Portfolio Discussion (Part 2)

By request, a peek into my personal portfolio

Rio Tinto

A bit of a copper play, with the giant expansion of the Oyu Tolgoi mine in Mongolia.

And the awesome business model to dig crazy amounts of iron in Australia for a penny and sell it at a multiple times higher price in Asia. With iron ore reserves in the ground counted in decades and probably in centuries.

Cheap hydropower to produce cheap low-carbon aluminum is also nice.

Good dividends as well, although “only” in the 6-7% range, to which can be added some share buybacks and growth.

Might become part of the “no war with Asia” of the barbel strategy.

I will also likely complement it by buying some Glencore sometime soon, to add more copper and coal to my mining exposure and reduce slightly the iron component.

CoolCo

Another company I covered in a report previously.

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It owns ships to move LNG around. And is one of the only pure players in that field I could find.

Europe is permanently in need of A LOT of LNG now that Russian pipelines are blown up or unused. The US are going to export a lot more in the next few years.

This makes the ships more valuable and cash-flowing. Meanwhile, the global fleet will be at best stagnant in total number.

The company is structured to just flow dividends into its corporate owner, a large Asian shipping company.

For some reason, stock aggregators like Yahoo Finance show a dividend yield of 6.35%. Probably because of a complex recent corporate history when it was pinned off from Golar.

The real yield I expect is closer to 12%, judging from the actual cash flow it generated. Any upside from growing LNG volume consumption globally, and growing shipping dayrates, will be a bonus.

Nuscale

An early startup, has great technology, and somewhat ahead of the competition in pre-sales and regulatory approval of its design by the nuclear regulation authorities.

Some level of support by the US government to export it to its Eastern Europe allies (Romania, Poland) and manufacturing alliances with Korean companies.

Pricing is whatever the market feels like, as the first project is not finished before 2028, there is not really any earning or cash flow to anchor the stock.

So the utter collapse of share price brought an already small position below 0.5% of the portfolio. I am seriously considering pouring a few months’ worth of savings, or 6 months of all my dividends into it and forgetting about it for the next 5 years.

It might turn into the Tesla of nuclear energy, or a total zero.

At $250M market cap, a company with a non zero chance to become a leader in the nuclear renaissance and SMR tech seems kinda cheap, especially if it can grab plenty of subsidies and government money to avoid a bad dilution.

1x potential losses but a 10-50x chance of upside is an interesting asymmetry to me.

Pepco

Very quickly expanding discounter in Europe.

This stock is a “buy what you know“ stock for me, following Peter Lynch's advice. 80% of my family's clothing comes from these shops, as well as most toys and new kitchenware.

On the negative, Polish stocks are unpopular, retail stocks as well, and the management team from the group that spun off Pepco might be less than ideal (or even honest) from what I have been told.

Expansion has been very aggressive, with good results in entering the UK, Italy, and Spain, and poor results in Germany.

Share price performance has been poor, to say the least, with a 60% collapse since May.

At the same time, a P/E of 13.4 for a company growing quickly feels excessive, including 13% CAGR revenues and stable unit economic and margin.

If starting tomorrow, permanently flat margins and zero growth forever would still mean an acceptable valuation at the current multiple. Except growth is still doing great, and likely better than most of the competition.

Overall, being the cheapest retailer with acceptable quality, and customers knowing it, is to me the retail winning proposition for an increasingly cash-poor Europe. Probably why the larger successes in Eastern Europe, the UK, and South Europe rather than in Germany.

Reflexions

What can be learned from this portfolio review?

So far (finger crossed), high concentration and going big on a few ideas has paid off very well.

Changes

Averaging down on Nuscale, Pepco, and Alibaba is probably a good idea. The detail is in the execution.

Doing it sooner would have increased losses, and worse, had large opportunity costs from giving up Petrobras, Transocean, and Ecopetrol.

I would like to add a bit more to Rio Tinto and complement it with Glencore to get more exposure to Asian commodity demand.

More Chinese exposure, including CATL and Tencent, should be in order as well.

What is Missing

The part that is missing and I talk a lot about is the defense sector.

This is partly because I feel that, sure, a war in the Middle East would benefit HII or others, but this is a theme already covered by my South American and offshore oil stocks.

Progressively reducing energy once having milked them for dividends and/or stock price rise would be ideal.

I also want to invest in Guyana a stash of money to keep there for 10-15 years, with maybe Suriname as well, but the hassle of opening a brokerage account in the country has made me postpone it for now.

Now rumor of war with Venezuela could soon open a window of opportunity of cheap Guyanese assets. In reality, I doubt Venezuela could invade anybody without suffering a crushing defeat by the US Navy.

Reducing Energy- Timing

Energy has been the dominant idea in my mind since oil went negative in 2020, as this was such a perfect signal for a bottom of sentiment.

I am split between doing it ASAP after such a good run, and realizing I might miss out by just not letting it run its course.

I am convinced we are still early.

Most likely, I could decrease exposure to oil from 70% of the portfolio to 50%. Probably by selling some Petrobras and Ecopetrol after the next ex-dividend date.

Then redistribute this sum equally into Chinese tech and defense.

And move another 10-15% of the oil portfolio from Columbia & Brazil to Guyana/Suriname.

Personal savings from income can be used to pump back up the size of Nuscale and Pepco slowly, dollar cost averaging these positions into long-term compounders (or permanent value trap disasters, who knows?).

Conclusions

Concentration

In troubled times, finding a few inflection points is enough for solid above-average returns.

In 2020-2021 it was energy.

In 2023, it might be commodities and/or Chinese tech and/or defense.

I would not be surprised that by 2027-2029, tech stocks and renewable energy companies will be where I want them to be.

Knowing when to switch is somewhat harder to decide. I have a history of cutting my wins too soon.

So I might go for a progressive approach, if anything because it forces the discipline of cashing in some profit, but not doing it too early either.

Income vs share price

Dividends give flexibility to redeploy capital without worrying about Mr Market's opinions. This is illustrated by Transocean vs Petrobras.

Transocean is something I HAVE to ride out, ignoring the crazy fluctuations.

Petrobras, I can fully ignore the share price, and just collect outsized returns regularly. As long as the dividend policy holds, and oil is above $50/barrel, no need for a change in sentiment.

Both brought good returns, ultimately, but Transocean price changes always felt a little bit more arbitrary and mentally tiring.

When dealing with unpopular regions like Brazil or Argentina, not being at the mercy of market opinions HAVING to change is rather important.

Playing China

This point above raises an interesting question about my plan to get exposure to Chinese equities.

What if CATL, Alibaba, and Tencent keep doing great on technology, revenues, growth, margins, and really all the fundamentals…? But share prices stubbornly refuse to move, and the valuation ratios just get cheaper and cheaper?

What if it takes international markets 10 years to stop being scared of China?

Irrational sentiment can persist for a loooong time.

I have been burned before by betting that losing money on shale oil would go out of fashion. I was a whole FOUR YEARS too early on this call.

Apparently losing money doing something is not a reason to not keep doing MORE of it for years, at least in Wall Street and the shale patch…

Maybe decent dividend yields like China Mobile or CNOOC are better than tech growth like CATL and Tencent?

I am really unsure about this one and will need to think about it.

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Dear readers and subscribers, I hope this was interesting, tell me what you think, if anything is unclear, or if you have any questions.

Let’s make this comment section the most active to date in this Substack :)