2022: The great rotation is here
Updated: Dec 20, 2022
In my first article of the new year, I want to share my strategy for 2022, what topics and sectors I am focused on and which stocks I currently have in my portfolio. I will write a complete 2021 review at a later time. The blog was started on March 29th 2021 and a lot of the stocks I wrote about will have catalysts comping up in Q1/early Q2. This is the reason I will wait before writing a full 12 month review.
The year started with an adventurous vacation trip to Finland. Me and my girlfriend spent a week in Lapland. We did a lot of snow hiking, reindeer- and husky sleigh riding. One of our goals for the trip was to experience northern lights. During the first days of our trip the sky was too cloudy and we hoped for the sky to clear later that week, but even on our second to last day we did not see any northern lights. Then on the last evening, when we had already packed and were close to going to sleep, my girlfriend saw the glimpse of northern lights and we went outside to witness this impressive view (see below). I'm mentioning this because having conviction and not giving up is also important for the stocks I discuss on my blog. A lot of them are very early in the cycle and not covered by analysts/market commentators. Having your own thesis and high conviction is important to hold the stocks through times of high volatility, in order to reap the rewards of a multi bagger later along the line.
In 2022 I am focused on energy (uranium, oil&gas), battery metals (lithium, graphite, copper, manganese), commodities, potash, carbon credits, emerging markets, Uzbekistan and biotech. I am planning to do some research on oil services companies and magnesium.
Moreover, I also dared the leap of faith at the end of 2021, quit my corporate job and became a full-time private investor. More on this topic and what I have planned for this blog will be shared in the coming weeks.
On Jan 5th 2022 the great rotation from tech to value became obvious to even the most casual market observer. After FED meeting minutes came out discussing sooner than expected rate hikes and tapering, followed by the release of the CPI number, Wall Street traders and their algos finally realized that the rate hike cycle started.
Source: Bureau of Labor Statistics. As of Dec. '21
Raising rates gradually to 1% by end of 2022 and then maybe to 2% during 2023 will not help against inflation, which rose 7% in December from 2021, the fastest pace since 1982. However, the real inflation rate is even above 10%, as the CPI has been heavily manipulated during the last 20 years. In the podcast below, Peter Schiff does a great job of breaking down the math and rationale. I don't agree with all his content & opinions, but in terms of economic theory he is very knowledgeable.
At 7% official CPI and a nominal interest rate of 2%, you would still "earn" negative 5% real interest rates. Taking into account that inflation will most likely not all of a sudden decide to fall, but rather rise further in 2022, the real negative rate will even be higher.
In a market environment with rate hikes and a potential tapering, stocks with elevated valuations usually underperfom energy, commodities, value and emerging market stocks. I had learnt a lot about commodities & energy in 2020 and gradually rotated out of tech and into metals, energy, emerging and frontier markets. Most of my rotation was implemented in Q1 and early Q2. My actions were triggered by seeing how the markets reacted to the small increase in bond yields in Feb/march 2021. The majority of retail investors and Wall Street shrug it off and still believed the transitory narrative. I always thought this narrative was nonsense and thus was happy to shift the gains I made in tech into undervalued sectors. My portfolio rotation was contrarian at that time and I sometimes felt stupid, as the market seemed to still believe the FED's narrative. However, since early January the rotation is in full gear and it is showing in the stock charts. Most hype stocks are more than 50% of their 52 week highs.
A great way to visualize the transition phase is to compare the 12 month performance of Fluor Corp (FLR) a value stock I had written about here, with the performance of DocuSign (DOCU). The divergence of the stock price in March 2021 and since Nov 8th 21 is very telling.
The two stocks are moving into complete opposite directions and I am certain this trend will continue with value, commodities etc moving higher. Meanwhile hype stocks, if not sold off already, will sell off once they have only the slightest earnings miss/miss Wall Street's expectations. This will give traders the excuse to rotate out of the stock. Finally the great rotation will lead to investors rushing into commodities, energy and other undervalued sectors. Commodities are a tiny sector compared to tech and new money flows will make the equities skyrocket. Being a stock picker will be ever more important in 2022, as many passive ETFs are based on indexes that are heavily skewed towards a small percentage of big tech stocks.
With the current macro situation at hand, what does my portfolio look like and what is my plan for 2022?
I am laser focused on microcap and small cap stocks. There are some stocks in my portfolio that grew out of the smallcap status, but those are exceptions. I like picks and shovels plays (hence the name of this blog), but not all of the stocks I follow are typical picks and shovels plays. Please find an overview of the sectors I am in below and my thoughts on them.
Portfolio distribution 1/17/21:
Precious metals (physical and stocks)
The gold price is holding steady above $ 1,800 and an uptrend has started now that the market has realized the FED is just doing lip service. During 2021 gold did sell off every time after FED notes came out, but it seems this year the opposite will be the case.
For those interested in the gold topic, I would recommend reading "Why gold? Why now?" by EB Tucker. He gives a great overview on gold, its history and in what different ways it can be leveraged from an investor standpoint. EB Tucker calls royalty companies the most profitable business in the world. Learning about gold and royalty companies is one of the reasons I bought shares of the gold royalty company Teuton Resources Corp. (TUO.v) last year. TUO has many properties but one of the highlights is Treaty Creek, a property they develop as part of a joint venture with Tudor Gold. The Treaty Creek property is located within the Golden Triangle region of northwestern British Columbia and legendary geologist Ken Konkin delivered a resource of 19.5 million ounces of gold equivalent—one of the world’s largest gold discoveries in the last ten years. I plan to write an article about TUO this year.
The founder of TUO Dino Cremonese also runs a silver exploration company called Silver Grail Resources (SVG.v). Silver exploration is under-invested in, a contrarian play and offers huge upside should the team make a discovery.
To further protect my buying power, I hold physical gold.
Life Sciences / Biotech
Biotech will be a mixed bag in 2022 and probably even further out. A look at the sector ETF's "SPDR S&P Biotech ETF" (XBI) chart will make it obvious that biotech has been in a bear market since Feb 2021. Brad Loncar wrote a great article here, explaining the reasons for the bear market and why it could turn around in 2022. From my Point of view biotech is now the contrarian trade and many investors have already capitulated. The twitter sentiment is very negative:
Those are usually the times to buy. Looking at the long term chart tells us that XBI had a 7 months bear market starting in July 2015, turning into a continued bullrun with new all time highs from Feb 2016 onward.
BUT keeping in mind the inflation topic from the macro segment above and the rate hikes narrative, one has to note that many biotech stocks are in the same category as hype stocks. The majority are pre-revenue companies and don't expect cashflows anytime soon. In addition, they are dependent on equity raises or big pharma buying them out.
My strategy is to be very selective, keep the life sciences/biotech portion of my portfolio concentrated on the names which either are already revenue producing, are close to going into commercialization or are buyout targets. Regarding the pre-revenue names I'll focus on names which tackle the demand for high unmet needs and have an approach to their science that is groundbreaking. I published two parts of a three part series about this topic so far. The first article covered cancer therapies (IBRX), the second article covered Alzheimer's Disease (CRTX) and the third part of the series will be published this year; it will feature Parkinson's Disease (IKT).
The only change I made in the portfolio regarding the stocks I wrote about on the blog is that I sold my common shares of Pluristem (PSTI). My decision was based on the news that PSTI's Phase II Studies of Acute Respiratory Distress Syndrome Associated with COVID-19 did not meet the primary efficacy endpoint. This is the second time in 12 months that they incurred a trial failure. However, I still hold some call options expiring in 2023, which I will use to play the Multinational Phase III Study of Muscle Regeneration Following Hip Fracture Surgery data readout, which should be in Q3 this year. The stock has been in a constant downtrend last year, management's execution did not convince me and I don't expect this year to be any better, as there are no catalysts I know about apart from Q3 data readout. With better opportunities at my hand, I decided to use the money and tax loss benefit from selling PSTI to dollar cost average into my other biotech stocks.
ImmunityBio (IBRX) is my highest conviction name currently. I used the low prices in 2021 to build a sizable position which is ~20% (cost basis) of my equity portfolio. I wrote about IBRX twice (intro article; update article) and the mispricing is still very much the status quo. After a PR that was released on Dec 20th which clarified a lot of open questions and confirmed the pausing of the ATM, IBRX has been in an uptrend. A firm support has been built and IBRX even decoupled from XBI and other comps like FATE & ARKG. I expect IBRX to break out to the upside in the coming weeks, based on updated trial data releases. My plan is to realize some gains on the move up (for risk management reasons), but keep the majority of my shares for the long run.
Other stocks I hold can be found below.
Cortexyme - CRTX: Alzheimer's Disease treatment
Inhibikase Therapeutics - IKT: Developing small molecule for treatment of Parkinson's Disease. Potential buy out target after they'll have completed ph2 in early 2023.
Arcturus Therapeutics - ARCT: RNA nanotechnology
Imagion Biosystems - IBX.ax: Developing a new non-radioactive and safe diagnostic imaging technology.
I will write a complete article about my uranium portfolio soon. The gist of it is that I am fully positioned now and just have to wait for the story to play out. There are a lot of catalysts coming up in 2022.
Battery metals, copper & recycling
A very simple story of supply demand deficit: No new projects coming online and the demand is rising steadily. Experts expect a lithium shortage already in 2022/23. It really shows in the prices of the materials, as the lithium price rose from $6K per tonne in early 2021 to $55K per tonne on 1/17/22.
Lake Resource - LKE.ax: Lake is the biggest position in my portfolio currently. They are developing a DLE lithium project in Argentina.
Vulcan Energy - VUL.ax: DLE Lithium & geothermal energy project in the Oberrheingraben area in Germany.
Novonix - NVX.ax: NOVONIX is the first contracted supplier of USA-made, high-capacity, long-life synthetic anode material, with a sales agreement with Samsung SDI, and an MOU agreement with SANYO.
The battery metals are not just relevant because of the EV transition, but also because of the rising living standards in emerging/frontier markets. Many people without access to electricity will get access in the future. A LOT of copper will be needed going forward.
Critical Metals Plc - CRTM.l: Copper and cobalt projects in DRC. Currently suspended from trading due to reverse merger process. Merger hopefully completed by end of Q1 and trading again afterwards.
Oil & Gas
Similar as the other commodities investments I hold, the oil & gas thesis is based on a structural supply / demand deficit. The under-investment in oil & gas leads to a decline in reserves and a lack in exploration. In addition, energy (oil) is needed to get all of the metals out of the ground needed for the transition towards other energy sources.
Africa Oil - AOI.to: A Canadian oil and gas company with a diversified African portfolio.
Delek Group - DLEKG.ta: Delek Group is an independent E&P and the pioneering visionary behind the development of the East Med. With major finds in the Levant Basin, including Leviathan (21.4 TCF) and Tamar (11.2 TCF) and others, Delek is leading the region’s development into a major natural gas export hub.
Watchlist: Usually share prices of oil services companies follow oil producers in an oil bull market. I added CGG to my watchlist. They are providing a comprehensive range of data,
products, services and solutions for complex natural resource, environmental and
infrastructure challenges. Based on their latest quarterly report, they might cross an inflection point regarding earnings and on the chart I can see that they are close to breaking through a major resistance. With exploration activities picking up again, geo services companies like CGG should benefit
Potash is my agricultural play and a topic not many investors talk about yet. However, it has all the things I look for in a commodity investment. centralized supply, possible supply shortages and rising prices. It is also a play on the growing world population and new middle class building in emerging markets.
South Harz Potash - SHP.ax: MoP developer in the Ohmgebirge region (Germany).
Trigg Mining - TMG.ax: SoP exploration / developer in Australia.
Emerging markets should perform well in times the US dollar is weak. My focus currently is on Indonesia as it has the 4th largest population in the world (270M). In addition, Indonesia is expected to become the world’s fourth-largest economy in terms of purchasing power parity by 2030.
Barito Pacific - BRPT.jk: Energy and Petrol company. Part of BRPT is Star energy, their geothermal business unit. Not more than a decade from now, Indonesia is projected to surpass the U.S. as the country with the largest geothermal utilization in the world.
BRPT's biggest business unit is the petrochemicals business. They are the only company to operate the international standard Naphtha Cracker in Indonesia.
Kimia Farma - KAEF.jk: Kimia Farma has evolved into an integrated health service company in Indonesia and overseas (India, Malaysia, Maldives, Kenya, Yaman, Hong Kong and the Philippines). Moreover, they are manufacturing and marketing pharmaceutical raw materials.
My focus regarding frontier markets is on Uzbekistan. I will write a separate article about my Uzbekistan portfolio this year. The portfolio I started at a local broker in Uzbekistan on 7/28/21 has a performance of +25.4% (dated 1/17/22) vs the NASDAQ performance in the same time period being only +0.89%.
The major pullback the NASDAQ had shows in this example and that valuations matter again. The Uzbekistan market is very undervalued and offers great opportunities for brave investors.
Innovative Industrial Properties - IIPR: "The pioneering real estate investment trust for the medical-use cannabis industry.  provide real estate capital to the medical-use cannabis industry". IIPR is a perfect picks and shovels play on the cannabis sector, doesn't face the same regulatory challenges the MSOs face and pays a growing dividend.
Carbon Streaming Corp - NETZ.ne: I recently published my investment thesis for NETZ here.
Cradle Resource - CXX.ax: I Had written an article about CXX here. The project they are looking for could be for copper, lithium, uranium or other popular metals. Since 1/12/21 CXX is suspended from trading on the ASX, as was laid out in the risk factors section I included in my article. I have been in contact with the company and they are confident as ever to search for a high quality project. The other factor that supports my conviction is that Grant Davey had increased his CXX common share position multiple times. He could also invest his money in one of his other projects, if he wouldn't believe in CXX.
For me the hardest part of the bull market is starting. I placed my bets, bought into companies, know which ones I have high conviction in and now...I will have to hold.
Holding discipline is the hardest part of riding a bull market.
Should some of the big bets I placed multiply in value, I will take some profits and keep the rest of the position to further ride the bull market. My intention is to do further DD on the titles I own and plan some research of new topics. Examples are magnesium, water treatment companies like BQE water and drill rig companies like Geodrill.
You can expect articles on the stocks I mentioned above. The articles could also be of the titles currently on my watchlist or updates to the ones I already wrote about. I also plan to do interviews.
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Some of the comüanies discussed in the article are also part of the "Picks and shovels plays" wikifolio, which is traded on the German Stock Exchange and managed by me. If you feel more comfortable having exposure to them via an actively managed vehicle than to choose and hold single stocks, check out my wikifolio. Sign up here for free to learn more about wikifolio and where it is traded:
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Disclaimer: This blog post is purely my personal opinion and is not financial advice. Please do your own research, before taking investment decisions. I am long the equities discussed.