Thoughts

The 2nd of March, 2022 the share price of Sberbank on the London Stock Exchange went on a wild rollercoaster ride straight into the abyss. Not too long before, the price was trading around 21 USD a share and now a low of 0.01 USD a share was reached. On that day alone the stock plummeted with more than 92%. Shortly after, the trading was suspended indefinitely.

A share price of 0.01 USD per share would mean that the company would be close to being worthless or that it would face bankruptcy very soon. Albeit, that was not the case here and thus a rare opportunity presented itself…

Sberbank is one of the biggest financial institutions in Russia and has its primary listing on the Moscow Stock Exchange ('MOEX'). It is also listed on the London Stock Exchange (and the New York Stock Exchange) to allow non-Russian market participants to more easily gain access to its shares. These shares are interchangeable and their prices should follow each other, i.e., a trader who bought the shares on the London Stock Exchange can request their broker to convert them to an equivalent number of shares trading on the MOEX. In normal situations traders won't engage in such conversions since there is no financial gain to win, or in other words: arbitrage is not possible here since the prices are derived from each other.

But these were no normal situations: on the 2nd of March, 2022 the MOEX had suspended its stock trading activities already for more than a week and it was uncertain when Russia's central bank would announce a reopening of its stock market.

Buying the shares on the secondary listing in London obviously entailed several risks, however, the opportunity to buy them for 1 cent presented an extreme asymmetric playoff and one of the craziest arbitrages I've ever witnessed. Indeed, I mention "witnessed" since I decided not to partake in this event. The old cliché is you buy when there's blood in the streets, but not literally. The screenshot below shows the price action of that day and shows market participants scooping up large amounts of shares around the 1 cent mark.

These buyers most likely did one of two things next: (1) either they sold at a profit (or loss) later that day (pure day-trading gambling), or (2) they performed an arbitrage trade later on in which they converted their shares to the ones trading on the MOEX (with a 1 to 4 ratio).

With the current share price of Sberbank, as depicted below, around 11 USD, the return on investment would thus have been an astronomical 1000x. The problem however that day was the low volumes on offer which capped the profit potential. I estimate that around 150kUSD was traded that day, while in the days before this was between 200mUSD and 350mUSD, with share prices between 1,5USD and 4,5USD. Nevertheless, even if you would have bought these shares in the days before, the gains still would have been substantial.

What I thought was especially interesting was seeing how brokers interpreted the imposed sanctions on these stocks in very diverging ways and demonstrating again the need to also diversify your assets across different brokerages. These were unique situations and hopefully we won't experience them anymore, but still it was valuable to learn which brokers had the best interest for their clients and which fell short in doing this.

The new year is well underway now, sentiment appears to be have shifted for the moment, but an even more sticky inflation (remember our central bankers shouting that inflation was transitory all year long in 2021, good times) and higher for longer interest rates pose some of the risks going forward (together with UFO's apparently popping up all over the globe). Sit back, keep your eyes open for opportunities, and enjoy the ride!

While in 2020 the markets were mainly impacted by one massive event that completely derailed financial markets across the globe, last year we saw a lot of, albeit smaller, crazy events unfold.

Most notable to me was the gamma short squeeze in GameStop that was orchestrated by a small army of redditors and managed to seriously damage the performance of several big hedge funds. A beautiful David versus Goliath situation that does not happen often in financial markets.

A close second was the pumping by Elon Musk of Doge, a crypto designed in one day as a joke that almost surpassed the 100bUSD market cap during its heights (and then Shib did it all over again a couple of months later …). Or the relentless shouting of policy makers that "inflation is transitory" while literally every single commodity (lumber!) was exploding.

One of the commodities that I focused on was oil. It first caught my attention when it went negative for the first time in history back in March of 2020. A remarkable example of a severe price irrationality: oil producers were willing to pay buyers to take the oil off their hands. Those buyers were scared demand would not return for a long time and had no more storage capacity left, while at the same time OPEC+ kept on pumping.

Since I strongly believed that we would be able to overcome the virus and that then 2021 would be a stellar year for the black gold, oil became a top priority for me. The way I played it was by building a portfolio of oil related companies: from the big oil majors to offshore drilling platforms, from oil pipeline companies to oil shipping companies, and from exploration companies to medium sized national producers. The key was to construct a portfolio that consisted of a series of oil equities that would have substantially different leverages to the price of oil. A lower leverage would be found in big oil companies (lower risk), while a high leverage would be found in speculative small oil companies (high risk). I knew that when the price of oil would start to go up again, it would increase the share price of all oil related equities.

By taking a portfolio approach, my overall risk was reduced thanks to the diversification. A big unknown at the time was how long the lockdowns would last and thus there was a risk that certain oil companies could go bust. However, by buying a large number of different types of oil related companies my overall risk was limited.

But what really turned out to become a gamechanger for me was that during my research, I stumbled upon the Canadian oil exploration and production companies of which most notably the smaller ones drew my attention: these had tumbled by more than 80% during March 2020. Those became the backbone of the portfolio and hence my highest conviction.

What a chart – an absolute beauty! If you bought the dip on March 20th and held until now, you would be looking at a return of nearly 2.500%. Though I'm fully aware that it is nearly impossible that anyone would have been able to time that dip, but even if you bought on any other subsequent day in 2020 the returns would have been astonishing reaching nearly a 1.000%. And this is not a unicum, it's not just this company: nearly every single small Canadian producer has the same chart with the same returns. Talking about leverage to the price of oil, these were indeed off the charts.

At the time of writing, the price of Brent Crude Oil is hovering around its 7-year high. With more and more countries ending all restrictions, demand is set to keep on soaring for the foreseeable future. While on the supply side, we are seeing multi-year low inventory levels coupled with structural supply challenges. This imbalance has been pushing and keeping prices up for a while now and I don't see that changing anytime soon.

With oil prices at current levels, record amounts of free cashflow are generated. With a reluctancy and even prohibition to increase capex for development and exploration of traditional oil assets, it will be interesting to see what all that cash will be used for. Regardless of the spending decision it's clear that us, shareholders, will be benefiting. For now, there is nothing else to do but to sit back and enjoy the ride.

Last year was a wild year filled with extremes on all levels. Financial markets were hit hard due to the COVID-19 pandemic presenting ample opportunities to capture astonishing returns.

The correction that occurred in February and March had stocks plummet globally across the board, yet selecting the stocks during that period that would generate the biggest returns in the short to medium term had to be done thoughtful since at that time there were a lot of uncertainties regarding the virus.

Six elements were important in my choosing:

• Strong brand
• Absence of large debt repayments in near future
• Healthy business-as-usual cash flows
• Growth potential
• Committed management
• Favorable shareholder structure

Based upon these six elements CAPRI HOLDINGS ($CPRI) was by far my strongest conviction buy.

CAPRI HOLDINGS is the holding company above the fashion brands Michael Kors, Versace, and Jimmy Choo. I have been following the company for several years now, ever since it was still trading under the ticker $KORS and so I acquired a good understanding of their business.

CPRI bottemed on the 16th of March around 4,30USD and currently is trading around 45USD resulting in a mind boggling 1000% in 10 months.

Truth be told I did not buy my full position on the 16th of March but purchased the stock bit by bit during the correction period. Nevertheless, what happened on the 16th of March is an ideal example of price irrationalities: people got lost from reality and assumed CPRI was going out of business. It shows how people tend to follow other people without doing any due diligence whatsoever. The company had very low deb interest payments to be done during the coming years and had almost no principal debt repayments due as well. And even if the pandamic would have lasted multiple years, a strong brand would never have any issue pushing the debt further out or refinancing it.

So what's next for CPRI? Looking at the graph one can see that the company was trading near 80USD in 2018 after which the stock price got into a downward trajectory. Much of this was due to the expensive acquisition of Versace (and Jimmy Choo the year before) and the conclusion of investors that growth was not going to return very soon because on one hand debt needed to be repayed and on the other high implementation costs were to be expected both crippling near term growth. As it turns out, based on the latest earnings announcenments, both brands are showing strong growth again offsetting the lackluster results of the Michael Kors brand. This is very encouring knowing the pandamic is still very much present in the key markets of the company. Over the last weeks the company has been getting plenty of price target upgraded from analysts (as always they are late to the party) acqknowledging my thesis.

Management made the right move by purchasing two high-end luxury brands to save the Michael Kors brand and thereby transform the company into a portfolio of luxury brands to mitigate risk and re-accelerate growth.