Cheapness still in cyclical names

This time is different?

You know how they say how the phrase “this time is different” is expensive? The problem with this phrase is, at what time scale do you measure the difference. If you only look at the last 20 or so years, then yeah things are really different this time. But look at the last 100 years, and things are not so different. War, large inflation and pandemics were things that happened periodically.

A lot of stocks that have run up are still trading like we will return to the pre 2020 status quo soon. I don’t think that is the case. So I adjusted my portfolio significantly, and considering further adjustments. Should have done this in December last year, as I saw a lot of this stuff coming :/ , including the Ukraine invasion (not at this scale though). But decided I was not a macro investor.

I am pretty pessimistic on Europe. I think the Balkans are likely to reignite at some point in the next 10 years. There are a lot of Russians living in Eastern Europe, a disturbingly large portion is quite pro Putin still. That will create tensions. The Baltics are very difficult to defend for NATO. Serbia is basically turning into a mini Russia. Bosnia is slowly splitting up from the inside. And EU authorities are largely absent in all this. As usual, problems will be ignored until it is too late, and then the wrong populist measures will be taken to put a bandaid on the whole situation.

But I want to limit my political commentary here, on to stocks!

Some stocks I have entered (at somewhat lower prices though) are Olin corp (OLN), CVR Partners (UAN), Serica energy (SQZ). Yeah they have run up, but if you look at the supply/demand situation, I really don’t see how we won’t have large fertilizer and EU natural gas shortages in the coming years. And that is if the Ukraine crisis is quickly resolved, which I think is now not that likely. Especially UAN and SQZ will likely earn 50-100% of their market cap in the next 12 months. OLN thesis is nicely described here (not mentioned is that they benefit from higher EU natural gas prices as well).

I took stakes in Extreme Networks (EXTR), a cheap compounder at about 9x FW FCF at $11 per share, that is at an inflection point, and will see higher growth and margins in the coming years. Took a stake in Avaya (AVYA), and made my Black Stone Minerals (BSM) stake significantly larger. For some reason US natural gas production and storage levels are still way too low, even with the warm winter in the US. And it is still trading at 2019 levels, even though there will likely be significant production growth in the next few years in their Haynesville acreage, and natural gas will likely be in a multi year bull market in the US as well due to infrastructure constraints. I can see between $2-3 in annual FCF in 2023 and beyond, most of that will be distributed.

Entered into Kaspi bank (KSPI) as well at $45. It seems Kazakhstan is desperately trying to stay neutral, and are now pushing through reforms that will decentralize power and further clip the wings of their former dictator Nazarbaev. Who was one of main causes of the large protests in january. So it seems like they are moving in the right direction. And if they can attract more investment and maintain neutrality, KSPI can be a real home run at some point. I also like how they pay large dividends, which are not affected by current capital controls. Still a smallish position though.

Ironically my Track Group (TRCK) position so far has been a disaster, sitting on a 40% loss here. It was a stock I was pretty optimistic about. They are improving shareholder communication though, because in April they will have a virtual shareholder meeting. Still think there are multiple ways value can be unlocked, either by selling the company, winning further contracts or by a merger (due to significant operating leverage involved). Or by simply activating that Chile contract.

But not holding it happily. Will probably take a year or two to work out. Could still be a big winner, could also go down another 50%. I think the fact that a large investor is involved who has been holding for a while means that they will likely not let this go to zero easily though. And it increases the odds of some sort of merger at some point.

Still positive about Spanish Broadcasting (SBSAA). Looking at transcripts of Iheart and Cumulus media, it seems they are expecting limited expense growth, and possibly benefit from inflation. With a large debt load, even if your real income growth lags inflation (say only 15% growth vs 20-30% cumulative inflation in next few years), debt/ebitda would come down significantly. And equity holders would win big.

Some relevant quotes from Iheart’s March 15 call:

Bob Pittman

Well, again, I think inflation is we're not a company that has in cost of goods, we don't have supply trucks. We don't have goods we're selling per se. We do see some of the inflation in wages, which I think we're managing well. And to a certain extent, we may wind up being a beneficiary. It may again push prices up.

And historically, media has tended to benefit a bit from inflation. Rich, I don't know if you want to add to that?

A long quote, but very bullish for radio. Remember that SBS reaches a large majority of Hispanics in the US:

Bob Pittman

…

When you talk about TV, the biggest TV network is NBC, reaches about 50% of Americans every month, slightly more than half of what we do. The biggest cable network, which I think right now is USA Network, I think, reaches 28% is the number. The next largest broadcast radio company is Odyssey, I think they reached 36% of Americans. So when you reach 91% of Americans and that's our -- with our broadcast radio, you just say, what on earth would -- why wouldn't you use that? What's derailing?

If you look at every medium that's had a decline, whether it's newspapers or TV, et cetera, it's because their usage dropped off and advertising followed. And I think when you look at the second trend, which is every advertiser today is looking for new efficiencies. And when you look at efficiency, the beneficiaries should be the people who have the lowest price for the same impact. And radio and TV have historically, and I think same true today, delivered about the same impact at the same weight level, in terms of sales for advertisers.

And yet, today TV is 4x the price. So to get the same thing you're going to spend 4x as much for TV. As we begin to develop unified buying systems where advertising agencies can now plan all media together instead of in silos, we're going to benefit from that. And I think as you see pressure on advertisers to get more efficient and to find efficiencies and costs, we're going to benefit from that.

So I think radio is in a pretty good spot. And it's sort of hard for me to think of the reasons why it wouldn't continue to grow. Easier for me to think about all the reasons why it is continuing to grow and why there's real help in that growth number for Multiplatform Group.

Finally a small illiquid new holding is Asia Commercial (104), a Hong Kong stock. This is somewhat of a special situation. They got a few luxury watch stores in Tier 1 cities in China, and a lot of real estate, mostly in Hong Kong and Europe that is greater in value than the current market cap. The stock has a net cash position and is only trading at 2-3x earnings.

What is most interesting though is that the founder has passed away. And his stake seems to be largely split up between his two children. Who have sold some Shanghai real estate, closed some (seemingly unprofitable) stores and most importantly sold the loss making gourmet business that he purchased in 2019. And paid out a large special dividend very recently that is 25% of the market cap.

From doing a bit of research it seems at least one of his children live in London, and they don’t seem to have a great interest in empire building. I think it is likely that further real estate is sold, and most of the profits from the jewelry business will be distributed in dividends. Luxury watches are currently in a bull market, so we might see abnormally high profits. As they are seen as a way to evade capital controls and preserve wealth (when real estate is doing a poor job at that currently in China).

But stock is even cheap based on 2019 earnings. Very very illiquid unfortunately.

I am also looking at housing stocks. I have to think about that some more though.

That about sums it up. As usual, do your own work, and I may sell any of the above mentioned stocks at any moment.