As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.
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During the month of July, the Paper Portfolio returned 5.61% vs 3.27% for the SPY. This brings YTD returns to 49.84% and 20.62%, respectively. The Paper Portfolio remains slightly behind the SPY since inception with cumulative returns at 55.65% vs 64.33%, respectively. While the “since inception” number continues to underperform, Capital Flywheels believes the Paper Portfolio stands a very reasonable chance of closing the gap, especially since the top 4 positions in the portfolio (KIND, NET, PINS, SE) are all still >50% below their all time highs. The Paper Portfolio has recaptured a significant portion of the gap even though the largest positions haven’t “worked”, yet.
At a high level, July was very similar to June in many ways. Markets continued to melt up. Although the Fed did do another 25bps hike, it is increasingly clear that the hiking cycle is very near done. Maybe there is another hike coming in September, but either way, the light is already very visible at the end of the tunnel. Inflation continues to come down. The latest inflation number came in at 3.0%, as we anticipated last month. While further progress on disinflation will be harder to come by, it is now back at a level where the Fed likely has more options than to hike relentlessly.
Against this monetary and inflationary backdrop, the economy also continues to hum along! Although the economy has slowed from the exceptional growth levels of 2021 (including a small dip into recession in early 2022), the economy has since hummed along with relatively good GDP growth. While Capital Flywheels still anticipates growth further slowing down in the coming quarters, the resilience so far is helping support the rally that we have been anticipating since 2nd half of last year.
One thing that continues to be abundantly clear is that we live in a chaotic era, an era of change. Some types of changes are normal even if we – as humans – prefer to avoid them, like the evolution of culture, tastes, and even technology.
But these are not the changes upon us.
Instead, we live in a chaotic era, an era of change that is remaking and redefining borders, civilizations, rule of law, systems, identity, and the very world we live in.
These are very core and systemic changes. These moments do not come along often, and it is critical to be aligned with the right forces that can carry us into the future. Aligning with the wrong forces in times of change often mean being left behind.
All of this is easier said than done, but do we must.
Turning to individual names in the Paper Portfolio, the good performance was driven by fairly wide breadth.
1/ NVDA – Nvidia (+10.5%) continues to standout. Incremental data points suggest Nvidia’s GPUs remain in very tight supply, which bodes well for revenue growth for the rest of this year.
2/ SE – Sea (+14.5%) also performed well, likely supported by recent media articles suggesting some headwinds for TikTok in Indonesia. In addition, some articles have suggested a potential return of Free Fire to India.
3/ MTCH – Match (+11.1%) may have benefitted from growing optimism about a recovery in the business. The company is due to report later this week, which should give more clues about the direction of the business.
4/ UBER – Uber (+14.6%) continues re-rate. After many years of investors questioning the profitability and viability of the business model, it is becoming increasingly clear that Uber can be a very profitable business. Perceptions are likely now changing, helping drive the stock price up.
5/ ATVI – Activision (+10.0%) is finally near the acquisition finish line. We initially added this position in April, assuming the deal with Microsoft would close by May / June. It took a little longer, but the regulatory hurdles now seem to be behind us. Given the stock price is now just a few % away from the acquisition price, we will also take the opportunity to sell position as part of this month’s rebalancing.
6/ ENVX – Enovix (+19.3%) performed very well in July. The company made additional progress towards commercialization, while continuing to demonstrate momentum with interested parties. We just added this position last month. While it is a higher risk company / situation, Enovix stands in front an enormous multi-year opportunity as the world’s demand for batteries grow exponentially.
7/ TPL – Texas Pacific Land (+14.4%) performed well as energy prices firmed up. Capital Flywheels does not have a particular view on the direction of energy prices, but TPL is a high quality business model levered to the most important energy production nation in the world today – the US. You may be surprised to learn that the US is now the world’s most productive energy power, and it’s not even close.
On the negative side, there’s a few underperformers. KIND (-4.6%) and MRNA (-3.2%) underperformance were likely just reflections of flows and investor sentiment. Both will be reporting results soon. Snap (-4.1%) is probably the only name that really deserves some focus. Snap reported results that continue to show negative impact from macro, privacy changes, and their own advertising evolution towards direct response ads. None of this is flattering, especially since peers are recovering faster / doing better. The journey may remain a bumpy one…
For the August rebalance, we will be adding two new positions:
ENPH – Enphase is a leading solar-related company, focused on inverters and batteries. The business is currently running into some headwinds in the US, but the headwinds are likely temporary. The business is not particularly expensive with a very good financial profile.
PAGS – Pagseguro is a merchant acquirer in Brazil, focused on small merchants. They have also become one of the leading neobanks in Brazil. PAGS (and its peers) have been negatively impacted by the very high interest rates and cost of capital in Brazil over the last two years (rates are currently at 13.75%!). Brazil is now on the cusp of cutting interest rates, which would materially improve the earnings for PAGS (and peers). I will admit that this is probably not a company I am confident in owning for the long-run at this very moment, but the near and medium opportunity looks attractive.
Alright, that’s all folks. Let’s see what August brings.
Disclosures: Of the stocks mentioned, I own shares in KIND, NET, PINS, SE, MRNA, SDGR, U, OKTA, SNAP, ZI, ENVX. I have no intention to transact in any shares mentioned in the next 48 hours.