2023 is over, and with it my fourth year of publicly tracking my portfolio and its performance. It was anyone’s guess what the year would look like as the stock market came out of a significant downturn. Interest rates were still rising, inflation was still at the top of most people’s minds, and many were predicting an entrance into a significant recession. But the market has a way of humbling people, and 2023 saw a furious market rally, buoyed by strong economic data, likely the end of rate hikes, and the emergence of generative AI as a new groundbreaking technological innovation.
Despite not having any exposure to the megacaps that led the market rally, I was able to beat the market by a few points in 2023.
This is the first year my portfolio outperformed the market while the market was up. As I noted in last year’s review, I aimed to position my portfolio more aggressively at the beginning of 2023, as the 2022 downturn had made valuations in sectors like tech more attractive.
Below is a review of my four-year performance against the Russell 3000. In previous reviews I compared against the Wilshire 5000, but my brokerage has dropped support for this index in 2023. The two are both very broad indices that seek to represent the total US market, and the returns are very similar.
Next is the composition of my portfolio as of 1/20/23. I assign each stock a confidence rating of ‘high’, ‘medium’, or ‘low’, which helps to determines the position sizing. In general, I try to keep the allocation to low-confidence positions below 7.5%, medium-confidence below 22.5%, and high-confidence above 70% of the total portfolio.
|% of portfolio
|Position split between shares and LEAPs (approx 60/40).
|PAC and OMAB are both Mexican airport operators. The combined weighting is 19.97%.
|Rating downgraded in Jul 2023.
|Position initiated in Apr 2023.
|Position initiated in Apr 2023.
In 2023 I fully exited only one position, the micro-cap communications company Issuer Direct (ISDR). ISDR was a small position that entered into a significant, transformative acquisition with a direct competitor, and I chose to exit as I didn’t have confidence in my ability to evaluate the execution risk related to the transaction.
My current high-confidence positions are Take-Two Interactive (TTWO), two Mexican airport operators (PAC) (OMAB), and RenaissanceRe (RNR), each of which are holdovers from previous years. Collectively, these positions represent just under 70% of my portfolio.
Take-Two is my largest position by a significant margin, and this year doubled the return of the market. Additionally, about 40% of my overall position is made up of LEAP calls expiring in Jan 2025 and 2026, which gave me leveraged exposure to the company that juiced my returns even further in 2023.
The critical catalyst for Take-Two remains the release of Grand Theft Auto VI, which was finally announced for 2025. The previous installment of the series (GTA 5) remains the highest-grossing entertainment release of all time. A successful sequel will likely blow the current record out of the water even before considering the possibility of an expansion into mobile – which, in my opinion, could have been a driving factor behind the 2022 acquisition of major mobile developer Zynga.
The long-term value of the GTA franchise (and the Rockstar studio more broadly) depends on the game holding up to scrutiny. The biggest risks going forward for Take-Two are simply the timeline of a GTA VI release, and then the execution risk related to the game’s development. With current forecasts suggesting a release in early 2025, I may look to take profits (especially on my LEAPs) if the stock price runs up significantly prior to release day, to reduce the risk of a flop. However, my long-term outlook on the company remains very positive, and I’m quite happy to keep it as my largest holding.
My second largest investment is in the Mexican airport operators PAC and OMAB. These remain my favorite way to gain exposure to the macro theme of nearshoring (though I have two related positions that I will discuss below).
2023 was a hectic year for this investment. In early October, each company released a terse statement indicating only that the Mexican government had “… decided, unilaterally and without any previous communication with the Company, to amend with immediate effect the terms…of the concession agreement” (which outlines the terms under which the companies operate). With no details to go on, the market’s reaction was extremely negative, and the stocks lost over 30% of their value intra-day.
As more information has come out, the stocks have significantly rebounded. The government decided to crimp the company’s margins slightly by reducing the size of a per-passenger fee they are allowed to charge, along with a more complex change to the way they calculate discount rates when setting tariff sizes going forward. The result will likely be slightly worse margins than previously anticipated, but the overall quality of the business has not changed.
What may have changed – at least for the near future – is the willingness of investors to overlook the political and regulatory risks associated with doing business in a developing country. Both companies continue to trade at particularly enticing valuation ratios, but there’s no guarantee of multiple expansion if the market fears that prospective gains will be capped by government interference. As for me, I continue to think that the strength of the businesses is more than enough to be worthwhile.
My final high-confidence investment is in the catastrophe reinsurer RenaissanceRe, which I most recently covered here. In the context of a particularly favorable P&C insurance market, RenRe was aggressive in 2023, spending $3B to acquire ValidusRe from AIG. Returns in 2023 were muted as a result, with the company requiring some time to fully demonstrate the benefits of increased scale, but I believe this will start to really shine through at the Jan 2024 renewals. The P&C reinsurance market remains quite attractive in my eyes, and I continue to see RenRe as the best way to play it. It should be noted that RenRe also suffered from an adverse political event this year, as the government of Bermuda announced and then implemented its first ever corporate income tax.
My medium-confidence positions are in Williams (WMB), Canadian Pacific (CP), Bladex (BLX) and Dolby (DLB), making up a collective ~27% of my portfolio.
I continue to value Williams’ position in the natural gas midstream market. The Transco pipeline is possibly the single most vital piece of energy infrastructure in the United States. I think that natural gas is a long-term winner in the energy marketplace and Williams stands to benefit from population growth trends along the Transco corridor, as well as the possibility of increasing LNG exports. That said, I’ve kept it as a medium-confidence position as risk-free rates have risen, making the stable cash flows slightly less attractive, and the company continues to use capital on tuck-in acquisitions rather than buybacks.
Canadian Pacific owns similarly vital transportation infrastructure and remains well-positioned to take advantage of growth in Mexican manufacturing after the acquisition of Kansas City Southern. However, I downgraded the company from high to medium confidence this year for two reasons: first, the rising interest rate environment poses some risk after the company levered up significantly to acquire KCS, and second, I felt that Bladex offered a more direct way to play the nearshoring thesis.
Bladex is a position I initiated early this year after learning of the company through Ian Bezek’s coverage on Seeking Alpha. The bank is based in Panama, funded primarily by a number of Latin American central banks, and is narrowly focused on short-term financing to support Latin American companies engaged in international trade. This positions the company to directly benefit from a return of manufacturing to the American continent.
Even after a 60% gain in 2023, Bladex appears quite attractively valued. The franchise is generating consistent double-digit ROEs in the higher interest rate environment, but the price is still well below book value and the dividend yield remains quite attractive at over 4%. Bladex has been choosing to deploy capital back into the business rather than increasing shareholder distributions – certainly welcome while the loan book is generating such excellent returns – but if growth opportunities slow down, they have ample opportunity to reward shareholders with buybacks or dividend raises.
Finally, I retained my position in Dolby, a leader in audio technology. Dolby continues to pursue growth via expansion of Dolby Atmos into additional device brands, and has not seen any erosion in the performance of its older television and radio codecs, allowing the company to maintain extremely high margins while funding continued R&D. I think the critical question for this investment is whether Dolby will be able to ensure that its technology is used in cutting-edge immersive audio/visual experiences, as represented by Atmos’ partnership with Apple Music.
I have two low-confidence positions, Sotera Health Company (SHC) and Doximity (DOCS), making up just over 3% of my portfolio.
Sotera is a position I initiated this April. The company is primarily engaged in sterilization of medical equipment and food products, and forms a duopoly in the US market with STERIS (STE). The critical open question surrounding Sotera was a serious of lawsuits related to claims of cancer caused by their ethylene oxide sterilization facilities. A ~$400M settlement was reached in the beginning of the year in the most significant suit, but questions remain as to whether this represent the end of potential legal liability, and what the capex burden will be for the company to bring their facilities into compliance with newer, more stringent regulations. If the company can successfully get past these issues, there is a very strong underlying business with good margins and solid growth potential.
Lastly, Doximity is a professional social network for medical professionals. The company is a “busted SPAC” that came onto the market in the middle of 2021 boasting eye-popping growth buoyed by COVID, but the stock has come firmly back to earth as growth trends have since normalized. Nonetheless, it’s a high-quality business with impressively high margins that is already quite profitable, unlike most of the failed growth stories that came out of the SPAC boom. The key question going forward is simply to understand exactly where the long-term growth and margin profiles of the business will normalize.
Looking Into 2024
Looking forward, I anticipate more portfolio turnover in 2024 then I’ve had in recent years. If the GTA 6 catalyst for Take-Two plays out as I expect, then I will hopefully end up realizing profits and distributing a decent chunk of my portfolio across smaller positions. I am also researching potential new additions such as Sky Harbour (SKYH) and Xometry (XMTR) – and will hopefully be more active contributing to discussions on Seeking Alpha this year.
Best of luck to all readers in 2024!