Investment decisions

MORAM – 2Q21

Introduction

This second quarter of 2021 has been a good one for MORAM. The managed portfolio went up 30.5% in these three months (including derivatives). Mainly due to our high exposition to the energy sector and small caps paying off. Brent price went up from $62.5 to $76, as well as natural gas and impacting positively to a significant part of the portfolio (Golar LNG, Bonanza Creek and Cheniere)

In macroeconomic terms, the main protagonist has been inflation. Probably, not in CPI terms (despite increasing 5% in annual terms in the US) but the price of Real Estate and commodities. Central banks are set to continue with their expansive monetary policies, and the increase in rates will wait until 2023 in the US, apparently. On the other hand, the interest rates of the 10-years US bond is going down and the US dollar index is going up, telling us a different story than the inflationary one.

Overall, we continue being optimistic with inflation trades in the short/medium term. Especially Energy, Mining and REITs. But we are also taking care of looking for some growth companies, ideally, combining best of both worlds as the cases of Power REIT, Golar/New Fortress, Italian Wine Brands and some other names we are currently analysing.

Portfolio rotation in the 2Q21

During the period, we added two new positions, Adriatic Metals and Power REIT. We exited Macerich ten days ago due to its 70% rise in this quarter and the more limited potential after the AK. We also close our position in Cheniere. We initiated this position last September at an average price of $47, it reached our thesis price and we sell not because we are not comfortable with the position, but because we see opportunities bigger than this. We also exited Gigas Hosting in April as we saw a good opportunity in Adriatic, and it was the position we had less conviction.

We were lucky and expanded our position (again) in Golar at $9.4 the day that Iain stepped out as CEO (April). We also increased our position in Greenalia a couple times this quarter, which is not going through its best moment in the stock market.

Portfolio as of 30th June: Golar LNG, Greenalia, Italian Wine Brands, Bonanza Creek, Power REIT, Repsol, Facebook, Adriatic Metals.

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Comments about the companies in the portfolio

Golar LNG is the main position of the portfolio, our journey started in May last year at $5.45 and we have continued buying ever since up to $11.5, averaging $8.7. Gimi date is getting closer, Brent prices are way higher than the $60 threshold (Hilli bonus) and JKM is at record levels. All of this gives us enough confidence to think that a new FLNG project will be signed before the end of the year. We are going to see soon what the plans for the 18.6MM New Fortress shares are. Probably, Golar will use a part of it to refinance its convertible bond. They will also give some of them to Golar LNG shareholders and hold the rest until NFE reach higher prices. Besides, shipping rates are record high to this time of the year, unfortunately, 97% of GLNG fleet available days were fixed this 2Q21. It improves onwards. Maybe someday we heard something definitive about T3. Nevertheless, even without new good news, we see a significant upside in Golar shares from here.

Greenalia is having quite a bad year. It is happening partly because of the excess of renewable companies that are trying to get listed. Also, the long bull run in the last months of last year and the beginning of 2021 is affecting the sector. In addition, the slow pace that Greenalia is having to finish new projects is also testing the patience of shareholders. On the positive side, it finished the construction of 3 new wind farms which are going to be connected to the network in July. Moreover, the new strategic plan will be released in the second part of the year. 2022 is expected to be the year that Greenalia will be listed in the secondary stock exchange, providing its shares with more liquidity and diminishing the 85% ownership of its CEO. However, we are aware that at its current market cap, this leap is going to be complicated. We see Greenalia as a multi-bagger in the coming years, and we are taking a similar approach we took with Golar the last year.

Italian Wine Brands has been the star of the quarter. As soon as they stopped the buying back program, we suspected that they were going ahead again with a new M&A. They presented the four potential targets (from 5 MM to 130) and emitted a €130MM bond. Two weeks ago, they announced that they acquired EnoItalia. A company that perfectly complements IWB. The shares have gone up 80% in this quarter. However, the company has a fantastic management team, it is well-positioned to continue growing (organically or inorganically) in the short term, and we believe that the synergies with EnoItalia are significant. Because of all of that, it is the third biggest position in our portfolio.

Power REIT has been a new acquisition this quarter. After spending long hours analysing its business model and assessing how sustainable it is in the medium term. We decided to open a position because of the pace they were signing deals, how accretive they were (>18% IRR), the small size of the company (€130MM) and the potential to continue obtaining these types of deals in the coming 2 years due to the cannabis situation at the federal level in the United States. One month later, after signing 3 deals in 4 weeks plus the announcement of a potential $18.1MM deal coming, we increased our exposure. We plan to close monitoring the company and the sector as the growth story can change rapidly if cannabis is legalised at the federal level and more financial institutions can compete against PW in the deals they are obtaining.

Bonanza Creek has quadrupled its market cap in the last 6 months, more than doubling its share price. It has done 3 M&A deals so far this year, inking very attractive terms. We discovered this company last year. It had no debt and it was making money. It had a bad reputation due to its bankruptcy in 2017 and the multiple it traded was very attractive, so we decided to add to our portfolio earlier this year. Currently, this position is under revision as Bonanza went up more than 140% this year, meanwhile, it has to digest the three M&A it has done. Moreover, the weight of the energy sector in the portfolio is huge (mainly due to the weight of Golar in the portfolio)

Repsol shares are not reflecting the rise in the Brent price, higher refining margins and the increment in the use of cars during this quarter. We are waiting to see the results and CC to take a decision over the stock. We believe that Repsol is in a privileged position to take advantage of this scenario, but this is a large company in the Ibex-35 index, which is not our favourite type of investment. We bought it at €9.2 and if we feel that the catalysers do not work, we will exit the position as we have more interesting opportunities to allocate this investment.

Facebook is our only position in the tech sector. We like the companies which take advantage of the network effect (Facebook, Amazon, Apple, Netflix,…) but we are playing this through cryptos instead of single shares. Facebook represents only 4% of the portfolio, but we feel very comfortable with this stock as we believe that it has fantastic assets (Instagram, WhatsApp, Oculus…) which are going to be easy to monetise in the near future. Apart from it, Marc Zuckerberg is young enough to continue growing the company with his vision for the foreseeable future. It is noteworthy that this position represents only 5% of the portfolio.

Adriatic Metals is the other acquisition we have done this quarter. It is a mining company in Bosnia, which has an incredible deposit, starting its operations next year. We liked Adriatic for several reasons such as the legislation in Bosnia, the quality of its mines, the discount it had. Overall, the asymmetric opportunity that gave as the trade. This position only represents 3% of the managed portfolio.

Note: you have the link to all this companies here: Portfolio

Derivatives / Options

Macerich – Taking advantage of volatility (Sold puts at $9 and $11, sold covered calls at $20, expired all in June)

Penn Virginia – Oil company with a small market cap, 78% oil which it had just been partially acquired by a known PE, diminishing the downside. (Sold puts $15, expiration July) 

New Fortress – Hedging the Golar bet (Bought puts $40, expiration Dec)

Golar LNG – Leveraging… (Sold puts $7.5, expiration Sept)

Pershing Square – “In Ackman we trust” – (Sold puts $22.5, expiration Sept)

Comments about the Crypto portfolio

This quarter we have increased our exposition to cryptos. The weight of crypto in the total portfolio went from 2% at the end of March to 4% as of 30th June. We sold all our position in ADA and concentred our crypto exposition in BTC and ETH (50%-50% of the investment amount). Obviously, it was a mistake not to start doing it just after the arrival of Covid-19 and the consequent monetary policy of central banks, but we believe that better is late than never. 

This first half of the year, we spent a large amount of time to gain a better understanding of Bitcoin and Ethereum. In fact, we started to write an article three months ago, and we still are making questions around before to finish it. Apart from the hype around cryptos, we believe that it can be one of the biggest asymmetric opportunities in a lifetime. However, as you can imagine due to the small percentage in our portfolio, we are still in the phase of studying it. We also believe that cryptos are here to stay, it is not something transitory, and it is better to invest some time to understand them better now than in 10 years.

Comments about positions in ETFs/Index Funds

We maintain our position in the four Index funds we had at the beginning of the quarter. Our only change has been to increase our position in the Real Estate fund that is performing very well this 2021.

  • Ishares Developed Real Estate Index (40%)
  • Vanguard Global Small Cap Index (25%)
  • Vanguard Emerging Markets Stock Index (25%)
  • Ishares Pacific ex-Japan Equity Index (10%)

Final thoughts

So far, it has been a good year for our portfolio. However, it is a little scary the approach to rule the economy that central banks are taking. Inflation in real assets is skyrocketing (Commodities, Real Estate…), and we do not know how “transitory” it will be. Fiat currencies are losing all their value. There is a huge structural problem related to the debt that countries cannot pay if interest rates go up, but they need inflation to receive higher taxes from citizens. And as the technology is making the world deflationary as well as the ageing population, the system needs some money printing to continue working… 

I hope you enjoy as much as I do thinking about this stuff to manage our portfolio.

Best,

Carlos  

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