CVE - Fishtown Capital Portfolio Heading Into 2023

Summary

• My portfolio returned +42.9% versus -18.1% for the S&P 500, my largest relative outperformance ever.
• 2022 winners included Cenovus, ZIM, H&R Block, Energy Transfer and Dole.
• I remain cautious heading into 2023, but more constructive as valuations have fallen and some economic weakness is priced in.
• I see more value in stocks now than at this point last year. Some fixed income names also look attractive and could do well when the Fed eventually reduces rates.

FY22 Performance

In 2022 I returned +42.9% versus -18.1% for the S&P 500 ( SPY ). This was my largest ever outperformance versus the index, and my 2nd best year outright (my best year was 2021 at +67%.)

I'm still cautious heading into 2023, but have found several names that have gotten significantly cheaper despite positive fundamental changes over the past year, and I enter the year 85% invested.

Here is my 2022 recap and how I'm positioned going into next year.

Winning Positions Closed or Reduced in 2022

• Cenovus ( CVE ), first written up as the Best Oil Stock for 2022 , last written up here . Cenovus has more than doubled from my initial purchases in the $8-10 range. I'm still bullish on the name, but have sold some purely in the name of diversification, as I've entered into other energy names that could have more upside.
• ZIM Integrated Shipping Services ( ZIM ) was an 8% position I started around $45 in October 2021 ( as discussed in my 2022 review ) and sold at $69 in late March after the $17 dividend as described in my Q1 Update for a double in 5 months. When I entered this name, it was somewhat obscure, but became more public with the massive Q1 dividend. Considering that most of this position was in a taxable account, I wanted to hang onto this until October for LT Capital Gains treatment, but felt that too much good news was priced in and the margin of safety had eroded. Too often in the past I've held onto something because of tax reasons I otherwise would have sold, and have regretted it. The only thing worse than paying the IRS is watching a big winning trade roundtrip back to breakeven or worse.
• Whitehaven Coal ( OTCPK:WHITF ) which I purchased 8/15 for $4.63 and sold on 10/7 at $6.90. Unlike most significant positions, I never wrote this up formally, as I had very little to add to a very public thesis.
• PaySign ( PAYS ) purchased at $1.50, sold around $2. Investment case was written up as Paysign: My top rebound pick for 2022 . I made over 30% in a few months which is nothing to sneeze at, but this has gone on to double before dropping back recently. Selling this was a miss, as my thesis seems to be playing out.
• H&R Block ( HRB ) purchased at $14, a big winner in 2021 and again in 2022. I have trimmed 25% of my H&R Block when it was over $45, but still like the name. The business is both recession proof and inflation resistant (both of which are in fashion again.) Forward P/E under 10 returning almost all cash flow in dividends and share purchases.

Losing Positions Closed in 2022

Another year with no major losing positions. My biggest loser was a loss in Bank of NY Mellon ( BK ) riding it down from $51 to $44, along with some other short term trades.

I've been very distrusting of the broader market this year and have kept a short leash on most of my positions. I sold out of PAYS earlier than I normally would have and left a significant amount of money on the table as a result.

Current Positions

Cash and short duration bond funds (15%)

This is the low end of the range that I'm comfortable keeping in cash. Unlikely I would go below this barring a major market correction.

Cenovus Energy (10%)

Described above, I still hold a significant position in Cenovus and remain bullish on the company.

Energy Transfer (15%) units, preferred shares, and calls

Energy Transfer ( ET ) has outperformed the broader market by nearly 65% this year and I wouldn't be surprised to see a similar outperformance next year.

ET will likely return to a $1.22 annual distribution in Q1, which would have it yielding over 10% at its current price with over 2x coverage!

All of the controversial projects are finished. Capital Budget in 2023 should be light, which should allow them to pay off a bit more debt and hit the 4x EBITDA level. After that, unit repurchases could be on the table, which are highly accreditive at these levels.

Berkshire Hathaway (9%)

Berkshire Hathaway ( BRK.A ) ( BRK.B ) remains an anchor in my portfolio. I haven't sold any Berkshire, it has just declined as a percentage of my portfolio because of gains elsewhere.

Earlier this year I predicted it would outperform the S&P500 significantly this year and it has. I expected similar outperformance in 2023, which may again look like Berkshire staying flat while the broader market declines.

Genesis Energy (6%) (GEL)

Written up recently as my Top 2023 Pick . So far so good. I would not be surprised to see this back to the $12-13 by the time they report FY22 earnings.

H&R Block (8%)

Not as insanely cheap as it once was, but I still think the company deserves a higher multiple and outperforms that broader market. I think it's a great stock for this environment.

Dole (8%)

I said Dole ( DOLE ) was poised for a major rebound in early October and it's already up nearly 30% since I entered the trade. I think this can run back to its IPO price next year and I'm excited to see the thesis play out.

Banks (9%) - Citigroup (6%) and JPMorgan (3%)

After selling out of the name early last year for a small gain above $60, I've recently repurchased Citigroup ( C ) $44.

Since I sold, Citigroup has had a year of building capital and will likely start repurchases in Q2. I think it's cheap enough even though 2023 could be another tough year for the markets. I'm not married to this position and could sell it if I see a significant and rapid macro deterioration beyond what I believe is already priced in.

JPMorgan ( JPM ) I still hold from my original $90 purchase price.

Peabody Energy (4%)

I've traded in and out of Peabody Energy (BTU) throughout this year, often taking advantage of large options premiums due to its volatility. I've re-entered this trade recently at $26.3.

Peabody has had an amazing year and enters 2023 with a net cash position. Peabody shares have been rangebound since March despite having 3 quarters of massive cash flow which has all gone to eliminate debt and build cash. I believe some of the recent weakness may be due to year end selling to keep this off books because of ESG scoring. Seeing this back over $30 at the end of January will not surprise me, especially as Met coal has strengthened recently on China reopening.

January Effect Holdings

I have roughly 20% of my portfolio in holdings that I believe could see a strong January. In particular, I've added other MLP names (along with my ET and GEL holdings) that I think were victims of forced selling from international holdings due to an IRS change .

Calumet Specialty Products Partners (3.5%)

Calumet Specialty Products Partners ( CLMT ) was my top rebound pick outside of GEL. Established at $12.97, I only got 2/3rds of what I wanted before the unit price got away from me when Calumet published a positive year end operational update. If this story plays out as expected, units could easily double from current levels.

CVR Partners (2%)

Purchased at $101, I've held fertilizer producer CVR ( UAN ) before. I believe this was caught in the MLP sell off as well. They may distribute $40+ this year.

Park Hotels & Resorts (2.5%)

Purchased at $11.65, Park Hotels & Resorts ( PK ) is a REIT that's dropped from nearly $20 down to $11 in the last 6 months despite RevPAR and Income recovering. Like most REITs, they have significant debt, but they're also generating a lot of cash and RevPAR outside of their San Francisco properties is nearly back to 2019 levels. EV/EBITDA likely under 10 for next year and trades at a substantial discount to private market values for its properties.

Douglas Elliman (2%)

Real estate is completely dead, everyone knows that, right? That's certainly what's priced in.

But, what if mortgage rates drop a little, sellers become a little more reasonable, and high end real estate does OK this spring and summer?

Douglas Elliman ( DOUG ) has gone straight down, from to $12 to $4, since being spun off from Vector Group ( VGR ) late last year. DOUG was capitalized with $200 million in cash before the spin off, and still has $195 million of its $330 million market cap in cash, so looking at Enterprise Value, it's down over 80%!

Just a name that I think is worth more than the current market value ex-cash, that has more upside than downside.

NuStar Preferred C Shares (2%)

Another name ( NS.PC ) that I wish I had bought more of, and still might even though the price is above my $22.25 entry point. These units will yield around 13% here and are becoming safer as NS is paying down its privately held Series D shares. The discount from par here I think is unjustified.

Pebblebrook Hotel Preferred Shares (2%)

Available in many series, I may add to this. Pebblebrook ( PEB ) has seen its stock price drop, and its preferred shares have dropped far below par down to $17-18 with it. I think hotels continue to normalize in 2023 and the preferred shares that have dropped far below par is a good way to play the recovery.

Yancoal Australia (2%)

After selling out of Whitehaven ( OTCPK:WHITF ) I used some of the proceeds to purchase Yancoal ( OTCPK:YACAF ) at $3.40. It trades even more cheaply than Whitehaven. This could double if Newcastle Coal prices stay higher for longer.

2023 Outlook

I'm still cautious heading into 2023, but a bit more constructive as valuations have become more reasonable, although stocks are far from cheap. Especially since the "E" in the P/E ratios may come under pressure next year.

We likely will see the real impact from the Fed rate hikes in 2023. I'm in the camp that inflation is getting under control, and I think the Fed is over tightening after keeping easy money policies going on for far too long.

The US Fiscal situation is bad and not getting enough attention, as we keep passing trillion dollar spending bills. Interest on public debt, much of which is short term, is set to become the biggest line item in the national budget. As a result I think the Fed will be forced to move short term rates back down to the 2.5-3% range in the near future.

As the year progresses, I may look to shift more into fixed income names, which could benefit from a lower interest rate environment. For the first time in a long time I see value in both long term corporate bonds and preferred shares that have fallen below par.

I wish everyone a Happy New Year and a great 2023. I'm grateful for the opportunity to share my ideas with you all!

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