The 2x Quick Sit That Got Away
Learning from a bargain situation I passed on in 2022
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“High quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them.”
Howard Marks, The Most Important Thing.
“Even the ugliest of assets purchased at the right price can make a great investment.”
Marathon Asset Management.
“Ick investing' means taking a special analytical interest in stocks that inspire a first reaction of 'ick.' I tend to become interested in stocks that by their very names or circumstances inspire unwillingness - and an 'ick' accompanied by a wrinkle of the nose on the part of most investors to delve any further.”
Dr. Michael J. Burry.
As I recently reflected on the Model Portfolio’s performance and what worked and what didn’t in equity markets in 2022, I was prompted to return to an equity situation that I can’t help but feel was the “one that got away” last year.
In this instance, the situation in question falls within the “Quick Sit” category of idea, being a shorter duration value trade rather than the 2-3 year conviction ideas I’ve previously written about. Indeed, in the current market I believe there is a place for opportunistic, shorter-duration quick sits within equity portfolios (where such flexibility is allowed), given how volatile equities generally remain, being largely driven by macro newsflow rather than fundamentals. I regard such quick sits as a sub-category of special situation investing, being opportunistic plays that can contribute to excess returns for a portfolio.
In this week’s issue, I pick apart an idea I highlighted last year that in hindsight seemed like a no-brainer, if one could see past the horrendous chart for the stock at the time, which showed a ~99% decline in the space of ~6 months:
And no, this idea is not Carvana (CVNA) or some other ARKK-like disruption/growth tech name, but rather an energy stock that stunningly collapsed in the year that energy outperformed all other sectors - here’s how this stock was faring mid-way through last year relative to some of the main energy benchmarks:
Indeed this stock was neck-and-neck with CVNA last July as one of the worst-performing stocks YTD at that point:
This would surely qualify as an “ick” investment in Dr. Michael Burry’s words.
Interestingly since its lows in the second half of last year (after I previously highlighted it), the stock is up ~113% as at the time of writing.
So what is the stock, and what made it such a highly asymmetric, “no brainer” value trade?
Let’s revisit the situation …