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Jan 4, 2022
2021 recap:
The story in 2021 was the rotation from growth to value, with the energy and banking industries in particular attracting investors. For Peattie Capital, returns were widely dispersed, with the best account gaining about 35%. However, dedicated growth/disruption portfolios fared relatively poorly and for them returns ranged anywhere from -2% to about +20%. The total return for the S&P 500 was approximately 28%.
Gains at Peattie Capital the past few years have been spectacular, with many accounts sitting on unrealized gains over $1mm, and a few over $2mm. One dilemma in 2021 was whether to take profits and join the market in rotating to “value” industries. This would be easy to do in IRAs but in taxable accounts it’s a different situation….especially in cases where there is still a long runway of growth and opportunity. Not only would selling generate enormous taxable gains, but it would also present a question of when to get back in. I think patience will be rewarded and absent any specific company (or client) issues, for now my intention is to continue owning several names that are well positioned for long-term growth, even though they were out of favor in 2021.
Reminder here that Peattie Capital manages separate accounts only and customizing portfolios based on specific client goals and preferences is a core tenet of Peattie Capital. Past performance is not a guarantee of future returns.
The biggest positions were winners
Across Peattie Capital portfolios the five most widely held names are Microsoft, Alphabet, Apple, Globant and Tesla, and last year they gained 51%, 65%, 31%, 44% and 52% respectively. I particularly like GLOB, which is a $12bn company and is not widely known or followed. I also like TSLA which is well ahead of all its competition, and electric vehicles are still only a 3% share of global auto sales.
The most concerning issue for me with any of these names is that they have been such strong performers recently. As far as fundamentals are concerned I like them all and expect to continue owning them.
But there were a number of losers too
The rotation out of growth/disruption hit a number of positions very hard, with several names off significantly and some ending the year in negative territory. The second half of the year was particularly difficult as the belief in entrenched inflation grew, accelerating the move away from growth. The rotation accelerated in November when Fed Chairman Powell removed the word “transitory” from his remarks, and as year-end approached many growth names became candidates for tax-loss selling as well.
Among these were Block (formerly Square “SQ”) and fellow payments company PayPal (“PYPL”). Twitter disappointed as well, as growth slowed and the company continued to tweak its model. For the year these three were down 25%, 18% and 19% respectively. I also held ROKU (“ROKU”) which dropped 54% from its high and ended the year down 31%.
While these names aren’t as widely held across PCM portfolios, they are in many portfolios and for the year had a significant and negative impact. I think these companies are worth holding, as they are executing well and still have significant growth opportunities. That said, both SQ and PYPL are facing increasing competition in the payments space and of these names they are the ones where I have least conviction.
Different year but same issues
It’s almost a repeat of last year’s letter as we continue to wrestle with potential rate hikes, lingering COVID issues, and an expensive and narrowing equity market. While I remain optimistic about the opportunities in the ongoing digital revolution, it’s important to remember that investing success is not linear. Many long term winners have had periods of moving sideways over a 12-24 month period and experienced 35% (or more) corrections.
As we enter 2022, the rotation into bank and energy stocks will probably continue as long as the markets at large believe in an improving economy and the onset of inflation. Banks benefit from higher rates and a steepening yield curve and oil/energy is viewed as a good inflation hedge. These two industries could be in long-term decline however as banks are being disintermediated by fintech and more oil can be brought to market to relieve supply/demand imbalances. Historically that takes a few months, but inevitably “price cures price” when it comes to commodities. In addition, many believe demand for oil is in long-term secular decline.
For some clients it may be appropriate to increase exposure to these areas.
A few other industries that look interesting are housing, and semiconductors and there may be opportunities in those. I also like companies with pricing power, and companies with specific catalysts on the horizon. Lately I’ve been adding an infrastructure company, which is planning to convert from an LP to a corporate structure, a formula that has been hugely successful for several private equity companies the past couple years.
For more conservative accounts portfolios tend towards larger, dividend paying and more recognizable names in defensive industries such as consumer staples, or utilities, among others.
January can be a difficult month as rebalancing dominates institutional behavior. We are still in a “TINA” world (“there is no alternative) as bonds continue to represent “return free risk” as far as I’m concerned. Even for income oriented accounts, I prefer dividend paying stocks with manageable payout ratios and a history of consistently increasing dividends rather than fixed income securities.
Less liquidity
While the Federal Reserve recently announced an acceleration of tapering, at the moment their balance sheet is still growing, just at a slower pace. Eventually that support will end.
Higher rates would be a headwind for equities as well, and it looks like at least one or two rate hikes are coming in 2022. It’s noteworthy to me that so far the bond market is rejecting the inflation story, otherwise rates would be trending higher. More likely it is signaling weakness ahead and a greater risk of deflation than inflation.
Several commodities support this idea even though it is not widely believed by the market at large. For example, iron is down 36%, the Baltic Freight index is down 39%, US lumber prices are down 35% and oil is down 15% (source: Ark Research “Innovation Stocks Are Not in a Bubble” December 17, 2021).
I think Alan Binder’s Dec. 30 opinion in the WSJ (“When It Comes to Inflation, I’m Still on Team Transitory”) outlines how historically under-supply inevitably has led to over-supply and in so doing reduced inflation. Regardless, right now there’s a somewhat flat yield curve, which tends to be associated with a slowing economy.
Narrowing market
In addition, I think it’s worth noting that even though the indexes had another sparkling return, under the surface many names have been much weaker, with more lows than highs and more companies trading below support levels.
According to the December 17 Financial Times (“Wall St. peaks mask treacherous currents beneath the surface”) on the day the S&P 500 first closed with a 25% 2021 gain, 210 companies were trading at least 10% below their 52 week highs. On the NASDAQ the disparity was even greater “with more than 1,300 stocks down 50% or more from their highest levels of the past year, and roughly 80% of the more than 3,000 stocks on the exchange off at least 10%.”
It’s a very expensive market too
According to David Rosenberg (“Early Morning with Dave” December 29) “We go into 2022 with the CAPE (cyclically adjusted p/e ratio) pressing against 40x….this last happened in 1999 heading into 2000. At this level, future returns, on a 1-year, 3-year and 5-year basis have been negative.”/FONT>
After such an extraordinary three-year run, with the S&P 500 gaining 29% (2019), 16% (2020) and now 28% (2021), the average for the following year is -2%, and on Thursday, 12/23, while the S&P 500 was making another new high, 334 stocks on the NYSE stocks were making new lows (Source: IBID).
A few final thoughts:
It’s also worth noting the extraordinary amount of algorithmic trading happening today. In the same December 17 article, Ark Research stated “By some estimates, algorithmic trading accounts for roughly 70% of all trading in the US, and even higher percentages during periods of higher volatility.” Momentum and algorithmic trading appear to drive stocks/markets faster and to great extremes, which creates an opportunity for anyone with patience and some fortitude. Most Peattie Capital clients are in it for the long term, which is the most likely route to investment success as far as I’m concerned.
To my way of thinking, interest rates will be the most critical factor. If we are through the worst of the supply shortages then inflation fears will (likely) abate, and there is a risk that the US economy goes from being under-supplied (broadly speaking) to over-supplied….the Alan Binder theory.
I pay very close attention to what’s happening in the bond markets. Low absolute rates underpin equity multiples and the shape of the yield curve tends to be a good indicator of the direction of the overall economy. Rising rates in an aging, narrowing and expensive market would be a challenging issue for the market overall.
While the conditions for a selloff might be in place, there’s no telling when any correction might happen, how long it would last or how deep it might be. Safe to say that it’s unusual for a market to be so strong for so long without a significant correction. People ask me all the time what the market will do and I can only say that I believe in a market of stocks, not a stock market. Regardless of the macro issues, and there are ALWAYS unsolved macro issues, owning the right names over time provides the best opportunity for long-term capital appreciation.
Peattie Capital portfolios are always based on meeting specific client goals and for some clients a more defensive position is warranted. However, left to my own devices I am still in favor of growth and disruption for long term success. Based on what I know today I expect to continue owning those kinds of names for most clients, and I think stock picking today is more critical than ever.
Best wishes for a safe and healthy 2022, and please feel free to contact me with any questions or comments.
Best regards,
Bill
CLOSE THIS ISSUE
September 24, 2021
Earnings for most Peattie Capital positions continue to be strong and after a somewhat sluggish first part of the year, most Peattie Capital portfolios have gained in the high teens for the year, pretty much in line with the overall markets.
A smooth year until September
Up until mid-September, the markets have been fairly smooth in 2021, without a 5% pullback in 227 days as of Monday Sept. 20 (source: David Rosenberg Early Morning with Dave Sept. 20, 2021). My guess
would be that’s due to some combination of continued support by the Federal Reserve, an improving
economy with decent earnings growth, and a lack of reasonable investment alternatives.
September’s volatility is a necessary (and healthy) reminder that markets don’t go in a straight line, and as unpleasant as it can be to experience, volatility is a friend to long term investing.
As usual, there are numerous (!) macro challenges
Among the macro issues being discussed are the ongoing debate regarding inflation (my answer:
possibly- but I think deflation is the bigger risk), the likelihood of the stimulus bill being passed and what
it will look like if it does, China’s decision to limit the growth of tech companies, the Federal Reserve’s
comments about tapering, whether the U.S government will default, polarization in Congress, the surge in
natural gas prices, and most recently whether Evergrande’s dire circumstances will spill over into other
economies.....oh and let’s not forget Covid and all the issues surrounding it. The headlines are enough to
make your head spin!
At the risk of oversimplifying, I maintain that the key factor underlying equity markets this year is the liquidity being provided by a supportive Federal Reserve. To my way of thinking this trumps everything,
and most analysts I follow think Chairman Powell will be re-appointed when his term expires in a few
months. So far, successfully handicapping the Fed’s actions has been helpful to investment success in
2021.
Valuation is a challenge....except in comparison to bonds
Most S&P 500 earnings estimates for 2021 I’ve seen are a little above $200, so even after Monday’s
selloff the main index is trading over 20x earnings. One challenge will be that if tax rates go up, which
seems likely, earnings growth in 2022 will be diminished, and rather than earning, say $220-$225,
earnings may be flat or so.
The market cap of the S&P 500 is running at about 175% of U.S. GDP, an all-time high (source: Barron’s The Trader Sept.13, 2021).
It’s also worth noting that breadth is weakening and as of Sept. 21, only 31% of the S&P 500 is trading above their 50-day moving averages, according to Dave Rosenberg (Early Morning with Dave, Sept. 22). Good stock picking is always paramount and I believe in a market of stocks, not a stock market.
However, the earnings yield of the S&P 500, the inverse of the P.E. ratio, is about 4.8%, far cheaper than US Treasury 10-year yield of roughly 1.3% (source: IBID), so at least compared to bonds, equities appear more attractive.
So what’s an investor to do?
To my way of thinking there are ALWAYS (!) numerous issues and headlines providing challenges to the
market and the most effective way to grow capital is to find companies that can develop and grow
regardless of those issues. I believe that in today’s world changes are happening faster than ever, and
emphasizing disruptive names will provide the best opportunities for long term success. The environment
is ripe with opportunities as collectively we are on our way to 7 billion people connected to the
internet....think of the possibilities!
The technological changes are pretty amazing. Consider that 20 (ish) years ago the fastest way to communicate with a group of people was via fax, and today a group email (or text) reaches anyone
instantaneously...or post something on the internet and potentially reach the whole world?
Equally important is that these technological advances are changing the way we all behave...get a ride anywhere, order any food you want delivered to your door, or instantly send money to anyone....all with
two clicks on your phone....or maybe I should call it your hand-held computer.
The point is that we consumers can demand what we want when we want it, and given the technology, suppliers can meet that demand. None of this was available until the advent of the iPhone; up until then
things were more supply driven (as in, your favorite TV show is supplied at a specific time on a specific
day). Today’s world is more demand driven.
Disruption will continue and owning the winners will generate significant profits. Left to my own, that is what I strive for at Peattie Capital. That said, it’s worth repeating that portfolio construction is always a
function of client goals and constraints. Some clients prefer larger and more well-known names, or
perhaps income oriented holdings. Peattie Capital only manages separate accounts so that I can
accommodate specific client circumstances.
A few specific names....
In my June newsletter I mentioned Globant (“GLOB”) and Upstart (“UPST”) as examples of companies I like to invest in, unless specific client constraints dictate otherwise. Both companies reported terrific
quarterly results, and since I mentioned them shares in both have gained over 50% while the S&P 500 has
gained roughly 3%. To be sure, not every selection performs so well, and no doubt these two will have
corrections along the way. However I still like them both very much and Goldman, Sachs just raised their
price target for GLOB to $395 from $230. Shares are trading today around $325 and have gained 48% in
2021.
Microsoft (“MSFT”) remains a top holding in most portfolios and the company just announced a $60bn share buyback and hiked the dividend 16%. Alphabet (“GOOG”) has several growth engines and is still
the dominant name in search. GOOG shares have gained 60% year-to-date.
Some other names I am looking at are Sea Limited (“SE”), The Trade Desk (“TTD”) and cannabis
company Ayr Wellness (“AYRWF”).
In conclusion, what are the takeaways from Covid?
Well first I would like to acknowledge the enormous human cost, and my heart goes out to all who have been affected.
I think the societal changes that were appearing before Covid have accelerated. Not only do we have the world in our hand, literally, but we don’t have to leave home to get to work, we don’t have to fly around the globe to see someone’s face, and we can even visit with a doctor from our home....anytime we want.
Many believe that we are in a “new normal,” and I agree with that.
From an investment perspective, I would say that as a result of these changes, many well-known
companies are facing a new, and difficult reality. Many of these are well known companies that are in the
biggest global indexes, and I believe that, over time, they will struggle.
Much of this “new normal” can be provided by a small number of companies, and Peattie Capital clients own several of them. I continue to believe that going forward the indexes will be challenged by these and other factors and I couldn’t be more excited about the opportunities for the secular growers emerging
today.
Please remember that past performance is not a guarantee of future returns, and I welcome any questions or comments.
Best regards,
Bill
CLOSE THIS ISSUE
June 7, 2021
2021 continues to be a challenging year at Peattie Capital, as innovation/disruptive names are (mostly) out of favor. For the year through May, most Peattie Capital accounts gained low/mid-single digits compared to a roughly 13% total return for the S&P 500. Conservatively managed accounts are roughly in line with the S&P.
Account performance varies based on individual client goals and constraints and past performance is not a guarantee of future returns.
Rotation, rotation
The primary beneficiaries of the rotation away from growth are cyclicals and small caps which historically have outperformed on a relative basis when the US economy is recovering. Rather than chase the current flavor of the day, I prefer to hold the names I own for several reasons.
First, I believe longer term they will continue to grow, and grow profitably. Second, consistently timing economic turns correctly so as to be in the favored asset class requires correctly predicting economic cycles, which is very difficult to do consistently. Third, selling big winners generates taxes, and fourth, selling them also generates the question of when to get back in.
For clients who are looking for a more conservative approach, or have some other goal (income e.g.) I am completely flexible and happy to construct portfolios that address those goals….and there are a number of those within Peattie Capital. Being able to address specific client goals is one of the reasons Peattie Capital manages separate accounts only, and is not a fund.
However, left to my own (as in “just do your thing, Bill”) I believe in the long term growth story of change/growth/innovation/disruption and expect to favor that going forward.
The inflation debate is still front and center
Of all the macro issues being discussed, I think the inflation question is the most important because inflation will drive interest rates and interest rates will directly impact stock prices. Most market participants and observers I’ve read or spoken with feel strongly that it’s a question of “when” not “if” inflation kicks in. I maintain that a variety of transitory events are happening simultaneously and therefore it’s still debatable if the inflation genie is out of the bottle.
Fed Chairman Powell has repeatedly stated his belief that current price rises are transitory, and recently several other FOMC members have also reiterated that position. Certainly the bond market is warming up to that idea, as yields have stopped rising, and haven’t gone above their previous high from late March. Lumber, corn, copper and US Steel’s share price all peaked in early May, as did the Baltic Dry index. Oil prices dropped to the $20s last year so the current high $60s price looks inflationary, but that’s only in comparison to last year.
One of my favorite market truisms as it relates to commodities is that “price cures price.” That is, a rise in oil begets more production, which eventually leads to an oversupply, which eventually leads to a price crash. Oil is on a long-term downward trend in my opinion, with lower peaks and lower lows over the past 15 (ish) years. Except for Texas Pacific Land Trust (“TPL”) I have avoided oil/energy related companies.
And not just commodities
As for other inflation-related items such as housing and materials, among others, I think the economy is opening up and there are supply constraints while demand is growing. It seems to me that the Federal Reserve has done a good job explaining that, and in this case I am with them.
Jason M. Thomas (head of global research at Carlyle Group) wrote an op-ed piece which appeared in the WSJ Thursday, May 27 titled “Reopening is Inflation’s Cure, not Cause” citing the 38% growth in motorcycle sales as an example of the current supply/demand mismatch.
- “If 38% were to represent the new trend rate of growth in demand for motorcycles, inflation would be a genuine concern….But if, as is far more likely, this growth rate represents a one-time boom occurring in very unusual circumstances under which consumers paid for goods to replace live events and travel, then motorcycle sales will likely moderate in future quarters, production will return to pre-pandemic levels, and price pressures should dissipate.”
One of my favorite economists is David Rosenberg, who writes daily about global economic data, and he stated on May 18 (“Breakfast with Dave”)
- We are seeing a price-level adjustment coming out of the pandemic and the price data can easily be explained by an economy re-opening in the face of several supply constraints….here we are in May, with all the inflation hysteria, and the Cleveland Fed’s 5-year inflation expectation measure was 1.48%, the same as in April, and the 10-year metric actually had the temerity to dip to 1.57% from 1.58%.....”
At this stage no one knows how the inflation story will play out but I also believe that technology, overall, is deflationary (as is debt) and there is innovation happening everywhere. It’s noteworthy to me that 30-yr. mortgage rates have hovered around 3% which doesn’t look terribly inflationary to me.
One other item worth mentioning is the potential for tapering by the Federal Reserve, which could trigger a correction….who knows when that might happen or what the market’s response will be.
The opportunities are still in technology
More importantly to my way of thinking is that the massive trends in all things digital are continuing unabated, and even after the re-opening these trends will not reverse.
A good example of this is Fintech, where Square (“SQ”) continues to evolve and provide more services and opportunities for customers. Most recently SQ announced that it will provide lending services. PayPal (“PYPL”) is another favorite here, and also is creating new digitally oriented services and operations. I might mention that Peattie Capital only owns one traditional bank, JP Morgan (“JPM”), and that in only a few conservative/blue chip portfolios.
The mega-tech names like Alphabet (“GOOG”), Microsoft (“MSFT”) and Amazon (“AMZN”) are still growing nicely and will be important names to own going forward, and I was delighted to read in this weekend’s FT that Julian Robertson, widely considered one of the greatest hedge fund managers ever, described Big Tech by saying:
- “I think they are good value. I don’t think the valuations are….much higher than they’ve been all along.”
Pretty much every account owns GOOG and MSFT, and most own some AMZN. It’s nice that such a highly regarded investor likes these names, and I have no intention of selling any of them based on what I know today. However, the best performing names over the next few years will be those who are still relatively small and can accelerate growth from current levels.
I expect there will be continued volatility in stock prices, especially if rates go higher, and I believe the key to longer term investment success will be finding and owning companies that are well positioned to compete in the new “digital” world, despite the ups and downs that will accompany those names.
A Few Examples: Upstart (“UPST”) and Globant (“GLOB”)
Generally, I don’t like to own recent IPOs, but Upstart (“UPST”) is an Artificial Intelligence (“AI”) platform which uses some 1600 metrics to help banks identify borrowers who may not appear attractive based on FICO scores but who actually are creditworthy. Lending is soft right now, and UPST’s platform can apply to all kinds of loan candidates and types.
The company states that 80% of Americans have never defaulted on a loan yet only about 48% have access to prime credit. CEO Dave Girouard said “There’s broad consensus that the credit economy is highly inefficient, if not broken.”
97% of UPST’s revenues are from fees from banks and the company benefits from loans without taking on credit risk. Revenues grew 42% in 2020 and accelerated to 90% growth in Q1 2021. In 2020 UPST had $1mm in net income, and in Q1 UPST reported $10.1 net income on a GAAP basis.
I believe UPST will be volatile, but is in the right place at the right time and that its $14 billion market cap will be much higher in a few years.
GLOB is a “digitally native” IT company with an $8bn valuation. Much like UPST, I think
near-term there will be volatility, but over the next several years it will be a much bigger company.
GLOB grew revenues 41% in Q1, the highest year-over-year growth in the company’s history, and guided to 54% growth in Q2. The company is profitable and relatively unknown as there is very little Wall St. coverage. GLOB increased the number of customers paying over $1mm annually from 112 in Q1 2020 to 139 in Q1 2021.
GLOB and UPST are good examples of the kinds of companies that I believe will deliver strong returns over time. That said, they are not for everyone, and I conclude by re-iterating that Peattie Capital Management manages separate accounts only, and has any number of accounts whose goals and constraints vary.
Please feel free to contact me with any questions or comments.
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March 1, 2021
Strong finish to 2020
2020 was another banner year for Peattie Capital clients, with many accounts gaining well above 30%,
and a few above 50%. The best gained about 70%, all net of fees. The total return of the S&P 500 was
approximately 18%. The past two years have been truly outstanding on both an absolute and relative
basis, but clearly the environment is different in 2021.
Note: past performance is not a guarantee of future returns
Earnings have been good.....
Until Square (“SQ”) reported Feb. 23, earnings reports from Peattie Capital companies in 2021 had been
terrific, and prior to February’s volatility, shares (and accounts) had been very strong. However, the
selloff has hit growth/disruption companies especially hard, with many positions down 15% or so in the
past week. This is not surprising since a) they have performed so well, b) in many cases trade at
extremely high valuations, and c) higher rates lowers the present value of cash flows. Broadly speaking
account gains have gone from low double digits to low single digits during this correction.
There is no way to know for sure, but for now it looks like the equity markets will follow the bond
market’s lead and if interest rates keep rising that will pressure stock prices.
I don’t know what rates are going to do and positioning a portfolio or selecting stocks on the belief that
“rates will rise/fall” seems too risky for me. I have been more successful choosing good companies to
own long-term, and staying with them as they grow. The approach has been particularly successful the
past few years.
It’s still early, but 2021 is starting to remind me of 1994, when rates also backed up sharply in February.
The total return of the S&P 500 that year was +1.3%.
Valuation
Taken in isolation, valuations are not an indicator of a pending selloff, although they can be a pre-
condition of one. Historically shares trading at 10x sales were considered very expensive, but in today’s
world a number of high fliers are trading at 30x sales and a few are at 50x sales. Another noteworthy
valuation metric is that the total market cap of equities is roughly 1.8x GDP; historically that ratio had
never been above 1.5x, which was considered extremely expensive.
Needless to say, the higher valuations are the more the market could be vulnerable to some sort of
catalyst, and most are attributing the selloff to the recent spike in interest rates. Despite Chairman
Powell’s repeated assertions that inflation doesn’t appear to be an issue, the bond market, at least for
now, thinks otherwise.
I’ve told clients and prospects regularly that investing is not a straight line, and that pullbacks, dips, and
corrections are necessary and healthy....scary and painful as they can be.
V-shaped recovery
Most economic data have been good, and there are reasons for optimism: some form of fiscal stimulus
is approaching, household savings have soared while simultaneously consumer debt service is falling,
vaccinations are increasing, GDP is growing above 4%, and areas of the economy are opening up.
The argument can be made that rising rates are a reflection of a recovering economy, which thus far
isn’t experiencing significant inflation. I might add that technology, in aggregate, is deflationary, and
jobless claims are still very high, so there is slack in the labor force.
No doubt there are rising prices in some areas, such as in certain commodities and also pockets of
housing. What might be most relevant about inflation is whether it is expected or unexpected, and
since we’re talking about it it’s safe to say it isn’t unexpected.
From a market perspective, I continue to believe that the overriding issue of the day is that we are in the
midst of a digital revolution which is bigger than previous agricultural/industrial revolutions because it is
global in nature and happening with incredible speed. Over time, being in the right stocks will provide
the best chance of investment success, even if some of them are currently out of favor.
I’m much more interested in individual stocks, industries, and societal changes than “the market” at
large and my observation about index investing is that indices have many companies that are “behind
the curve” as they have spent capital on short-term fixes such as borrowing to buy back shares. Longer
term that is not a viable strategy.
A little pruning.....
In most portfolios I’ve trimmed a bit but as I’ve said many times, selling winners not only creates a
taxable gain, but also presents the question of when to get back in. Warren Buffett’s comment
(paraphrasing) that if you wait for the robins to sing, spring will be over comes to mind. Said differently,
by the time you’re comfortable buying back in, shares will likely have gained 30% or more.
Most clients have enormous unrealized taxable gains, and in a few cases I have “boxed” shares (boxing is
being both simultaneously long and short a company’s shares, such that price changes have no impact)
as I still believe our holdings have wonderful opportunities ahead. For example, Square and PayPal
(“PYPL”) are not only redefining the role of a financial institution, but they are also a backdoor way to
play crypto currencies and digital wallets are rapidly replacing cash as a payment method.
According to Worldpay, in 2020 “digital wallets surpassed cash for the first time as the number one
payment method at all points of sale (POS) globally” and are the second most popular e-commerce
payment method in North America.
Bitcoin.....and SPACs
I think it’s worthwhile having a small (2% ish) exposure to crypto currencies, and clients own the
Grayscale Bitcoin Trust (“GBTC”) as a way to do that. I’m not a fan of trusts, funds, and most ETFs but
without insight into which crypto currency is the best to own I am defaulting to the biggest and most
liquid.
Gary Gensler, nominated to run the SEC, has made favorable overtures about bitcoin and his
confirmation hearings are scheduled to begin early March. I note that many institutions have begun buying it as well. Here’s a quick summary of bitcoin’s largest opportunities according to Cathy Wood,
founder of Ark Research:
Bitcoin as a global settlement network
Bitcoin as protection against the seizure of assets
Bitcoin as digital gold
Bitcoin as a catalyst for currency demonetization in emerging markets
Ark Research has been wildly successful since its inception about five years ago and I have a great deal
of respect for their work. On a recent conference call ARK mentioned that SQ and MicroStrategy
(“MSTR”) are “showing the way to use bitcoin as an alternative to cash,” and suggested bitcoin’s current
network value of roughly $1trn could scale more than fivefold in the next several years.
Special Purpose Acquisition Companies (SPACs), however, are a different animal, and my opinion of
them is much lower. Based on what I know today, there is little chance I will ever own one. To me
SPACs are a symbol of excess and while I respect the athletic achievements of Alex Rodriguez and
Shaquille O’Neal, I have no insight into whether they can find companies to buy and manage...and I’m
skeptical of their motives
Here’s what Coburn Ventures had to say in a recent research note:
“Let’s not forget the high dollar incentives that SPACs give out to get a deal done within two years.
SPAC sponsors who are paid to “promote” a deal typically receive 20% of the SPAC’s equity for a
nominal purchase price, then liquidate once the deal is done. Great work if you can find it!”
Reminds me of another Buffett saying, “Only when the tide goes out do you discover who’s been
swimming naked.”
Having taxable and nontaxable accounts at PCM is very helpful
Reminder that Peattie Capital manages separate accounts only, in order to be flexible and accommodate
individual client needs and constraints. About half of the clients have both a taxable and non-taxable
account here, and one effective way to manage overall risk exposure for these clients is to raise cash in
the non-taxable account. By definition, doing so doesn’t generate taxable income and simultaneously
reduces the client’s risk profile.
Please feel free to contact me with any questions or comments.
Best regards,
Bill CLOSE THIS ISSUE
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