This is my next reopening trade
Earlier in the year I stated that I was over 30% in cash. Despite the markets rallying seemingly everyday, I am now only around 10% cash and continue to invest more everyday.
My mindset changed on cash allocation when I began to think more about inflation. Record low interest rates combined with higher government spending leads only one place, higher inflation levels. To protect my purchasing power I decided to take a more active approach to portfolio management.
My portfolio now is slated to generate significant free cash flow should the super commodity cycle we are in continues. I have ownership exposure to met coal (record steel prices will benefit this), fertilizer manufacturers (food prices are sky high), oil companies (I think oil will go to $100/bbl) and junior gold miners. These are my three commodity plays, which if current prices hold, should result in record free cash flow for these particular industries.
I am also continuing to play the reopening trade. My favorite new industry is the traditional media industry, particularly the radio space. I started buying a small, illiquid radio company the other day and will continue to add should shares become available. If I ever get a full position in this company I will be happy to share it with subscribers.
But eventually all of this mania will end. There is a significant amount of speculation in the market. Valuations across the board seem to be at nose bleed levels. A new joke cryptocurrency with mind-numbing valuations seem to be released everyday. AMC, GameStop and other meme stocks still haven’t crashed.
Maybe this is a new normal? Has the Fed printed so much money that individuals have nowhere else to put it besides meme stocks and zero revenue generating cryptos? Sure, I can see that. I don’t think anything can surprise me anymore in this market.
Despite the new environment, my style has not changed. I will continue to invest in cheap stocks that the market is not looking at. I’m a contrarian at heart. I won’t invest where everyone else is investing. I invest where no one else wants to invest.
There is value to be found. You just need to dig in the weeds a bit. Go where others don’t tread. Invest where eagle’s dare.
Box Office Rips: F9: The Fast Saga generated $70 million in its North American box office this weekend. The box office exceeded expectations and was the largest debut since Star Wars: Rise of Skywalker in 2019. We have been bullish on movie theaters since late 2020 and still think there is opportunity for investors. Our top movie idea can be found here. Since publishing the stock is up 15%, but we think it still have more room to run.
Iron Ore Inventories Fall: China port iron ore stockpiles fall to eight month low or hitting the lowest levels since early October. Iron ore futures were up in Asia following the report. What this means? Iron ore prices are likely to stay high given the surging demand and lack of supply. We are playing the demand for iron ore and steel by purchasing met coal companies which still trade at 2-4x EBITDA (depending on how you slice it).
Higher Steel Prices: Hot-rolled steel prices continue to reach record highs on the back of potential infrastructure deals, lack of production throughout 2020, an insane amount of pent-up demand for steel, and logistic issues allowing produced steel to get to where it is going. I think this continues for at least another 12 months and as highlighted above, have positioned my portfolio to take advantage of this demand through met coal, which still trades like an undervalued unwanted value sector.
Thermal Coal Deal: Billionaire Boss Ivan Glasenberg Makes One Last Coal Deal In Final Days At Glencore. Glencore is buying the remaining 66.6% of Cerrejón, a Colombian thermal coal mine, with BHP and Anglo selling their interests in the JV for $294 million each. Cerrejón is one of the largest coal mines in the world, capable of producing around 25 million tonnes annually. It is located in La Guajira, Colombia.
Speaking Of Coal: Anglo American just spun off their South African coal mines (meet Thungela Resources Limited — valued at $230 million USD) which is reported to be only 1/3 of the EBITDA they are expected to generate this year. What is more interesting is Thungela appears to be well capitalized including a significant amount of cash on the balance sheet. Thermal coal prices are skyrocketing due to higher natural gas prices, boding extremely well for investors in Thungela. If you have a view on thermal coal and don’t mind investing in South Africa definitely check out this idea.
Fertilizer Pricing Is Flying: I am highly bullish on fertilizer companies. I wrote up CVR Partners (UAN) in May as my top play for fertilizer operating leverage. On Monday CVI Partners dropped an investor presentation (they own 36% of CVR Partners) and highlighted CVR Partners in it. In the presentation CVI highlights that since the beginning of 2021 UAN prices have risen over $150/ton. Remember, at the beginning of 2021 prices were $159/ton. Meaning CVR Partners is now realizing over $300/ton. If this pricing continues to hold CVR Partners will generate a significant amount of cash flow and should pay an extremely strong distribution.
Business Travel Remains Down: The United Airlines CEO stated that business travel remains down over 60% compared to pre-COVID levels. However business travel was down over 90% just a few weeks ago. I think it will take another 12 months or so before we get a full recovery from the business travelers. I do think business travel will return as the individuals who win additional business will be the ones going to physical meetings, over Zoom meetings.
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