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Capital 19 Catch-Up

Weekly Index Movement

S&P500+1.5%
Nasdaq+0.7%
Aussie All Ords+1.3%

Global stock markets added to recent gains last week in holiday-shortened trade in the US.

US markets were closed on Thursday for Thanksgiving and only traded for half a session on Friday as everyone rushed to the shops for traditional Black Friday sales.

Black Friday gets its name because the volume of sales supposedly turn retail profits from red to black on that day. Kind of like our Boxing Day sales.

Seeing as it was a short week and not a lot happened, rather than bore you with uneventful news, I thought I’d keep to US tradition and think of all the things I am thankful for in my portfolio this year. This might be a short list.

Dividends

Growth has been hard to come by in 2021 (except for my energy shares which are rocking and rolling). But it seems to have been a bumper year for Dividends.

New Hope Coal (NHC) paid a whopping 56c a few weeks back. The stock is trading at $5.60 so that is 10% in this single dividend alone before you even consider the franking credits.

Another coal stock, Arch Resources (ARCH) just announced a quarterly dividend of $10.75. That stock is presently at $156 so the dividend will be 7% and that is just for this one quarter. Imagine what the next year holds.

Woodside Energy Services (WDS) paid $3.06 this year. Add in Franking and that takes it to $4.37. At the present share price of $37 that is a 12% yield.

Who needs growth when you are getting income like this?

Getting Paid Interest Again

After more than a decade of extraordinarily low interest rates being paid on savings accounts, interest rates are finally going up. This is very good news for those with cash savings.

Having a Portfolio

Whilst it hasn’t been pretty, I am thankful that I do actually own a portfolio of assets that tends to grow with inflation. Those poor non-investors have to cop petrol over $2, groceries up 30% and electricity up 40%. If you don’t have assets to offset this when it happens, your quality of life is going backwards at a fast rate.

The ability to invest anywhere in the world

For the past decade, or two decades really, the US market has been the place to find growth. As the technological revolution gained steam so too did tech stock prices.

In the year 2000 Apple (AAPL) stock was trading at the split-adjusted equivalent of just 26 cents. Today it is over $148 for a gain of 56,900%.

That is a good example of long-term investing in a growth industry.

But we might be entering a new decade for investments, one where interest rates remain above 3% for an extended period of time. It could be some time before we see lofty tech valuations driven by near zero interest rates.

But the good news is there is a whole world out there that I can access. I don’t have to just be stick to US tech stocks or Australian Banks.

The name of our company, Capital 19, is because we have the ability to use our capital to buy stocks in 19 different countries.

We will likely need that ability if we are to profit in coming years.

The S&P500 is now up 12.5% from its October lows and appears to us like it could be running out of steam. We would not be surprised to see it roll over this week.

History shows in years when the S&P500 has ended down for the year (which it will almost definitely do this year), the low for the year occurs in October 50% of the time and December 50% of the time. Its a coin toss as to whether we have seen the low for this year or not.

When I look at the market I try to figure out what it is thinking. With the S&P500 at 4026 and earnings forecasts for the next 12 months are $220. That puts the S&P on a PE of 18.3 which basically says the market is not worried about an earnings recession next year.

There are three scenarios here.

Bearish: Stocks are clearly overvalued because there is simply no way for earnings to hold at $55/share per quarter over the next year since even Fed Chair Powell has said the odds of a “soft-landing” are diminishing.

Neutral: US large caps are fairly valued at the current 18x present earnings power. Barring an exogenous shock, S&P companies should be able to manage their cost structures and hold their current earnings power of $55/share. After all, what corporate manager doesn’t know there is a recession waiting in the wings?

Bullish: Stocks are cheap because they trade at 16.5x the Q4 2023 earnings run rate of $60/share, or $240/share annualised. Markets look 6 months out, so if the S&P 500 really earns $55/share for the next 2 quarters (come what may), then by June 2023 the market should be discounting a new record high for corporate earnings in Q4 as long as economic growth starts to improve again.

I feel the most likely path is somewhere between Bearish and Neutral. That’s why I find it hard to add to positions at these valuations. I’d rather play the bear side, particularly in the short term and look for a new low in December.

To do that I could buy a contra-ETF. But which one? I don’t want to short the Dow as the large number of industrials in that index is making it perform better than the others. The S&P500 could be a possibility as it is largely tech, but seeing as tech has been the weakest sector, I’d target the Nasdaq through QID which is a 2 times leveraged contra Nasdaq ETF. Which is another way of saying it goes up twice as much as the Nasdaq goes down.

CatchUp Stock Tips

Buy DateBuy PriceCurrent PriceGain / LossStop Loss
TXN1 Aug 22177.94177.07-0.5%145.00
ASC8 Aug 228.5215.20+78.4%6.40
CDNS15 Aug 22188.83167.31-11.4%130.00
UNH22 Aug 22541.39537.62-0.7%450.00
GMS5 Sep 226.505.46-16.0%4.00
AAPL12 Sep 22159.59148.11-7.2%130.00
CRK19 Sep 2218.2218.90+3.7%12.00
OXY24 Oct70.8170.28-0.7%58.00

Nine fell to a low of $8.05 last week, narrowly missing our buy price. Let’s keep the plan the same and add under $8 if we can.

Buy Nine Energy Service (NINE) at no more than $8

Nine Energy Service, Inc. is a service provider for the unconventional oil and gas industry in North America and abroad. It does cementing and coiled tubing services for oil drillers

Our thinking on this one goes like this. Capex spending by the oil industry has fallen dramatically. That hurt Nine back in 2018 and 2019 and was compounded by the Pandemic in 2020. But Nine survived and was made lean during the process.

With the new upcycle in the oil price and increasing demand from Europe the US oil drillers are likely to expand capex going forward. They can do this because they are making more profits so have money to spend and have a longer-term demand structure from Europe. Biden would even be happy as it might keep a cap on oil prices.

For a company the size of Nine, increased Capex spend by the big guys is massive. We saw the first signs of this in their Q3 results

“Q3 was a very strong quarter for Nine,” said Ann Fox, President and Chief Executive Officer, Nine Energy Service, “driven mostly by price increases across our service lines, as well as increased volumes within completion tools, which enabled us to drive strong incremental margins again this quarter.”

One aspect we don’t particularly like is the amount debt they run. But they are addressing this

“De-levering the balance sheet continues to be a top priority for Nine. During Q3, we repurchased $13.0 million par value of bonds for $10.1 million of cash or 77.7% of par, leaving $307.3 million outstanding. I am extremely happy with our team’s ability to take over $90 million of debt off the balance sheet, while also maintaining strong liquidity throughout one of the most volatile environments we have faced. The Company is poised to generate free cash flow going forward and we plan to continue to reduce our financial leverage. Going forward, we believe that Nine can de-lever through a combination of growth in profitability, as well as reduction in net debt.”

When it comes to valuation, the recent margin expansion and increased demand changed the dynamics of the business. From making a loss in 2021, the company is forecast to make a profit of $2.29 in 2023, putting it on a PE of 4.5.

The stock has had a stellar run recently, we watched it go from $7 to $10 so now we don’t want to chase it but will wait for a pullback to buy into. Hopefully around the $8 mark which allows us to buy it on a PE of under 4 and we will aim to sell when that PE approaches 8 for at least a 100% gain.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.