It’s almost been a year since I started this blog and it is about time to have a discussion on performance. I took some time to think about how to address this topic appropriately. Do I only discuss the companies mentioned in previous posts? That would make sense, however I almost never mention when I sell. I also tend to trade around a particular position, sometimes quite often, including occasionally buying / selling options on the positions. Most importantly, this is not a ‘follow me on my journey’ blog but more of a journal. When I look back at this thing in a couple of years, I would like to see a regular broad discussion on what was going on at the time and some of the investment decisions I’ve made that had a big impact on overall returns. So it seems fit to discuss the performance of the entire portfolio.

H1 2021

Let’s start with the first half of 2021. Over the first half of this year the portfolio is up 59%. After an initial overshoot during January (and subsequent correction in February) mainly due to a much overheated spac-market, the portfolio traded in line with the overall market up to the end of April. Basically all the outperformance has been realized over the past few months. During this period the portfolio composition was approximately 25% cash, 50% ‘long-term’ investments and 25% warrants / options.

There has generally been relatively little action in the portfolio up until April, when companies started to report FY 2020 and Q1 2021 results. I suspect we’ll see more action in the second half as some shares had big moves after their Q1 results and I suspect Q2 will be even better. In addition, a part of the portfolio consists of pre-closing spacs (shares and warrants) of which only two closed their business combination in June. Three more are expected to close in July, while the others will close during August – October. That means that for these companies the share price action will be in the second half.

Let’s look more closely at what drove the performance during H1.

‘long-term’ investments

This part of the portfolio simply consists of investments (long only) in companies with a big discrepancy between the current price and my estimate of fair value. A good plus has been that there have not been any big losers so far this year – which is always an important part of achieving good returns.

More specifically, Destination XL (DXLG) has been the biggest winner in this bucket. DXLG is a large specialty retailer of big & tall men’s clothing and shoes. DXLG very well followed the ‘never waste a good crisis’ playbook and was able to shed >$50m in operating expenses during 2020 (of which ~30% headcount reduction). This is a LOT on ~$320m revenues. Part of the cost cuts will come back given the massive ramp-up in demand so far this year but I estimate $20-$30m opex reduction is structural. Just imagine the operating leverage on a company where demand during Q1 has roughly returned to 2019 levels, the promotional environment is much more benign and costs have been massively slashed. Indeed, Q1 results were great and management increased guidance, though still very conservative. If trading since March is any indication of what is to come, Q2 and Q3 will be massive.

As mentioned, a part of this bucket is also comprised of spacs, most of which still are pre-closing and only two so far have closed and started trading in June. Skillsoft (SKIL) finally closed the thing and Vintage Wine Estates (VWE) has been recently discussed. Over July, OppFi (FGNA), Holley (EMPW) and Stryve Foods (ANDA) will start trading. Later, Airspan (NBA) and Reservoir Media (ROCC) will join the party. I discussed most of them in a recent post.

All the above spacs are companies which I think are interesting, have good fundamentals and/or some kind of an edge and will come relatively cheap onto the market (dilution included). Interesting to notice is that, based on the Q1 results, almost all of them have been trading so far above their previously guided 2021 targets. So far so good it seems.

One should expect some volatility in the period after closing. My experience is that it generally takes some time for closed spacs to start trading on fundamentals and to shed the (currently) negative ‘spac’ connotation. I suspect that as the companies perform, show good results (and particularly good cash flow generation for most of them) and analyst coverage is picked up, the share price will move accordingly. So I expect the next performance discussion in six months will include much more on these positions.

Regarding the other investments previously addressed. IP Group (IPO) went sideways for the past months. It’s still a relatively small position at the moment as I’m awaiting more information regarding Oxford Nanopore’s IPO and don’t want to tie up too much capital for too long. I intend to increase the position once we have more visibility. The IPO is still scheduled for H2 and valuation ranges are between GBP 3bn and GBP 4bn. However, considering where peers such as PACB still are trading this trade still looks very interesting.

The Hexagon spread trade is still on. Both Composites and Purus shares massively derated after a period of much hype in the sector, but the spread is basically unchanged. This is still a nice trade as it does not tie up much capital and the spread is still very large.

Warrants / options

Over the past years I’ve been in and out of spac-warrants. After the spac meltdown in February a good opportunity arose again to add cheap warrants of attractive companies. Many were oversold and rerated to a more normalized level during the past few months. I’ve also been able to profit a bit from the correction in spac-land by buying put options on crappy spac deals some time before the deal vote.

All in all a good first half of the year though I suspect H2 is where all the fireworks will happen. Let’s hope it’ll be on the upside.

2020

A quick word on last year’s performance. 2020 was an absurd year in terms of return with the portfolio up almost 600%. On average, the portfolio consisted of ~30% cash, 40% long-term investments and 30% options / warrants. The latter exposure moved around quite a lot throughout the year depending on the opportunity set available.

Without going much into details, I believe the key word for 2020 was ‘luck’. Many positive things came together in a period with plenty of volatility (read opportunity). To name a few: I was lucky I went into the March crash with a good amount of cash available. I was also lucky to have been keeping tabs on the spac market before that time and before many learned what a spac actually is. This led to big opportunities such as Open Lending (LPRO) and Alta Equipment Group (ALTG). In addition, buying a bunch of pre-deal warrants at 20 – 50ct during the March lows was an incredible opportunity. Lastly, I was lucky to have been keeping an eye on the ESG / sustainable investing trend in Europe over the past years, with the US strongly lagging. Combining the latter with an increase in spac listings was a clear recipe for a hype and I was lucky to have been in pole position.