit from the increased specialization of the spinoff that highlights their growth… but if it recovers on this news, then it shouldn’t have fallen in the first place. Sometimes the stock market just exists to give you a reason to shake your head and mutter to yourself. Perhaps the boost was because the spinoff is happening a little bit earlier than promised — they’ve been leading us to expect all along that it will happen by the first quarter of next year, and the latest news is that it will be complete by early December… so that’s good. Investors hate to have to be patient.
If you’re not caught up on the details, the company is basically splitting out a fourth of itself — every three shares of Delphi, which will be renamed Aptiv and will be focused on electronics and autonomous driving, will become accompanied by one spun-off share of Delphi Technologies, which will be the powertrain company and will keep the DLPH ticker. So the spinoff, and the company that will probably get less love from investors, is the one that will actually keep the historic name and ticker.
And as I alluded to briefly when I was writing about Katusa’s re-tease of the stock earlier in the week, Trek Mining (TREK.V, LWLCF) announced an update of its upcoming “business combination” that will create Equinox… and part of that deal, which they say should close in late December, is that Anfield, the smallest of the three companies in the combination, has agreed to “monetize its assets” — they will sell Coringa for $22 million, and to sell a receivable for about $13 million, for a total of $35 million… which is pretty close to what Anfield was valued at before they became part of this three-way merger.
So yes, that confirms that Ross Beaty, who was the lead investor of Anfield, wanted out of Anfield’s lead project, Coringa (which is small and is also faced with some local objection, it appears), and that the folks at Trek mining wanted Anfield only because it came with some cash and with Ross Beaty, presumably because of the connections he brings as he helps lead their other projects, primarily Aurizona and Castle Mountain (and, perhaps, because having Beaty aboard meant they could get slightly better terms on their financing).
The previous deals that were made to build Trek out of the original Luna Gold, Lowell Copper et al also were at least partially designed to build up some cash (in addition to the exploration properties). So… now they’ll end up with another $35 million in cash… or, well, $18 million now, plus probably another $17 million in a couple installments over the next couple years. Anfield had a bit of cash on its books already, as well, so it’s really a total of about $43 million in cash that’s coming from Anfield to Equinox along with Ross Beaty.
They already had plenty of cash and liquidity before this, and a big line of credit as part of the business combination, but I suppose no miner ever turned down extra cash. Shouldn’t be any problem financing the construction of their relatively inexpensive mines, and there’s still ample reason to expect Aurizona to be up and running and producing gold fairly soon (they say late 2018, so even if you add six months because miners are pathological optimists that’s not much of a wait) — unfortunately, that probably still doesn’t make the mines immediately more appealing to new investors unless gold prices rise (or they have additional exploration success)… but it does take away most of the financing risk. The stock could still certainly fall hard for any reason, as it has, or fall further if gold prices fall, but the company won’t be so desperate for cash at that time that they have to give up the ghost. They should be in fine shape to survive a downturn now, if that does happen to be the next market swing — and they’re still in good shape to begin producing a meaningful amount of gold in about a year and a half.
And I’ll leave you there, dear friends — no big transactions in the Real Money Portfolio this week, though I have updated it for you as usual. No Friday File next week while we’re closed for the Thanksgiving holiday… enjoy your break from us!