$49,072

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The All In Portfolio was down 1.55% this week to $49,072.

The smallest position, which represents 36% of the portfolio was almost 10% for the week on zero news. I have not added to my position and will likely sell to allocate elsewhere on any rebounding price action.

I am a little hesitant on selling 2.5 months before the year closes due to additional short-term capital gains taxes. This year has been an incredible year for me and I will end up eating a lot of my gains in taxes.

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All In

This past week I ended up reallocating the remainder of the All In Portfolio back into a met coal stock I was previously invested in. As I penned in a prior email to investors

For 2022 I am assuming the company produces 14 million tons of met coal at $175 per ton. Cash costs will still be in the $75 range, giving us a cash margin of $100 per ton. Run the numbers on this anyway you want, but I am getting in excess of $1.2 billion in EBITDA and close to $1 billion in free cash flow. With a current enterprise value of only $1.6 billion, there could be significant upside.

The real question should be, what does a debt free coal company that generates 14 million tons of met coal production trade at post 2022? And if the commodity bull market continues then what?

Exiting this met coal company earlier this year from Evergrande risk was probably foolish. Sure, the real estate market in China could collapse, bringing down the steel and iron ore markets, which will impact the demand for met coal. But if the real estate market doesn’t collapse and this tiny little met coal operations generates the kind of cash flows I am forecasting, there could be major upside.

Overall, I am willing to risk $30,000 (give or take) to have major upside over the next 12-18 months. If I am wrong, I don’t think this little met coal producer will go bust, given management’s discipline to reduce net leverage, combined with the current pricing structure. So if I am wrong, I don’t think I will take a complete capital loss — a risk/reward proposition I really like.

Snippets

  • I published a new top idea for subscribers to Alpha Letter Pro last week. You can find the two writeups here and here. The stock price has effectively doubled since management announced they are selling a business unit for over $800 million (at the time of the announcement the market cap was under $300 million). I think the stock price could double again with very little downside should the asset sale go through. This is now my largest position. I will continue to acquire more shares if there is any pullback in the stock price.

  • Retail stocks soared at the end of the week. The reason? A few Wall Street analysts put notes out saying how not every retailer is going to be impacted by the supply chain and rising cotton prices, especially the retailers that ship to the east coast of the United States instead of the backed up west coast ports. I am fully invested in two east coast retailers (see here and here) that should do well over the next 12-18 months.

  • The EIA put out a note saying how U.S. households will pay a much higher heating bill this winter. Half of U.S. households use natural gas to heat their homes. The EIA noted that bills would be 50% higher if the winter is 10% colder than average and 22% higher even if the winter is 10% warmer. Rising commodity prices and lack of supply is the key driver to this price increase. A good way to play this is to invest in thermal coal miners. Thermal coal is a cheaper alternative to natural gas, and we could see a lot of electricity providers switch over thermal coal should prices of natural gas continue to stay strong.