Q1 FY 2022 Portfolio Review: +3.2%

Unless your portfolio was super overweight commodity stocks (think E&P energy, agriculture, metals, coal, etc.) then most likely it was tough sledding for the vast majority of people during Q1 2022. For the quarter, the Russell 2000 finished down 7.8% (IWM), the NASDAQ Composite down 9.1% (QQQ), and the S&P 500 (SPY) down 5%. As bad as those quarterly results appear, and they are indeed ugly, a sharp rally in March 2022 masked just how challenging Q1 2022 really was for most investors.

And in case you forgot, Q1 2022 was exceptionally volatile. For example, the Russell 2000 entered the year at 2,245. By January 28, 2022, at its intra-day low, the Russell 2000 hit 1,901. At that low, the Russell 2000 was then down 15.3%. By February 10, 2022, at its intra-day high, the Russell 2000 rebounded all the way back to 2,105. That rally didn’t last and by February 24, 2022, the Russell 2000 made a fresh year to date low, trading as low as 1,894. The index closed at 2,070, on March 31, 2022. For perspective, from its November 8, 2021 intra-day high of 2,459 to its February 24, 2022 intra-day low, of 1,894, that translates to a 23% pullback. As for an official bear market, as I believe most people only use the closing day prices, the November 8, 2021 close on the Russell 2000 was 2,443 and on January 27, 2022, the Russell 2000 closed at 1,931. So, the official bear market started on January 27, 2022, with the Russell 2000 down 21% from its all-time highs.

If you are overweight technology stocks then let’s quickly do the same exercise. The NASDAQ Composite entered the year at 15,645. Its all-time high intra-day high was struck on November 12, 2021, at 16,212. On an intra-day basis, it struck a low of 13,095 (1/24/2022). Similar to the Russell 2000, the NASDAQ rebounded smartly, all the way back to 14,490 (2/9/2022). However, by February 24, 2022, the NASDAQ made a fresh year to date low of 12,588. As for the official bear market, on a closing day basis, that occurred on March 7, 2022. The NASDAQ’s record closing high was 16,058 (11/21/21) and the index closed at 12,830 (3/7/2022).

As for my two portfolios that I actively manage, I have a less active portfolio where I don’t move in and out much, and then a very active portfolio. That said, the very active portfolio holds some high conviction names, but also does a lot of tactical trading. When I say tactical trading, this means trading earnings events (after they are reported) and material catalysts.

Just to be clear, let me further explain what trading earnings mean. I follow well over 100 companies, at least from a far, and I very closely monitor the news. Seeking Alpha is an amazing resource to follow real time earnings press releases as well as tracking the breaking news. So when I read a really good earnings report and the guidance also has to be really good too (often, the guidance is more important in most cases), then I dig in and the read conference call transcript and sometimes a few prior conference calls so I am up to speed. So, for example, company XYZ reports its earning at 4:15pm. I read the earnings release and guidance. If I am intrigued then I wake up by 5am, the next morning, and then synthesize the prior night’s earnings call and review its 10-K. If there is something that I really like, a good setup, I then write it up for the group and either buy shares in pre-market or shares at the 9:30am opening bell.

Q1 2022 Blended Performance +3.2%

Portfolio 1 – Less Active Portfolio: -9.7%

Entering the year full invested, in this account, and despite owning some MoneyGram shares (MGI), Kohl’s (KSS) shares (not enough Kohl’s), and a large position in JAKKS Pacific (JAKK) that bounced back nicely (although I did sell all my JAKK shares, in the low $13s, and therefore missed the brief move in JAKK shares to $16), I made three errors that really dinged the Q1 2022 performance. One was buying a 9% sized bet in Vroom, Inc. (VRM), as I happened to catch the Bill Miller CNBC interview on February 9, 2022. I got outside of my process and oversized this bet (I should have only bet 4% to 5%) and with the benefit of hindsight should have waited for its Q4 2021 earnings before allocating any capital here. Secondly, I was nearly fully invested in this account, entering 2022, so I couldn’t take advantage of the two big sell offs (January 28th lows and February 24 lows). Thirdly, a big overweight position in Summit Midstream (SMLP) really dinged this account. Just to be clear, I still love SMLP shares and think the stock is super undervalued and misunderstood name. As for Vroom, I would argue the horse left the barn and that it makes little sense to be a seller, at least in the $2s, as a number of things can go right from here, including a sale to Carvana Co. (CVNA) or a more well capitalized large company / private equity firm buying them, and or the cycle turning. That said, given VRM’s high cash burn, no question, its platform is burning.

Portfolio 2 – The Very Active Portfolio: +16.1%

As I have explained in prior performance articles, in the very active portfolio, I grew this account from $205,000 (on January 1, 2020) to about $553,000 on June 30, 2021. At that point, I was instructed that my mandate changed and I was required to keep at least $400K in cash as this family member’s objectives have been met. However, as the market got more volatile, towards late January 2022, I was able to persuade this family member to lower the required minimum cash threshold from $400K to $350K. Therefore, my baseline of available capital for 2022, for fair and accurate performance tracking is $200K (the starting value of the account of $549K – $350K (the required minimum level of cash). So the total return of this account was $32,215 / $200,000 to arrive at the +16.1% return in Q1 2022.

Recent Actual Tactical Trading Examples

As difficult as January 2022 and February 2022 were to navigate, March 2022 was a fantastic month for tactical trading.

Let me quickly share a list of some tactical ideas.

1. On February 23, 2022, I bought Bassett Furniture (BSET) at $16.25. After they sold their logistics business, it was signaled the deal would close late February 2022 and the press release suggested a special dividend could be announced. Based on the expected after tax proceeds and existing cash on the balance sheet, I calculated BSET’s pro-forma cash to be at $11 per share, post-sale and net of taxes. Lo and behold, soon after, a $1.50 special dividend was later declared and BSET shares bounced back, trading up to nearly $21 on March 22, 2022.
2. Bought shares of Red Robin Gourmet Burgers, Inc. (RRGB) at $13.75 on March 10, 2022 (after hours), after synthesizing its earnings report and guidance. The next morning, before the bell, on March 11, 2022, I wrote it up for my SWC group. RRBG briefly traded over $18 on March 22nd.
3. Bought shares and wrote up a piece on HireRight Holdings (HRT) the morning of March 22nd (before the bell). I bought shares in the mid $13s (pre-market). The stock opened for regular trading at $14.35 and it traded as high as $17.75 on March 31st.
4. Bought shares of OLLI at $40 even (pre-market) and wrote up Ollie’s Bargain Outlet Holdings (OLLI) on March 24th (before the bell). I put a strong buy on it. Earlier this week, OLLI shares traded over $49.
5. Bought shares of HNST at $4.85 and wrote up The Honest Company (HNST) on March 25th. This one didn’t work as well, but I added more shares at $4.40 (also on March 25th) and sold at $5.13. HNST shares briefly hit $5.53 on March 30th.
6. Bought and briefly wrote up shares of Diamond Offshore (DO) at $7.50 (a relatively small position) on March 31, 2022. This has been disappointing so far.
7. Bought some shares of RCMT at $10 (pre-market) and more at the 9:30am open at $9.42 and wrote up RCM Technologies (RCMT) the morning of March 31, 2022 (before the bell). RCMT traded as high as $12.70 on April 4, 2022.
8. I will only mention this one too as I recently shared it on the free site. Bought and wrote up Chicken Soup For the Soul Entertainment (CSSE) on morning of April 1st (before the bell). The stock opened at $9.80 and briefly traded over $13.50 (April 4th) before pulling back. I put a strong buy on this idea.

Those eight ideas are all very recent and actual actionable examples of what I do on the tactical trading side. Six out of the eight were real time synthesizing of earnings reports. BSET was a special situation with the anticipated catalyst of a special dividend and Diamond Offshore was a stock that traded post-bankruptcy on the NYSE for the first time since its prior bankruptcy and delisting.

Why The Market Was So Tricky During Q1 2022

If you are looking for my high level perspective on why Q1 2022 was so tricky I will share a short version. The market is confronting the highest inflation in forty years (driven by crazy supply chain / just in time issues, Covid, and demographics as the baby boomers retire in droves) and this forces the Fed’s hands on interest rates and unwinding its Q.E. program. As Covid moves to the back burner (excluding China), perhaps as Omicron very well might have accelerated the end to peak cases, we had war in continental Europe for the first time since 1945. Ukraine, a country of 45 million people, was attacked by Russia and tens of millions of people’s lives have been destroyed or significantly impacted. This unprovoked war led to massive sanctions and most of the world turning its back on Russia. As Russia is a big oil producer (roughly 10 million barrels per day of production and 4 million barrels per day were exported), coal producer, natural gas producer, fertilizer producer, wheat producer, and controls important natural resources such as nickel (think EV cars and batteries) this further exacerbated the ‘transitory’ inflationary period. The huge leg up in oil prices, briefly touching $130 per barrel (front month), and for perspective oil started the year at $75 per barrel, has led to record nominal gas prices in the U.S. and other parts of the world. Natural gas prices spiked, notably in Europe, as Germany and other industrial places imports a lot of natural gas to run their factories and heat their homes and buildings.

To add insult to injury, and notwithstanding an exceptionally robust U.S. job market and a very healthy consumer (think record amount of aggregate savings), businesses have to lap 2021 when they report 2022 numbers and we all know there won’t be last year’s record stimulus (remember the three rounds of stimulus: 1) $1,200 per adult/ $500 per child, 2) then $600 per both adult and child, and 3) then finally $1,400 per both adult and child).

With inflation so high and compounded by the fact that the Fed woefully underestimated and underappreciated its duration, hence why the word ‘transitory’ looks so silly now, the Fed’s hand is now forced, at least in the short term. As a consequence, the 30-year mortgage rate recently spiked to 5%. And the war in Ukraine and $4 plus gasoline prices are feared to significantly impact consumer sentiment and therefore consumer spending. The jury is still out on what happens to consumer spending in 2022.

As an aside, I have watched first hand, as some fantastic retail stock prices have got cut in half (or move) since November 2021. And I am talking about high quality companies not sketchy companies that were one time Covid winners. One could argue that a lot of bad news and fear is already more than priced in, but as we are still in the shoulder season, we have to wait another three to four weeks to get Q1 2022 earnings (late April 2022 and early May 2022), so we won’t know until then.

Putting It All Together

If you found Q1 2022 a very inhospitable market, well that is because it was. There were a few big drawdowns and notwithstanding a few fierce bear market rallies, it has been incredibly difficult to make money, unless of course a person happened to be long a bunch of commodity stocks entering 2022 and they held on. The war in Ukraine is a major humanitarian tragedy. That said, from a market perspective, it was a huge windfall for the vast majority of commodities producers.

Although it would have been a lot easier if we faced a market that was far less volatile and difficult, then again that is what makes markets so dynamic and attract really smart people to this industry. And let’s face it, allocators of capital / savvy speculators we can’t always pick the battlefield. Therefore, it is our job to adjust and adapt to any environment and find a way to lose less money on the big down days and opportunistically make money, even if that means we have to use our bandwidth and analytical abilities to engage in some tactical bets (when the setups are favorable from a risk/reward standpoint).

Good luck to readers in Q2 2022.