End of May 2021 Portfolio Update

I published my last portfolio update showing my top 10 positions in April and wanted to provide an update since I’ve swapped out 3 names. This does not mean I’ll be giving monthly portfolio updates going forward, as it promotes short-term thinking vs. longer-term time investing horizons which I think is more profitable. It just happened that I made some big portfolio changes this month.

Without much ado, below are the portfolio updates as well as quick synopsis of the top positions as well as explanation of why I removed the 3 names:

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Remains on Top 10 List:

1. Oil stock basket - As oil demand comes back post-COVID, the supply destruction that occurred in 2020 will lead to an oil deficit in 2022. “The fear of peak oil demand will lead to the reality of peak oil supply” Stocks in my oil basket include $OAS, $LPI, $CPE, $CDEV, $NR, $SD, $PAA, $OXY warrants, and call options for $SU + $DVN. This is by far my biggest bet right now at 30-40% of my overall portfolio!!!

2. Macerich (MAC) - Not a “dying” mall operator but a play on class A urban/suburban real estate that will always be in demand. Financial distress/bankruptcy scenario has been eliminated with recent liquidity actions. Stock is up 20%+ from when I wrote it up for Seeking Alpha

3. Wells Fargo (WFC) - Primed to benefit from cost cuts, rising net interest margin, and removal of punitive asset cap. Trading at significant Price/Tangible Book Value vs. peers. Wrote it up last week on my blog with target price of $60. It’s getting close to that target so if stock continues to run up I may remove from my Top 10 list

4. United Natural Foods (UNFI) - Food distributor with irreplaceable physical assets that will rapidly pay down its debt, which will reveal its monster free cash flow generation ability

5. Cleveland Cliffs (CLF) - Iron ore miner that has transformed its business through vertical integration. Go-forward earnings power will be much higher than previously, which sell-side has not yet caught up to in their forecasts

6. Essential Properties (EPR) - Owns theme parks, arcades, theatres and other “experiential” properties. Should greatly benefit post-COVID as consumers release pent-up demand for going out after a year of lock-down

7. Armstrong Flooring (AFI) - Undervalued residential/commercial flooring manufacturer with net cash position post land sale, and management laser-focused on turning around previously mismanaged operations

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New Additions to Top 10 List:

1. Advanced Emission (ADES) - Will have almost $5/share in net cash by end of year from existing cash on B/S + expected tax credits. Manufactures activated carbon to help coal plants reduce pollution as well as for water treatment applications. Has announced strategic review to assess potential options to unlock value. Deep value with huge margin of safety with the net cash position and a clear catalyst to unlock value with the upcoming strategic review. Great Seeking Alpha writeup on ADES here.

2. Embraer (ERJ) - Aircraft manufacturer that’s still not recovered from COVID crash unlike its airlines peers, potentially due to Brazil discount. Will benefit from shift to narrow-body aircraft as well as overall market recovery

3. Alibaba (BABA) - What if I told you that you could buy a Ferrari with a small dent for the price of a Kia? That’s right, you should run out of the dealership without looking back. This is how I view BABA currently. The stock is trading at low 20’s P/E with ~30% expected growth for next few years and at 4%+ free cash flow yield. At these levels, BABA’s value is too compelling to ignore even if you apply a higher discount rate due to the China government risk

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Deletions from Top 10 List

1. Sequential Brands (SQBG) - This one is painful to write as I’ve suffered a 50%+ loss. Fortunately my other big winners have completely eclipsed my one big loss in SQBG so far in Q2. Long story short, CEO resigned and concerns about potential bankruptcy are looming. I’ve cut my position to <1% of portfolio and have learned a valuable lesson to not bet big on any stocks going through restructuring / bankruptcy process. I am planning to write a future post about my biggest investment mistakes to share lessons learned (often very painfully!)

2. Scorpio Tankers (STNG) - The stock has appreciated 20%+ from $18 at end of April to $22. I’m not selling at this level but also not adding either. Shipping is notoriously volatile, so I’m only buying more shares when I have a huge margin of safety. Plus I have plenty of exposure to oil prices through my oil stock basket!

3. Uranium ETF (URNM) - I’m still bullish on uranium but there’s a ton of shitco junior miners in the space so it’s hard to bet big. And I’m not a fan of buying a sector ETF since you get diluted returns while paying a hefty fee to the ETF custodians. Still maintaining a good sized position in the ETF but not Top 10 worthy.

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Honorable Mentions (not Top 10 but in my Top 40)

• $MUDS

• $COTY

• $ZIM

• $BTU (wrote a Seeking Alpha article here)

• $UAN

• $TEN

• $RCKY

• $HMHC

• $VALE

• $CATO

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Please post your comments & questions below, and enjoy your Memorial Day weekend (for those who are in the U.S.)!