Weekly rollup | Aug 01-07 2022
Stocks Mentioned: Matson (MATX), Marathon Gold (MOZ.TO), Skeena Resources (SKE.TO), Danaos Corporation (DAC), Global Ship Lease (GSL), Adventus Mining (ADZN.V), Integra Resources (ITRG)
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August 03 2022
Thoughts on Mutual Funds
I had a call with a friend who wanted my take on investing in Mutual Funds. He reeled off the 1- and 3-year returns on a few funds, all showing stellar multi-year CAGR of 30%+. My take is that I'm forever cynical of mutual funds because I know basic statistics and the game being played by the big mutual fund houses.
Say a big mutual fund house launches 200 funds run by 15 "portfolio managers". Each fund having different rules, styles, list of allowed investments and position sizes, etc. Some funds gather AUM, some funds fail to gather AUM and are collapsed into the more profitable funds. By profitable, I mean profitable for the fund house - which is defined as a fund having enough AUM to generate a fat management fee. Over a period of time, the fund house keeps launching and collapsing funds. The marketing department picks up the prospectuses of the funds showing good gains and passes them on to the sales force. Mutual fund sales is a whole other ballgame. Salesmen are compensated based on the assets they gather. No part of their compensation structure is deferred and linked to the subsequent performance of the funds they sell.
The salesmen have every incentive to push the easy sale - the funds which show a demonstrable track record of great multi-year returns. Investors are fooled by the track record, and when they realize in a few years that the funds they invested in didn't live up to the hype, they don't connect the dots. They simply switch to the next batch of funds marketed by the snake oil salesmen. The salesmen, all sympathetic and apologetic for getting the investor into the fund he thought was the best, pushes the next sure thing. The fund house retains the unhappy investor's money, the salesmen make their commissions, and the merry racket continues.
The fortunate folks who actually do manage to pick the top funds are also trapped, in a way. They attribute their performance to their superior selection skills, and stay in the mutual fund game hoping to repeat their past success.
However the individual funds perform, the fund house and sales force come out on top. The investor has been convinced by financial media (guess who pays them for advertisements?) that buying and holding stocks for the long run is the best strategy, so he sticks to investing his savings in mutual funds regardless of performance. If he does make money off his investments, that's only incidental.
But, but, but... what about the skill of the portfolio manager? Try asking the mutual fund salesman whether there has been a change in the portfolio manager of the fund they are pitching. They wouldn't even have that information. But let's say they inform you that the same manager has run the fund for the past 10 years. Follow up by requesting information on all the other funds that portfolio manager is responsible for and the track record of those funds. You'll never hear back from the salesmen, because that questions signals that the game is up and you're no longer the easy mark he was expecting you to be.
If you want to be even more of a curmudgeon, ask the fund house for the full list of their funds 3 years ago, and the 3 year track record of those funds at that time. Study that list and see for yourself whether you'd have managed to pick today's winning fund from that list. Chances are slim to none, and slim left town.
Don't be fooled by the mutual fund prospectus, it's all merely survivorship bias. When they tell you that past performance is no indicator of future returns, they really, really mean it. They tell you that's just a legal disclaimer, but it's not. It's the only absolute truth you get from the industry.
Matson (MATX) reported Q2 EPS of $9.49, as compared to $3.71 for the same quarter last year. However, shares got slammed yesterday because the company warned of declining freight rates.
"However, in recent weeks we have seen a gradual decline in the Transpacific freight rate environment off the highs experienced earlier this year. This indicates that rates have likely peaked for now, and, at this time, we expect an orderly marketplace for the remainder of the year with our vessels continuing to operate at or near capacity and earning a significant rate premium to the market because of our differentiated, fast ocean services."
The Hawaii market softened as well, with volume down 1.5% yoy.
As with the sell-off in April, I see no reason to panic based on the price action. I'm not adding, but I'm not selling a 2 PE stock just because an earnings decline will cause it to become a 2.5 PE stock. At these valuations, earnings, dividends and share buybacks are your friend. Forget the trend.
Sell Marathon Gold (MOZ.TO). The current rebound in gold presents a better exit point. I've been waiting on a takeover offer ever since I put this trade on and no luck so far. Best to take the loss and deploy capital elsewhere. Based on entry at C$3.06 on 10/1/2021 and exit at C$1.7 today, the trade lost 44.4%.
I'm waiting for Skeena Resources (SKE, SKE.TO) to release its Feasibility Study on Eskay Creek, originally scheduled to be published in June. I believe the FS will demonstrate compelling economics even during these inflationary times. The 2021 PFS called for initial capex of C$488 million for an after-tax NPV of C$1635 million and after-tax IRR of 62% assuming US$1700/oz gold and US$24/oz silver. The by-product All-In Sustaining Cost (AISC) was a stunningly low US$138/oz and cash cost was $84/oz. The margins are clearly high enough to withstand a capex and opex blowout. Skeena is the last of the gold exploration stocks still in the portfolio. Let's give the company a couple of weeks to put out the FS numbers, failing which I'll get rid of it.
August 04 2022
Matson (MATX) CEO Matt Cox sold 5000 shares at $79.82. Given he still holds 252,802 shares I don't see any red flag here.
August 05 2022
When stocks are objectively cheap, corporation action tends to correct for it. This should be a catalyst for other containership lessors, notably DAC and GSL.
Shareholder dilution continues at Adventus Mining (ADZN.V). The company issued 13.5 million 3-year share purchase warrants to Trafigura priced at C$0.513, potentially equating to C$7 million worth of dilution if exercised, and on this basis, Trafigura currently owns approximately 8% of Adventus. The company is also selling an additional C$10 million worth of stock to Trafigura, taking the dilution up a notch by directly bloating the shares outstanding. Current market cap: C$72 million.
As much as I like value trades, cheap stocks are cheap for a reason. When it comes to gold explorers, it's mostly because they just keep diluting existing shareholders, making sure that the perceived value disconnect disappears.
We saw the same thing play out at Integra Resources (ITRG):
August 06 2022