My Portfolio

Investors,

This was one of the best investing weeks of my career. One of the stocks I have been a long-term holder in doubled after they announced the asset sale of one of their businesses. Despite the over 100% run-up in the stock, I think there is still more upside to come, and really think it could double again.

I have continued to add to my position as I think the downside is minimal, if any, with major upside over the next 6-12 months. The only way we get downside at this current valuation is if the asset sale does not go through, which I am pegging at an under 10% chance of happening.

If it goes through, which management estimates is in Q1 of 2022, the stock should re-rate as a large cash infusion is added to the balance sheet and a large portion of the proceeds are returned to shareholders through special dividends or repurchases. If everything goes smoothly with the asset sale I am expecting the valuation gap to close, with another potential double over the next year or so.

I have made this company a major portion of my portfolio and it is not single handily my largest position. I love setups like these. Minimal downside backed by a strong margin of safety and strong upside backed by near-term asset sales.

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Pent-Up Demand

I continued to add to my favorite retail position the other day. The stock has continued to trade materially weaker as supply chain headwinds and the price of cotton increases.

I think Wall Street is a little shortsighted here. A significant amount of costs were removed from the cost structure during COVID. In addition, I believe this retailer has pricing power. Their customers are they are affluent, with money to spend.

The holiday season should be strong. Thanksgiving and Christmas are important holiday’s for this retailer. I think we may see some pent-up demand since everyone had to skip these major U.S. holiday’s last year.

I think this stock can re-rate back to previous 52 week highs over the next 6-12 months (representing over 50% upside) and potential to go even higher should the new management team turn the concepts back into growth mode.

All In Portfolio

I reinvested back into one of my favorite commodity plays in the All In Portfolio, allocating 500 shares at a price of $60 per share. The All In Portfolio now holds two names.

I ended up selling this commodity name a month or so ago due to Evergrande risk and decided today that the risk/reward was too great to miss out on. Here is my thought process.

The company will produce around 7 million tons of met coal for the remainder of the year. I used a weighted price per short ton $105 per ton. Cash production costs of $75 per ton get us a margin per ton of $30. At a cash margin per ton of $30, I am coming out to $166 million in operating income and $245 million in EBITDA. Take out $36 million in interest expense and $60 million in capex and we get free cash flow around $150 million. In addition, the company realized $69.6 million gain in income tax receivable during Q3 which will improve the balance sheet.

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?

I plan to hold my position in this coal company and stay patient. I think there is real room for excessive returns and I decided I am willing to take commodity and China risk. Please see my original research report on this company if you are a subscriber.