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Y H & C Investments June 2022 Update- Edition 166

 

Index/AssetMay 2022Year to Date 2022 
Dow Jones-.22%-9.21% 
S&P 500-.56%-13.30% 
Nasdaq-3.63%-22.78% 
Russell 2000-1.0%-16.98% 
Oil+8.41%+54.45% 
Gold-1.77%+1.02% 
Silver -4.76%-6.14% 
10Yr Treasury

January 1- 1.631%

May 39- 2.853%

-7.2 Bp+135.1BpNote- 100 basis points makes up 1.00%
U.S. Dollar Index-.24%+5.61% 
Bitcoin-Jan 1, 2022-46, 055

May 30, 2022

31, 837

-17.72%-31.46% 
Y H & C GARP Model+1.57%-24.27%https://interactiveadvisors.com/yhc-investments?portfolio=long-term-garp

 

 
Y H & C Concentrated GARP-7.23%-7.61%https://interactiveadvisors.com/yhc-investments?portfolio=concentrated-garp
Y H &C Results Are not GIPS Certified and dependent on third party calculations. They are time weighted   

 

 

U.S Economic & Financial Markets Outlook-Inflation and Recession Fears Ramp Up Market Volatility as Energy Prices Soar! (Return figures in this section come from the May 30, 2022, editions of the Wall St. Journal. Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

In May, the Dow Jones Industrial Average lost .22%, the S&P 500 fell .56%, and the Nasdaq dropped 3.63%.  May is usually a month in markets where volumes start to dry up.  The adage of ‘Sell in May and go Away,’ has a grain of truth to it.  Investors often find the summer months very volatile but on light volumes.  With little activity, prices get whipsawed quite a bit because one side of a trade tends to dominate.  We certainly did see quite a bit of volatility in the last month as high-profile earnings misses from retail giants Target, Wal Mart, and Dick’s Sporting Goods suggested supply chain issues remain problematic for retail margins.  Snap, the technology company, also was taken to the woodshed for warning of a dramatic slowdown in advertising.  Concerns about the economy moving into a low or no growth environment weigh heavily on trading sentiment, but inflation levels remain the biggest obstacle.  Continued upward pressure on prices could force the Federal Reserve into a much longer period of interest rate hikes.  When we last looked at analyst estimates for Fed Fund rates, most believe the Fed will hike rates anywhere from the next seven to ten meetings.  Faced with much tighter monetary policy, investors don’t know how high interest rates will go.  If it’s one or two fifty basis point raises and then the Fed stops, that is an entirely different circumstance then ten straight fifty basis point increases.  All of this depends on inflation levels and on that point, the big one to focus on is energy.

With oil prices sitting at over $110 a barrel, the biggest issue the country and globe faces is a lack of refining capacity.  With green policies all the rage, the number of oil refineries operating both in the United States and globally is down dramatically.  Unfortunately, policy makers don’t realize it takes five years or more to build a new refinery.  Mr. Biden is now asking existing owners to restart idle plants to find a solution to the problem.  There just aren’t many available.  Poorly considered policy leads to tough economic circumstances for the consuming public, but excellent economics for owners of these valuable assets.  The other major consideration is energy impacts so many other inputs, especially related to transportation.  If you need an example, look at airline ticket prices.  They are up dramatically since 2021, and a big reason is because of the energy situation. As for stock prices, one must consider if a one percent increase in interest rates justifies fifty to eighty percent selloffs?  The important question is will it only be a one percent increase, or much more?

Global Economic & Financial Markets Outlook-Oil Producing Countries Post Gains as the Rest of the World Remains Mired in Red! (All country index data provided by countryeconomy.com, May 27, 2022)

With oil prices up 50% in 2022, oil producing country indexes show strong year to date results.  Non-oil producing indexes are typically mired in misery with most showing five to ten percent losses.  The Eurozone index is consistent with that range, showing a -12% number.  Interestingly, the FTSE index, which represents the UK, is ahead by 3%.  Within the country, the political leadership has decided to impose a ‘Windfall Profits’ tax on energy companies.  The purpose is to help the citizenry pay for the large rise in living costs.  Electricity costs have soared and the inflation rate in the UK for April showed a 9% jump in the Consumer Price Index.  I would note there was not a windfall loss subsidy for the energy companies a few years ago when oil went to minus $37 during the height of the pandemic scare.

From a long-term perspective, the tax certainly won’t make reinvestment in the North Sea by energy entities more attractive.  With scarce refining capacity across the globe, Europe and the UK need a thoughtful reexamination of how they approach energy sourcing.  Here in the United States, don’t be surprised if we see calls for a windfall profits tax soon.  With little chance of passage in the current Congress, a sober approach to energy is going to take a higher priority as energy prices keep escalating, maybe to astronomical levels.

Just to give you a taste of the strong results from the oil producing countries, Jordan is ahead by 16.7%, Kuwait, 13.57%, Qatar, 11.13%, Saudi Arabia, 14.41%, Norway, 7.15%, and the Emirates +16.72%.  Of note, South American countries Brazil (+6.37%), Chile (+22.51%), and Columbia (+8.60%) all show nice results.

The Art of Contrarian Thinking-Understanding the Investment Thesis: Change in Earnings Power and Balance Sheet Arbitrage! (YH & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

Over the last ten years, the performance of a vast majority of stocks was related to their increase in earnings power.  In most cases, operating income is the important measure.  When a company like Amazon, Google, Facebook, Microsoft, or Netflix goes from earning, say $500 million or a $1 billion per year, and five or ten years later is earning five to ten billion per year, the dramatic increase in income often justifies a large rise in the stock price.  The projected improvement in earnings power is what you are looking for in companies you are interested in buying.  Specifically, what are the ways this will happen?  As an example, a position of the firm recently completed an acquisition.  Prior to this purchase, the entity was earning about $150 million per year.  Post the integration, earnings are estimated at $400-450 million per year.  The improvement should occur in 2023.  The next six months will require cost cutting and streamlining.  It has been a star performer over the last twenty years so waiting six months for management to integrate the assets is mandatory for long term shareholders.  It is why a great deal of investing is about having the patience to stick with companies you own.

Of course, not every investment thesis is centered around improvement in earnings power, though most should be.  In a different example, a new position is based on the wide disparity between the value of the owned assets on the balance sheet versus the existing market value of the stock.  The question becomes how does the value of the owned assets get realized?  As these are mostly minority non controlled positions, management must collaborate with these companies to grow their earnings power.  It might be through an acquisition, cost cutting, or simply continuing the same business path and seeing a change in market sentiment.  Balance sheet arbitrage can take longer, but with active and creative leadership, the returns can often prove worth the extra time waiting for.  My point is to understand the investment thesis of each position so when you monitor the operational results, you know what you are looking for to judge the progress (or lack thereof).

Y H & C Investments- May and June Update

In May, the biggest news of note was a prominent position of many clients agreed to a buyout offer.  The final payment is scheduled to take place in the second half of the year, but I would expect July or August to be when the deal closes.  This is the second buyout of a position which took place during 2022.  Looking forward, next week I am scheduled to attend the LD Micro Summer Event from June 7-10. The LD Micro events are always exceptional and this year over 200 companies will present.  Over the last month I have looked at these enterprises and have meetings scheduled with several prospects along with a few current management teams we have positions with.  I will have an update on it in the July report.

On a personal level, again I want to thank my clients for their continued support.  Interacting with people who trust you with their hard-earned money is an ongoing commitment and one I accept and relish.  Investing is important in it helps people do what they want to when they want to do it. Nothing is guaranteed with investing and the future is what matters, so to that end I will continue working hard to create value for those of you who have placed your trust in me.  I also appreciate those of you who recommended my services to your friends.  It has helped a great deal so if you know of anyone who needs some investment help, please keep me in mind.

Thanks for reading the newsletter this month!

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

 

 

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