LVLU - Only Playing 'B-' Baseball But Managed To Eek Out A January 2023 Total Return Of +21%
Summary
- After an extraordinarily tough 2022, January 2023 was jubilant and a great month for bulls.
- The Russell 2000 was up 9.8% and I'm happy to report I posted a +21% total return, during the month of January 2023.
- This piece mostly discusses my numerous mistakes, notably on the portfolio management side of the house, not so much on the stock picking side.
If you are a long only investor that stayed the course and avoided get caught up in 'Market Timing', a person that ignored the scary headlines about the sky is falling or last year's theme song 'Don't Fight The Fed!' and therefore don't own stocks, then January 2023 can only be described as jubilant! The market absolutely ripped during the month of January 2023.
After a brutal 2022, a year where you simply had to survive and live to fight another day, January 2023 was amazing.
Despite playing 'B-' baseball (I will explain more later), during the fruitful month of January 2023, I'm happy to report my total return, across my two actively managed accounts, was +21%. This is a wee tad better than the Russell 2000 ( IWM ), which posted a blistering +9.8% month! Also, in the appendix section, I show readers the actual performance figures via Fidelity's Performance Tracker tool. As much fun as authors reporting their performance via excel spreadsheets, I for one, really love to see actual numbers and monthly performance cadence.
As amazing as January 2023 was, for long only investors, this Warren Buffett quote, from his 1997 Annual Letter is apt.
Given our gain of 34.1%, it is tempting to declare victory and move on. But last year's performance was no great triumph: Any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.
Explaining Only Playing 'B-' Baseball
If anyone is reading this note and thinking I'm being a little coy by saying I only played 'B-' baseball, let me explain. Essentially, the stock picking was 'B+' ish throughout the month, but my portfolio management skills have been kryptonite, and can only be graded as a 'C' (and a 'C' that is graded on a curve).
Let me explain. Over the past one hundred years, 2022 was one of the most difficult years ever, for 60% stocks and 40% bonds portfolio strategists. The recency bias from 2022 carried into 2023 and if you actually had capital 'at risk', as a long investor, unless you were super overweight E&P energy, 2022 was about surviving. In 2022, traversing this rugged terrain, on a weekly basis, drove me to frequently read my favorite Dr. Seuss book - Oh, the Places You'll Go!. Me and my wife are blessed with three young and healthy kids, so we try to weave in reading, and this book is amazing. If you've read Dr. Seuss then it is pretty intuitive that Oh, the Places You'll Go! was one of his final and finest works of art, and his version of delivering a commencement speech at Harvard or Stanford.
As a stock picker, in 2020 and most of 2021, I felt like this:
You won't lag behind, because you'll have the speed. You'll pass the whole gang and you'll soon take the lead. Wherever you fly, you'll be the best of the best. Wherever you go, you will top all the rest.
(Dr. Seuss - Oh, the Places You'll Go!)
As a stock picker, and definitely not a market timer and/ or macro strategist, 2022 felt like this:
Except when you don't. Because, sometimes, you won't. I'm sorry to say so but, sadly, it's true that Bang-ups and Hang-ups can happen to you. You can get all hung up in a prickle-ly perch. And your gang will fly on. You'll be left in a Lurch.
(Dr. Seuss - Oh, the Places You'll Go!)
So entering 2023, after never working harder to keep my head above water and posting a +5.3% total return, in 2022, I only had 2% of cash (or dry powder as I love to call it). My big theme entering 2023 was the January Effect was going to be prime hunting ground for alpha. As stock pickers around the world know, the intellectual hunt for alpha is our North Star.
The problem is that I was out of position and caught off sides, entering 2023. Sins of poor portfolio management, from 2022, that carried into the brave new year, in 2023.
Let me explain.
About 18% of my capital (on a cost basis) was and has been tied up in Advanced Emissions Solutions ( ADES ) and then in December 2022, I made another bone headed sizing error, by dramatically sizing up Express, Inc. ( EXPR ), to a 13% sized bet, at $1.30 per share. Entering 2023, I had/ have other core positions like NCR Corp. ( NCR ), Rogers Corp. ( ROG ), TravelCenters of America ( TA ), and three or four other names. Therefore, my tactical capital was limited. Moreover, in the early going of 2023, I had to make some difficult decisions and shore up some capital to take advantage of my working theory that the January 2023 Effect would be sublime.
To give you a poignant example of just how poor my portfolio management skills have been, on the morning of January 5, 2023 and well as January 10, 2023, I saw the DermTech, Inc. ( DMTK ) news, within five minutes of the press releases. As an aside, almost every morning (from 6am to 9am) and evening (4pm to 4:30pm), I closely monitor the press release news feeds, using the fantastic Seeking Alpha portfolio tracking tools, as I track over three hundred plus stocks. Candidly, I don't miss many company news events and usually see most news within fifteen minutes of it breaking.
In terms of DMTK, here is a company that had roughly $140 million of cash, as of September 30, 2022. Here is a company that built a better mousetrap for early melanoma detection, in a non-invasion manner, one that is better for the patients. That said, the catch is that as good as the science seems to be, the management team here has the worst go to market strategy and has been burning cash like drunken sailors. Despite the tremendous IP value, of the science, I'm sure there would be a food fight to buy this business in a 'Strategic Review' scenario, the high cash burn rates marred the IP value as market participants were extrapolating DMTK running out of cash. These fears combined with the bloodbath that ensnared so many EBITDA negative stocks, throughout 2022, led to this once $80 stock ending at a sub $2 per share (DMTK only has 31 million share outstanding). Also, from my reading on this name, I understand that doctors don't have a strong incentive to use DermTech's products as they get paid a lot more doing biopsies. To make a long story short, I saw DermTech's January 5, 2023 and January 10, 2023 important press releases live, and only bought a timid 2.5% sized position, at $2.04 per share (on January 5, 2023). Oh, and by the way, DMTK traded up, to as high as $6.44, on January 24, 2023. And let's just say, yes, of course, I made some money here, but I also left some serious money on the table by not letting this winner run. Letting the winner's run is very important and a concept, that drives outperformance. Let just say, and there are other factors I won't go into in this note, I've struggled with this concept, mightily, in fact.
Secondly, there were a number of promising January Effect 2023 names on my 29 stock targeted buy list. That said, I couldn't buy all of them due to poor 2022 portfolio management positioning (over sizing of a few bets), which led to a large opportunity cost. The other big issue is only catching pieces of big moves.
For example, to my marketplace group, as there are a number of write ups I just don't get around to sharing, on the free site. I would love to share more, but the stocks that have catalyst tend to move fast and by the time I get around to sharing them, they already moved. Anyway, enclosed below, please see these snapshots: I will give you four quick and recent examples:
And yes, of course, I made money on these names, but I sold them too soon.
1) Daktronics, Inc. ( DAKT )
I bought this one at $2.35. Not enough!, only a 3% sized bet, and I missed the second leg up. In 2023, they refinanced their debt and an activist got involved here. The reason the stock traded under $2 was because of a big unforced error. DAKT had a covenant breach that led to a delayed 10-Q filing and they had to scramble to get a refinancing extension. This never should have happened. And clearly, the management team was asleep at the wheel.
2) Wolverine World Wide, Inc. ( WWW ) at $11.25
As this was earlier in the month, when I was cash constrained, I bought it at $11.25, but sold in the low $12s, as I needed cash for another good idea. The stock traded up as high as $16.70, yesterday.
3) eHealth, Inc. ( EHTH ) at $6.25
I bought and recommended it, at $6.25. I undersized it and sold at $7.20. It goes onto hit $9, yesterday, before profit taking.
4) iMedia Brands ( IMBI ) at $0.57
I was 6% sized here, at a cost basis of $0.57 per share, as of December 23, 2022. I sold most of it between $0.74 to $0.81 and I sold my last small piece, at $1.05, on January 30, 2023. That same day, albeit briefly, IMBI traded as high as $1.20. Let's do some math here, on the original and fully sized position, of 35,000 shares. The difference between selling at $0.80 and $1.05 (as catching $1.15 or $1.20 and high ticking it would have been pure luck), is $8,750 (35,000 shares x an incremental $0.25 per share gain). By the way, I'm very actively watching this name and eagerly awaiting news on finalization of the sale leaseback, commentary on Q4 FY 2022 Adj. EBITDA results relative to November 2022 guidance, FY 2023 Adj. EBITDA guidance, and management's balance sheet plans. I do own some iMedia Brands ( IMBIL ) baby bonds (at a cost basis of $9.80) that I'm holding onto. These are 8.50% coupon baby bonds with a $25 par value. Candidly, if we get the right news and further clarity here, I'm willing to go HUGE on these baby bonds, depending on the price. Again, though, I need a lot more clarity here, before getting myself in trouble and on another sizing mis-adventure.
From a housekeeping perspective, here the realized gains and losses.
(Flagship Account) January Realized Gains Highlights:
I only included realized gains or losses that exceeded $1,500.
- iMedia Brands ( IMBI ): $7,022
- Mesa Air Group, Inc. ( MESA ): $6,770
- DermTech, Inc. ( DMTK ): $5,226
- Spruce Biosciences ( SPRB ): $4,581
- Polished.com ( POL ): $3,648
- eHealth, Inc. ( EHTH ): $2,278
(Flagship Account) Realized Losses Highlights:
Also, baked into my results, and very much as a drag on overall performance is relatively small bet on ProShares Trust II - ProShares Ultra Bloomberg Natural Gas ( BOIL ) (now 6% sized, at cost, as I've been slowly adding to it). As natural gas, the commodity is the widow-maker, I've been very intentional and deliberate about slowly adding. I bought a very, very small position on January 3, 2023, at $15 per. And since then, have been slowly adding. This has been a goat rodeo, as natural gas prices have had their sharpest 100-day decline in the history of the commodity. I can't believe the March Futures contract is currently trading at $2.47 MMBtu, but that is what it's showing on the screens. An in depth article on natural gas might be a good idea. Perhaps, it is a subject I might entertain, at some point in the future.
Incidentally, I live outside of Boston, and we are expected to experience temperatures in the negatives from Friday night and through Saturday morning.
Putting It All Together
Ordinarily, I usually only report quarterly performance numbers, as monthly reporting takes too much time and it is a bit of overkill. That said, January 2023 was extraordinary and a welcome reprieve for the bulls. As a small cap value investor and speculator, January 2023 and the January Effect 2023 were optimal condition for peak performance, alpha generation, and running up the scoreboard. As the saying goes, though, you got to make hay when the sun is shining, as that we did. However, the great thing about the market and questing to become a good investor, which is a lifelong pursuit, is you can always get better and my North Star is striving to improve. Even Sir Warren Buffett, the GOAT (Greatest of All Time!), stills makes mistakes and is perpetually learning.
Here's to intellectual curiosity and perpetual learning!
I hope to see you out there on the battlefield.
Cheers,
CCI
Appendix
Reporting actual performance figures in Microsoft Excel ( MSFT ) or Google Sheets ( GOOGL ) is fun, but see actual performance figures, with real dollars, so readers can do the math, is better.
Flagship Account (January 2023 Performance): +$74,017
Smaller Account (January 2023 Performance): +$13,056
For further details see:
Only Playing 'B-' Baseball, But Managed To Eek Out A January 2023 Total Return Of +21%