Trades from 2020-07-17

Replaced GXG with CIB

I think Colombia and Vietnam are two of the countries that have the best prospects of future growth. I haven't found an opportunity to take exposure to Vietnam that seemed worth taking. There is an ETF which tries to give exposure to Vietnam but it is composed almost entirely of foreign companies doing business in Vietnam, and it is not particularly correlated with the performance of the Ho Chi Minh Stock Index, so I've never taken exposure to Vietnam. I bought GXG a couple years ago and have now liquidated it at a significant loss. My core thesis remains in tact as far as I'm concerned. I still strongly believe in the growth of the Colombian economy.

However, I really don't like ETFs. They are structurally bad ways to own stock. I only ever buy ETFs to pick up exposure to foreign countries where it's hard for me to do the research. Even then, I'd be better off picking at random than investing in an ETF if I could efficiently do that, but sometimes I don't have a good way to invest in a foreign country. One reason I switched from TD Ameritrade to Interactive Brokers for my investing is because it gives me access to far more markets globally. I'm also not particularly fond of ADRs. Like ETFs, they carry fees. That's the simplest reason why it's a bad idea to invest in an ETF. If you're planning to buy and hold, if you just buy all of the constituents, it's cheaper than owning the ETF. Similarly, ADRs are all but guaranteed to underperform their underlier because they typically come with an annual (percentage based) fee. However, ADRs aren't quite as perversely structured as ETFs. For instance, they don't rebalance extremely inefficiently one to four times a year. So I would still rather own an ADR (like CIB) than an ETF (like GXG) all other things being equal. Of course, all other things are not equal, and CIB happens to be a company that is much better aligned with my reasons for investing in GXG to being with than GXG is.

Like most emerging market ETFs GXG gives me way too much exposure to things I don't want exposure to, particularly natural resources. Bancocolombia is a Colombian bank with a NYSE-listed ADR that happens to also be the biggest constituent of GXG. It also has outperformed GXG generally, and has a very attractive valuation at the moment even if I wasn't actively seeking exposure to Colombia. Despite being less diversified across the Colombian economy than the ETF, I actually think CIB gives me significantly more direct exposure to the Colombian economy than GXG does. Banks have a ton of exposure to GDP growth and to changes in the relative strength of their economy in the world and their region. I would like to have exposure to the Colombian tech sector, but I don't think I'm going to find that anywhere. Technically, there is some of that in GXG. However, it is significantly smaller than the oil exposure, so I pick up a lot of exposure I don't want. (I'm not categorically opposed to the petroleum sector. For example, I've invested in MPLX and am still long MPLX, but I don't want broad exposure to that industry because I think its on the decline. I also picked up some additional exposure to the oil/natural gas sector today, but it's still in keeping with the kind of exposure I'm happy taking.)

Additionally, ETFs are designed to limit volatility, at least in theory. I want to hold volatile symbols. Volatile symbols are better for generating income than non-volatile symbols because you can sell covered calls against them at significantly higher premiums.

Sold a portion of my ECNS holdings

ECNS is another position that I want to exit because it is an ETF. I can take Chinese exposure directly far more easily than I could in the past and I plan to continue to do this.

Additionally, I hold ECNS in a IRA because it has a decent yield. However, I get less benefit than I otherwise would from doing this because it is a foreign ETF and I still pay foreign tax in its dividends.

I plan to continue selling this position as I come across appealing high yield stocks to replace it with.

Sold slightly more than half of my SDEM holdings

SDEM is an emerging markets ETF with the same problems as GXG and ECNS put together. Foreign tax in an IRA and natural resource exposure I don't want.

I plan to continue selling off this position as I come across appealing high yield stocks to replace it with.

Bought EPD

Now, I know what you're thinking. I just got done telling you that I was reducing my natural resources, particularly oil, exposure, so why am I going out and buying an oil and natural gas company?

I want to hold high yield domestic stocks in my IRA. Oil companies and REITs are two of the best ways to do that, but both of these types of companies tend to have many of the same problems. They tend to be non-performing assets. Gold is a bad investment in the long term because it doesn't improve. It just sits there. Investing in stocks has outperformed investing in gold and will almost certainly continue to do so. Gold is a store of value. It's a robust store of value. One way to think about the market and the economy that makes a ton of sense is to just declare the value of gold to be constant. In this view of the world the value of the dollar is declining. Everybody knows the value of the dollar is declining. That's what the whole concept of inflation is about. However, gold seems like its appreciating relative to inflation adjusted dollars, not just nominal dollars. This is because the cost of goods is decreasing. Manufacturing keeps getting more efficient. Goods are cheaper than they used to be, land and gold are worth about what they've always been worth, dollars are worth less than they have been in the past, and ownership in companies is worth a lot more than it used to be. All of these statements are completely consistent with what standard economic models say should be happening if production keeps getting more efficient. There are supply and demand considerations with gold, but not really. Demand increases with population; supply increases with economic feasibility.

Most oil companies have much of their value in non-performing assets. They own ground oil (or rights to drill it) and much of the value of the company is associated with the oil they own that is sitting in the ground. The value of their business operations is based on the value of their non-performing assets that are sitting in the ground. EPD and MPLX aren't like that. The value of their business mostly comes from their business operations: their pipelines and their refineries. They get treated like they are part of the oil and gas sector, but they are really businesses that produce value like businesses operating in a sector of non-performing assets. I think this gives them a tendency to be chronically undervalued, but more importantly, it gives them a structural reason to be particularly undervalued when oil and natural gas prices are low. For a growth investment, a propensity to remain undervalued would be a reason to think twice about buying, but EPD is an income investment, not a growth investment. I bought it for its 9.8% yield that are attached to a company that has been performing well.

I expect its revenues to decline this year. They declined year-over-year in the first quarter. However, once the COVID situation is fully behind us, I expect them to go back to growing revenue, earnings, and yield like they have been for the last 15 years.

Bought LTHM up to a round lot

I had an odd lot holding of LTHM. This is the lithium producer that spun off from FMC which was my original reason for buying FMC. I increased my stake to a round lot. I also was short some puts which expired in the money today in LTHM, so I expect my position to passively increase a little over the weekend from those puts being exercised.

I really like this company. I'm thinking about increasing the stake further. I wish I could figure out how to invest in the convertible shares they recently issued, but I don't know how to navigate the world of bond trading. They're convertible at something like a 35% premium of the price at the time they were issued (which isn't much different from the current price).

Doubled down on VLNS

I actually increased my position by 125%, not 100%. I read their earnings announcement (from Wednesday) today. I'd been thinking about increasing my stake, but that sealed it for me. I also listened to their earnings call this afternoon and that further increased my optimism.

I think this is pretty clearly the best cannabis stock in the Americas, and ludicrously undervalued. I mean, I think it should be the most valuable cannabis company in the Americas. It's the first company that realized that the high margin part of the cannabis industry is going to be creating derivative products rather than growing weed. They are Canada's biggest buyer of raw cannabis.

I was a cannabis bear until about a month ago, so my stake in VLNS is pretty new and not down that much. I've looked into other cannabis companies from time to time. The first time I did this, I decided to put some money into the tobacco industry and bought MO stock. The second time I did this, I decided to keep waiting for the cannabis bubble to pop. The third time I did this, I decided that Aphria didn't look overvalued, so it was a good time to do broader research to try to find the best opportunity, so I looked into all of the cannabis companies I found on lists of cannabis companies that have actually posted a profit. There's a line from "Candle in the Wind": "You had the grace to hold yourself while those around you crawled." I'm not a big fan of analogies, but I like that one here. They're doing something completely different than the rest of the industry, and it's obviously working much better. I didn't initiate a position in Aphria, though that remains my second favorite cannabis company I've investigated.

What was particularly interesting about Valen's most recent earnings call is how many different ways the company is well-positioned and thriving. They got started with cannabis oils, so the bulk of their current business is still in that segment, and their written materials related to this earnings presentation mostly focused on why they still believe that this is a really good business and making the case that they are better at it than anyone else. This would be more than enough reason to invest in them at the present valuation. However, during the earnings call, it was incredibly obvious that the company's executives are much more excited about the opportunity in hydrocarbons than in oils, but these are not yet as big of a part of their business. Then in Q&A someone asked them to comment on demand in beverages (since they just launched that), and their responses was "It's overwhelming to say the least," and they went on to talk about how they can't keep up with it yet. Their business is doing so well in so many different ways that they didn't even bother to mention this in their written materials or their oral presentation until someone asked about it explicitly. All of the things that they did proactively highlight made more sense for them to proactively highlight about their business than this. And they're profitable. They weren't quite GAAP profitable this quarter (Covid and inventory write downs), but they have been previously, and they indicated strong confidence that they would do significantly better in Q4 this year than they had in Q4 last year. (They did better in Q1 and Q2 than they did last year, but they saw enormous growth throughout the year, and they did worse financially in Q2 than they did in Q1.)

This is a company with 100% year over year revenue growth in the face of significant impairment to its business due to COVID-19 and a P/E of 19. It's a company that was founded in 2012 that is already buying back shares while expanding at an incredible rate.

Now, there's an old saying that says anything that seems to good to be true probably isn't, but I'd be shocked if Valens is a fraud for quite a few reasons. For one thing, it just uplisted from a less scrutinized listing (whatever the Canadian equivalent of Pink Sheets is, I think) to TSX and have net bought back shares since doing this. There is no reason whatsoever for them to do this if they are not legitimate. For another, they are a white label producer and put out press releases every time they get a new contract for their white label production. If they're lying about this, it would be really easy for someone to call them out on it. Finally, it's really obvious that they are an extremely professional operation of competent people. Their website is extremely informative and contains quite a few industry research papers like a B2B players' website should be.

My biggest concern is that it looks like the CEO has been selling shares. However, the companies remaining executives have all been buying (albeit at a slower rate than the CEO has been selling).