Beating the Market in 2022
Originally Published January 6th, 2022
Just when we all thought we had seen some things over the past couple of years, from the massive drop in 2020 due to the CoVid-19 pandemic, to the crazy tech run-up in 2021, we arrived in 2022 and saw the market turn in its worst performance since 2008. Yes, my friends, the past few years have been a wild ride, but I have stayed fully invested (for the most part) and worked my way to significant alpha in 2022.
For those that have not followed me from the beginning of this portfolio, it began with a 2000 dollar investment in early November of 2016. From this starting point, I have contributed somewhat regularly to the account, sometimes keeping it in cash as I wait for opportunities, and grown it slowly and patiently. I am not a person with a ton of extra money to add, averaging around $1000 per month, this mostly comes from living rather simply and making sure that I can continually add $250 per week with automated additions.
From an education standpoint, I am not educated formally in any financial field but have and continue to learn everything from reading and studying what I can get my hands on. The articles I publish are just as much of a learning experience for me as they could ever be for any of those that are reading along.
Gross Overview of Returns
For the full year 2022, the Profit Investigator Portfolio returned 1.72% in comparison to returns of -19.48%, -9.44%, -33.57% from the S&P 500, DJIA, and Nasdaq respectively.
This of course is not the returns that I wanted, but it’s a 22% alpha when compared to the average of the three indices while staying fully (>90%) invested!
The Changing Portfolio
December came and went in 2021 and the portfolio, along with the broader markets, produced significant returns. While the portfolio holdings returned over 25% for the year, there were some doubts about 2022 creeping into the back of my mind. These concerns were documented in an article that I wrote for Seeking Alpha titled “Finding Value In 2022: Inflation, Interest Rates, And Research”. You can find that article here if you want the full information, but it detailed some plans that I was going to move the portfolio out of many of the current positions and into things like consumer defensive, energy, equity REITs, utilities, and/or healthcare.
So what did I own, and what did I move to?
I sold most of my holdings that were outside those categories, including Viacom (VIAC), Verizon (VZ), AT&T (T), Alibaba (BABA), Starbucks (SBUX), and Home Depot (HD). While this doesn’t necessarily include everything that I sold, it highlights some of the larger positions that I moved away from.
During this same time, I began to push my chips in on the strategy that I had developed. Starting in late January and continuing through May I started or increased positions in PBF Logistics L.P. (PBFX), Suburban Propane Partners, L.P. (SPH), Antero Midstream Corporation (AM), Graftech International (EAF), Petróleo Brasileiro (PBR), and Occidental Petroleum (OXY).
Only three of my holdings were not started this year, Ulta (ULTA), Prudential Financial (PRU), and Graftech International.
Worst Performer
While there may be a couple of candidates for this, the one that sticks out is Graftech International. I have written extensively about this company, and have a lot of conviction about the long-term future, but 2022 was a disaster.
While Graftech started the year above 11 dollars a share, it quickly took a nosedive as recession and inflation fears reared their ugly head. Add to this continued China shut down and it was a never-ending free fall that finally stopped in Q4.
This I should (and frankly did) have seen coming. The incoming economic recession, along with the expiration of many of the long-term contracts pointed towards nothing but near-term downside. While this has allowed me to increase my position, it did cause the portfolio to lose a couple of percentage points in the year.
I still have high conviction in the company, with the balance sheet pointing in the right direction and the company being vertically integrated to be a leader in graphite electrodes. That being said, I should have listened to a timeline I wrote about for Seeking Alpha that noted the real upswing from Graftech should come in 2024 when debt is near zero and they can reinstate the dividend.
Best Performer
Sometimes you have a great thesis, write about it, even buy it, then realize later that you should have committed higher weighting to the stock. This happened with my 2022 best performer, Coda Octopus Group, Inc. (CODA). This company was featured in a Weekly Value Finder article (here) in August and shortly after publishing I purchased a position. While the position ended the year up over 40%, it only makes up ~1% of my portfolio.
Currently, CODA is still priced very reasonably, under 10x FCF and just over 3x price to cash. This is still a position that I am looking to acquire more shares on any near-term negative movement.
Top 5 Holdings
If you want to see all the holdings, you can check it out on my website here, but I wanted to at least note in this article my current top 5 holdings.
Occidental Petroleum (OXY) - 8.64%
Petróleo Brasileiro (PBR) - 7.31%
Ulta Beauty (ULTA) - 6.78%
Graftech International (EAF) - 6.42%
Prudential Financial (PRU) - 6.33%
These are my top 5 holdings to begin 2023 that makeup over 35% of my entire portfolio. I have high long-term conviction in each of these names for a variety of different reasons and expect that all five of these names will continue to be mainstays in the portfolio unless something drastic changes.
Portfolio Breakdown
As of writing, I break my portfolio into three sections: Individual stocks, ETFs, and cash.
My current breakdown to start 2023 is as follows:
Individual Stocks - 11 (55.52%)
ETFs - 5 (36.27%)
Cash - $10,657.99 (8.21%)
As you can see, my stock holdings are pretty concentrated in comparison to many other long-term investors. This has evolved and has found its way down to eleven individual stocks, my lowest in over a year.
My ETF holdings are all automated investments and help to stabilize my portfolio to follow the market. This isn't the best way to beat the S&P 500 but does typically help to correct some of my mistakes, or at least makes them hurt significantly less.
Finally, we come to my cash holdings, which now sit at just above 8%. This may increase above 10% soon as I move away from positions that I have deemed overvalued.
Moving Forward
As we march forward into 2023 there are a few key things that will still be happening with the Profit Investigator portfolio.
Always look for 15%.
What I mean by this is my minimum goal for every investment I make is a 15% compounding return for a 5-10 year period. Yes, that's right, I am doing my best to look 5 years into the future, which means I have little time for super risky companies. Aiming for 15% means I can double my money every five years, hopefully without taking significant risks.
FCF per Share (Free-Cash-Flow) is King
When you look at the long-term returns of stocks, for the most part, they will eventually follow their FCF per share. This means that as I evaluate a company, I want to see what type of money-printing machine they have created and how they are going to use it. This sounds very easy but isn't. You need to factor not only in accounting sleight of hand but also growth rate, dividends, debt repayments, etc. No matter what though, companies that produce significant amounts of cash over a long period do pretty well for their investors.
ROIC (Return on Invested Capital) is a Close Second
ROIC is simply how well the company allocates its money towards profitable investments/projects. Basically, if you have twenty dollars and you spend it on lemons, sugar, water, and cups, can an investor expect that you are going to be more than twenty dollars on the lemonade you sell? Companies with a good positive track record of ROIC are what I like to own.
Dividends can Outweigh Growth
Don't misunderstand me here, a failing company with a dividend will end up losing you money in the long run, and probably the dividend in a short time as well. What I am speaking about is low-growth companies that make up for it with a stable, or even growing, dividend. If I'm looking for a 15% annual return, and I see a company like Antero Midstream (AM) at a price that I could lock in a yield on cost at >10% (I did this), then that leaves me with a mark of less than 5% growth of the stock price to reach my goal. On top of that it gives me some safety because if the company has a solid balance sheet, the downside risk is mitigated in my mind as the DRIP will let me sleep easily. Again, I'm not saying to go chase dividends. I just take it into account when calculating my acceptable risk and returns.
Nanocap & Microcap stocks
When the market falls such as it did in 2022, it does it relatively broadly. This means that many stocks that were significantly overvalued such as big tech, may have brought down stocks that were already sitting at low market caps. Along with this, there is a significant advantage for retail investors to invest where the big-boy hedge funds will not, and that is by purchasing companies that are under a $300M market cap. While being a micro/nanocap shouldn’t be the only reason to purchase these companies, it is an easy way to begin to narrow the search for the next ten-bagger. CODA fits this profile for me.
Conclusion & How I’m Starting 2023
I will be starting 2023 on the hunt for more value stocks like I have featured in each week’s Value Finder articles. Over the last six months, I have covered 14 stocks and named 6 of them buys. During that time the 6 buys produced a 7.65% return while the S&P 500 lost over 5% in value. This goes back to sticking to the conviction that I have when I am performing the research and purchasing these companies.
You can see all of the Value Finder stocks here.
I fully expect to keep a heavy concentration during 2023, with the portfolio never reaching more than 15 positions, and will reduce the weighting of my ETF holdings by contributing more to my individual/cash holdings. My goal would be to get this weighting under 30% (currently ~36%).
That’s all I have for the review and hope you enjoyed it!
As always, thanks for reading, and happy investing!
The Profit Investigator