Its close enough to year end to check in on how the ideas I’ve presented during the year have performed, and to update where we stand on the various theses presented. The below table summarizes the overall performance of each idea since publishing, along with benchmark performance, and alpha (outperformance vs the benchmark). Note, this is on a gross basis (ignoring stock borrow and divs), so these are not an exact replica of would-be trading performance, but close enough for an examination of the accuracy of my recommendations and idea hit rate.
Overall idea performance:
Since March, I’ve presented a total of 7 ideas – 5 shorts, 2 longs – so just under 1/month (I wrote twice on a couple of names). Six of the seven ideas generated positive returns (hence the 86% ‘hit rate’), probably higher than I would expect on a normalized basis. Meanwhile average returns on an absolute basis – 12% on the shorts, 40% on the longs – were acceptable (for the shorts) to excellent (for the longs). On an alpha basis, I am much happier with the short performance, since the average short generated 17pts of alpha during the hold period (around half a year on average so >30pts of alpha, annualized), which, combined with the absolute positive performance during a strong bull market, is about as good as I would expect to achieve from my short book. I don’t really put too much stock into the strong performance from the longs, as the sample size (just two ideas) is too small to draw from. Nevertheless if I can return even half the alpha I actually generated (ie 14pts going forward, not the 28pts I managed on these two ideas) on an absolute basis from the long book, I would generally be very happy.
Of course, not everything went right and the major eyesore was the Tesla (TSLA) disaster. I will comment on that, along with my other names, in the updates section below.
Westshore (WTE.CN) – short; original article here, -7% vs benchmark +5%, 12pts alpha
WTE has underpeformed a little of late, but actually held up incredibly well for most of the year. This was somewhat surprising, as many of the original thesis tenets have unfolded as predicted: namely, Cloud Peak, a key customer (moving to ~30% of volumes from 2021) indeed went bankrupt; it was purchased by a potentially cash-poor acquiror (the Navajo Nation); and the surety bonds backing the Spring Creek mine (the only mine exporting coal through WTE) were abrogated by the new owners, probably leading to the suspension of mining (this item is still tbd). Also, Teck Resources (TECK), currently >60% of WTE’s volume, confirmed – despite significant cost overruns – that their competing Neptune terminal would not only go ahead in 2021 but that CN had committed to spending $125mm to enhance rail connectivity for Neptune – further underlining the existential threat to WTE’s tonnage. Meanwhile, the global market for thermal coal has collapsed, both because gas/LNG prices have fallen in Asia (the key substitution fuel) and because cheap, Rupiah cost-based Indonesian coal has flooded regional markets after Indonesia removed export restrictions early in the year. Indeed, with this composite backdrop, and many of WTE’s other clients in distress, WTE is probably a better short now than when I first wrote it up, as the key Teck renegotiation catalyst is still yet to come and the overall coal environment is much weaker. I remain short, and think 2021/22 EBITDA estimates are at least 50% too high.
I have already written a follow-up so there is not really much to add. This ‘company’ appears to be running on fumes; is quite likely to be insolvent today; has essentially ‘gone dark’ (it is not compliant with financial reporting requirements, in my view); and is a clear going concern risk likely to run out of cash within months, if not weeks. The fact the stock remains with a $2.5bn market cap is a huge anomaly, but one I expect to be correct in short order in the coming weeks or months. I remain short and think equity value is zero.
Clearly the largest blot of my record (and personal PnL) this year. To say TSLA was, and is, beyond frustrating, is putting it mildly. That said, I am loathe to add to the encyclopedic coverage already in the blogosphere on TSLA unless I have something novel or additive to say. In that vein, I will simply comment that many of my original suspicions re the balance sheet (stretched beyond comprehension), the PnL (aggressive in the best case), and the fundamental end game (less than zero), remain. However many of the catalysts I anticipated to break the cult-like faith in the stock – eg, the inability to tap equity markets because of regulatory issues around Musk; the inability to scale the business to profitability as units scaled; and increasing abuse of customers and regulators alike – simply failed to do so, despite unfolding broadly as expected (look at EPS consensus contraction over the course of 2019 vs the stock price, for example). I covered my TSLA short at $280 after the most recent earnings report (where I believe Musk fully crossed from ‘aggressive accounting’ to ‘accounting fraud’) because it truly seems that in the absence of regulatory willingness to act and an ongoing hyper-bull market, this seems the quintessential stock ‘that can remain irrational longer than you can remain solvent.’ No doubt I will come back to TSLA on the short side when the mood music changes (even if at a much lower price), but for now I’m taking a break from the name.
Netflix (NFLX US) – short; original article here; -18% vs benchmark +5%, 23pts of alpha
Not much has changed fundamentally at Netflix: they continue to spend exponential dollars on content for diminishing subscriber returns. The US market now appears saturated, and the company has pushed more aggressively into low-price, low-lifetime value markets (like India) while continuing to spend higher dollar amounts on content globally. I remain convinced the long-term, fundamental earnings power of the business – given the content flywheel they are inexorably treading upon – is very low (even before the onset of price-destructive competition, which has finally come to the US in spades); but that doesn’t make it the greatest short in this kind of market (where credit conditions remain lax and with credulous investors aplenty). I remain a keen observer but with no current position.
Aercap (AER US) – long; original article here; +17% vs benchmark +10%, 7pts of alpha
While I commented briefly on this blog (this year), I have been a long-term holder and bull on the AER business model and its astute, shareholder-friendly management. Not much has changed this year: the company continued to produce solid double-digit underlying RoEs from the leasing business, while reducing the average fleet age through asset disposals at sizeable premiums to book value, all the while buying back stock at a substantial discount to book. The stock has performed well, but a number of other leasing businesses – all variously inferior to AER in scope and track record – have been sold at large premiums to book, so I feel the stock will either continue to rerate to above book value ($69.5 today, and $72 likely at year end); or the company will simply continue to hoover up its own stock until it gets there. An added kicker from here is the lack of overhang from Waha – the Emirati investment vehicle recently sold out of the last portion of their holding (6% of the company), which AER bought back 1/3 of, so the shareholder base is much cleaner now and the fundamental picture remains as clean as it has been in years. This is still my largest long.
Shinoken (8909.JT) – long; original article here; +63% vs benchmark +13%, 50pts of alpha
No doubt, Shinoken has been a beneficiary of the firm Japanese market rallying into year end. But in many respects the thesis is unfolding as anticipated. Namely, the sector-wide crisis in the apartment development business that wracked the industry for much of 2018/early 2019 has started to dissipate and the last two quarterly report from Shinoken demonstrated both the strength of their franchise (already bouncing back and returning to growth from next year) as well as the cash-generating power of the business in the absence of growth (the company successfully reduced inventory for cash, aggressively, during the last 6 months, and is now less levered than it has been in the last 5yrs). Furthermore, the recurring services components of the business – now 50% of group EBIT – continue to grow uninterrupted, and the company appears to be moving forward with its two REIT projects (in Japan and Indonesia), which at the margin can only help the valuation of the group (given where REITS trade vs Shinoken at <7x EPS today). I entered this position at <4x EPS and now it has rerated to 6.5x EPS (on FY20 numbers); I still think fair value is much closer to 11x EPS, while my numbers have proven a little conservative so far. As such, and with the sector headwinds seemingly abating and the market returning the growth next year, I don’t think the bar is particularly high, and remain convicted in this position for 2020.
K+S (SDF.GY) – short; original article here; -22% vs benchmark +0%, 22pts of alpha
This investment is still young, but the thesis is developing nicely. Potash prices have weakened further, as inventories in the key export markets of Brazil and China remain very high by historical standards. The Indian contract for 2020 priced at an acceptable level, but the Chinese contract remains unsigned and given inventories likely won’t be until after Chinese New Year. Meanwhile BHP – the likely new entrant post 2021 – appointed a new incoming CEO, an insider who has been on the Executive Committee approving Jansen capex (now $3bn cumulative) for years. I think it is much more likely Jansen gets the go-ahead (early 2021 FID), with all the terrible consequences for potash pricing, and SDF specifically, that implies. Management at SDF appears to be more cognizant of the precariousness of their position, as they both took down production further (at the recent earnings release) and talked up the potential for further asset sales/deleveraging in the near-term (although I’m not entirely sure what options that have). This remains a high-conviction short, as I think 2020 could be a year of reckoning for SDF, where I expect balance sheet restructuring of some form, before the 2021 Jansen decision raises true existential risk for the company.