4Q21 Portfolio Review

I thought 2020 was going to be one for the record books as it contained the start of a global pandemic plus history’s fastest recession and recovery, but it may end up a footnote compared to 2021’s excesses. It absolutely blows my mind that NFTs are selling for millions of dollars and there are multiple cryptocurrencies that have multi-billion dollar market caps. It’s slightly more believable that there are tons of companies with no cash flow, and some with hardly any revenue, that are trading on stratospheric price to sales ratios. I lived through the dotcom bubble, which has quite a few parallels, and just like the dotcom bubble I think there’s going to be a lot of people with all sorts of regrets within a couple years.

But enough old man yelling at sky ramblings, let’s talk fourth quarter 2021.

Overall the portfolio returned 4.05 percent for the quarter, which brought the full year’s performance to 48.6 percent.

It was one of those quarters where old-school cash-flowing businesses beat high-flying tech. Part of that was because of the shift in interest rate policy that favored financials, industrials, and general value stocks over the tech companies. When you have a 50x multiple on revenue it’s amazing what kind of hit a stock will take when the discount rate on that revenue projected 20 years in the future increases just a titsch. Of course, I’m assuming someone somewhere is actually doing some sort of modeling where the discount rate matters versus just YOLOing it so they keep up with their benchmark and everyone else.

I’m probably wrong.

Winners

But stable and boring is good. I don’t need hardly anything to go right; I just need it to go slightly less wrong than the market is expecting. And during the fourth quarter of 2021 I had a number of positions that put up some decent numbers:

  1. Cigna
  2. Intercontinental Exchange
  3. Jabil

Cigna has long been a cheap stock because of its limited growth prospects and the regulatory uncertainty surrounding health insurance companies. Some of that pressure abated in the fourth quarter as Congress proved largely impotent in accomplishing anything. ICE and JBL just continued to execute – they’re both good businesses in growing industries and they’re taking advantage of the opportunities. ICE is pretty much at my estimate of fair value so I won’t be adding to that position but JBL still has room to run.

Losers

Like always, some positions went down. I know this is the internet and this is just some random portfolio update so I know I should claim every single position increased in value, but that’s just not the way real portfolios work. The fourth quarter’s biggest losers:

  1. Perrigo
  2. AT&T

Perrigo is a lesser-known stock compared to the rest of the portfolio. They manufacture consumer self-care products and are in a bit of a turnaround situation. They sold off November 10 when they announced earnings. They are executing on their turnaround but they reported lower gross margins from supply chain disruptions and lowered their full-year 2021 guidance.

AT&T on the other hand, is just AT&T. It declined ~17 percent in the fourth quarter. I personally think lowering its ambitions to be “just” a telco is a good thing, but with its debt load, capex needs for 5G, and future interest rate hikes the next best alternative for a lot of people just got more enticing.

Shorts & Options

I keep a list of my long positions updated and publicly shared through my Portfolio page, but given the risks inherent in shorting and option trading, I don’t publicize those. On net, shorts and options were good to me during the fourth quarter and accounted for roughly 2.8 percent of the fourth quarter’s performance. Options and shorts aren’t meant to be the driver of my portfolio’s returns but if they can add a couple points per year, then over a couple decades they’ll really make a difference.

2022 Predictions

I’m not one to make too many predictions but I don’t see inflation going back to 2 percent without some accelerated rate hikes. I think demand is still too strong and still pent up while the logistics chain snarl is still being worked out. Freight rates are coming back down – I just heard that they’ve decreased to $19,000 from $23,000 per container – and I think that will be the tell for when the economy finally starts to cool back down again.

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