Favourite Books of 2022 and what I think will do well in 2023, closing the Carvana chapter, selling my longest held stock...

And a look at Man King Holdings and Lion Rock Group Holdings

'This piece is an opinion and for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.'

“For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.”

― Howard Marks

Good morning and hello!

Today we have a variety of topics:

• My favorite books of 2022 and a podcast recommendation

• What sectors/countries/stocks I think will do well in 2023

• Closing the Carvana Chapter

• Why I am selling my longest held investment—British American Tobacco.

• Shorting Nvidia

• Looking at Man King Holdings and Lion Rock Group

Favorite Books of 2022

I have read 38 non-fiction books and 15 fiction books in 2022.

Fiction

Out of the 15 fiction books, most were from The Witcher series. I thoroughly enjoyed the games, and the books were excellent as well. If you have any other great fictional series, please comment.

Non-fiction

In terms of non-fiction, my favorite was “The World for sale” by Javier Blas. It describes the world of commodity traders like Vitol, Trafigura, Cargill and the history of Glencore. It takes you from the Soviet Union to war zones and ethically questionable characters and how they trade oil, wheat and other commodities. An exceptional book and my favorite in 2022 by a considerable margin.

Podcast recommendation

I listen to far too many podcasts, and most information can be quickly forgotten. One of the exceptions came from Nick Radical, known as @NICKRADICAL4 on Twitter. He was on Value Hive, where he shared his investment philosophy and on what to focus on. What a gem of a podcast!

What, I think, will do well in 2023

Here are my picks and reasons of what, I think, will do well in 2023. Keep in mind that I am quick to change my mind, so never nail me down on an opinion or stock pick.

• LATAM oil stocks (like $PBR, $EC, $YPF)

Despite being long-term bullish oil, I have no idea where oil will trade next year. However, these companies due to political fears are so cheap, that even at $40 oil, they will give me a decent return of around 10% (except for YPF who is more speculative). Every dollar that oil is higher gives me a higher return. There are obvious political risks in Brazil, but Lula already had two terms in the past and proved less radical than many thought. Additionally, congress in Brazil is divided among the parties, so they can't wave through any extreme regulations. The last time Lula was in charge, Petrobras did a 8x. I'll take my chances. I also think that $CRESY, an Argentinian agriculture stock, will do well.

• Coal stocks (like $BTU, $WHC, $YAL, $ARCH)

Despite the big rise in 2022, coal stocks are still rather cheap. Most other commodities have corrected down 50% or more—and I expect the same of the coal price. Even then, the coal miners look attractive. Most funds can't buy them due to regulatory or ESG reasons, and they return money to shareholders via dividends and buybacks (except $BTU, who will do so once they paid down their debt).

• Diversified Metals/Energy like $GLEN

Metal miners in general are cheap. I made the prediction that Glencore will be among the biggest companies this decade—and I still stick to that (for now).

• Japan

While I currently have no position besides Zigexn, I think Japan will do well. The country has low valuations and a rising inflation might change the big cash allocation that many companies have. Furthermore, several companies have already announced manufacturing diversification outside of China, and Japan with the low yen can profit from that as well. Big export companies that Buffett bought like Itochu and Mitsui might be good investments, as well as export-focused ones like Casio or Nintendo.

• Silver

Due to inflation, I think that gold should have done much better this year than it did. Silver is basically a call option on Gold. I have not yet built my positions yet—but my silver portfolio will probably look like this once I am finished

• Uzbekistan

The wildcard, where I am in progress to open a broker account there. The country was basically closed off until 2016. Since the death of the long reigning dictator, they have opened up their economy and bring companies public. Their GDP is far below Kazakhstan, but is quickly growing. Once I have opened an account, I will post further updates.

I also want to hear your opinion, so what do you think does well in 2023?

Closing the Carvana Chapter

I have written up Carvana as a short in May when the price was $36. I had my short position before, but that was the time when I knew it would be a 🍩 (0). Since then, the companies stock price declined another 88%, and I increased my short along the way. Now I have closed out my position. It was among the top contributors to my performance in 2022 and my most successful short so far. I still think it will go to 0, but given the massive decline—the risk reward isn't there anymore.

Why I am selling my longest held investment—British American Tobacco

When I first invested into British American Tobacco a few years ago, the thesis was simple. It would return around 13% with buybacks and dividends, and it would act as an inflation hedge. As I built up my position, the market got pricier and pricier. For a long time, British American Tobacco was the biggest position in my portfolio (until the coal stocks overtook them)—just because I could not find anything as cheap. The company returned exactly as much as I thought it would (with a small price appreciation as well), but it failed as an inflation hedge in my eyes. In the tobacco industry, we saw a shift last year. Smokers changed to cheaper brands, who did not have as much pricing power. For that reason, BTI's revenue increased only by 2-4%, despite high inflation. In the 70s, the tobacco companies would quickly hike the price up – making the sector one of the best performers that decade. In 2022, that situation appears to be different. As a result, the company has broken my thesis.

I still believe that it will do a nice 10-15% return with the dividend, but the reason I bought it, is no longer valid. Furthermore, the market is now much cheaper, and there are more opportunities. I want to avoid getting married to a stock or be prone to thesis creep, so I sell.

Shorting Nvidia

The thesis for shorting Nvidia is simple. The companies operating earnings are down 77% due to crypto demand for GPU plummeting and the gaming sector slowing down. Additionally, the growth in data centers has stalled QoQ (Quarter over Quarter) and I think we might see a reversal here as well. Despite the horrific growth and earning slowdown, the company is 3x its historic valuation when growth was a steady 15%. For that reason, I short Nvidia. However, these forces might quickly reverse, so keeping an eye on it, is important.

A look at Man King Holdings and Lion Rock Group Holdings

Now come the analysis of the stocks that I choose in my last article from the Peter Cundill screen. I sadly caught the flu last week, so I analyzed Man King Holdings and Lion Rock Group Holdings, but will do Stellantis soon. Be sure to not miss it.

Man King Holdings

Man King Holdings is a small cap that engages in civil construction for the city of Hong Kong and has a stake in a Pakistani coal transportation route that was created by the One Belt One Road initiative. The company went public in 2015 and since then, management's predictions have been rather mixed. As they built infrastructure for the city of Hong Kong, their customer concentration is understandably very high. Despite that, revenue increased 2.5x since the IPO and earnings 41%. To diversify away from the construction sector, the company bought 20.3% of a coal shipment service company for HKD$45m. Since then, it returned HKD$8.7m in 2020, HKD$18.9 in 2021 and HKD$15m in 2022, totaling HKD$42,6 m in just 3 years. That is an exceptional return on investment.

Self-dealings are common in Hong Kong stocks and no exception there, the company first rented and now leases their offices from a company owned by a sibling and spouse of the CEO -.-. Not great news.

A 9.7% dividend yield and a negative enterprise value means, that as long as earnings are relatively stable, returns should be good. And that is the problem. I researched the civil construction industry in Hong Kong for hours and still have no idea, who gets which contract and why. The company might be a good investment, or it might not—but because I can't even give an estimated guess in my scatter plot of confidence (because it sure as hell isn't a circle), I pass.

Lion Rock Group Holdings

Formerly known as 1010 Printing Group Limited, the company offers printing services for international companies. The CEO also owns 6.8% of a company that is a big customer of Lion Rock Group, but the margins are in line with the industry, so it appears that they don't sell to that entity at egregiously low prices. David Webb, a now retired activist investor in Hong Kong also holds a position. David Webb pushed for more governance and transparency in the companies that he got involved in.

From the get-go, I enjoy the management outlook a lot more. They are often pessimistic, citing that price wars will go on for years, despite competitors exiting the market and a proposed diversification away from China. So far so good, the company delivered on that promised and has diversified its printing footprint to Malaysia and Singapore. That subsidy isn't profitable yet, and they expect to lose money on it for quite some time.

The company usually acquires small printing companies and optimizes their margins. Those acquisitions have been a mixed bagged. Some Australian acquisitions were quickly profitable, whereas Quarto where they acquired 19.1% in 2017 and increased that ownership in 2022 has been questionable, as the stock price is down around 40% since then. The business is now again profitable and trading at low valuations, so it might still turn out ok.

Earnings and revenue are up due to the high demand as people stayed home and read. As a result, management expects a weak second half-year in 2022. Again, the company is very cheap at an EV/EBIT of 3.47x and 2.81 PE, whereas the historical mean is twice that. Furthermore, the company paid a 10.3% dividend yield. So just from the dividend yield the company will deliver decent returns and the company has been doing small buybacks as well. Looking at the printing industry, the earnings are much easier to project than those of Man King Holdings. So if we assume the pre-pandemic demand and include their acquisitions since then, revenues would be around HKD$1700m. At 25% gross margins (which is historically on the low side) and the same SG&A costs, we would be left with HKD$39m operating income. The HKD$39m operating income would be enough to cover the dividend. Given that the company has made over HKD$100m in operating income in each year since 2012, I think it is a reasonable assumption that the dividend can be sustained. That for me is enough to start a small position (probably around 2-3%) in my portfolio.

I hope you enjoyed today’s article and I wish you a Merry Christmas!