This past week was eventful. I started the week by liquidating all of my coal equities.
The Evergrande news spooked me. Because if the China real estate market was about to collapse it would take down the steel and infrastructure markets with it. If steel fell, met coal would go with it. And given that China consumes the most steel in the world, met coal had a very real potential of crashing harder than a rock.
Since I am not well versed in Chinese geopolitics and don’t have a great gauge on the over economic market in China, I decided the risk was too great to take and exited my coal equities.
I was not the only one to exit that day as coal stocks were down double digits across the board.
Exiting an investment has always been kind of sad for me. On average I spend at least a month trying to understand an investment before I ever underwrite and commit capital. This due diligence process includes building a detail discounted cash flow model, reading through financials, going through earnings calls, talking to management and doing all of the former with the competitors in the space.
So when I have to exit an idea, in some ways it marks the end of that research process. But in the back of my head I always know that one day Mr. Market will sell off an industry I know extremely well yet again. I will then update my models and begin the underwriting process all over again. And the best part is, underwriting an equity a second time never takes as much work effort as the first time as I have all of my prior notes and models that I can use.
If and when Mr. Market decides to sell off coal equities again I will be ready.
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I’ve doubled down on this stock
Last Saturday I penned an article titled, “Down 80%, Forced Index Selling, And Large Insider Buy Warrants A Small Speculative Position”.
I ended up buying this stock the day before it was kicked out of the S&P 600 Small Cap index and am currently up close to 25% in one weeks time. I love buying stocks when non-fundamental investors are dumping due to regulations and rules.
Despite the fast re-rate, I doubled down on this stock last week in the “All In” portfolio when I acquired 4,491 shares around $3.34/share.
I decided it was time to double down on this new ideas as insiders have rapidly been purchasing shares at a multi-decade low. And these insider purchases are not pennies. Since September, insiders have purchased $627,963 worth of their own stock with over 90% of these purchases occurring just last week.
In addition, the corporate team is strategically shifting their business strategy to de-risk future losses and increase earnings power. If these strategic corporate actions work, this company could generate a significant amount of free cash flow relative to their enterprise value.
I haven’t made this new investment a full position yet. I have literally only done one weeks worth of research on the company and need to get more comfortable before I fully underwrite this stock. But given the incredible setup which includes forced sellers and insiders purchasing large blocks of stock at an all-time low while they strategically turn the business around, I couldn’t help myself to take a small nibble on this apple.
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