Oil Will "Crush" All Other Investments In 2023: Harris Kupperman's 2022 Portfolio Review
While I work to put the finishing touches on my “23 Stocks I’m Watching for 2023”, one of my favorite investors, Harris Kupperman, has offered up his own portfolio review.
While I work to put the finishing touches on my “23 Stocks I’m Watching for 2023”, which should be out this week, one of my favorite investors that I love reading and following, Harris Kupperman, has offered up his own position review for 2022 heading into 2023.
Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection. Mr. Kupperman is also the chief adventurer at Adventures in Capitalism, a website that details his investments and travels.
Harris is one of my favorite Twitter follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest thoughts to Fringe Finance, published below - bold emphasis is QTR’s.
Harris Kupperman’s 2022 Position Review
It seems that everyone has a blog these days. Once a year, we must stop everything, tally up the scores and see who got it right. Besides, what’s the point of going through all this effort, if you cannot point to your record of continuously nailing major trends and investment themes. Even when I get one wrong, there’s a learning process involved in admitting the mistake and avoiding future ones. With that preamble out of the way, let’s dive into the 2022 Position Review. (Prior Position Reviews 2021, 2020, 2019, 2018)
*Normally I publish the review a bit closer to the last day of the trading year, but I’m headed out to Sicily and then Malta for a well-deserved vacation. Don’t worry, I’ll post plenty of vacation pics…
Historically, the year-end review has focused on individual stock tickers, but over the past year and change, I’ve been migrating this blog to focus more on the big picture trends, while Kuppy’s Event Driven Monitor (KEDM) picks up the tickers themselves (or at least the ones that aren’t small caps). With that in mind, let’s dig into the trends, before doing a recap on some legacy positions held over from prior years.
From a performance standpoint, 2022 was something of a listless year after two big years (2020 & 2021) for the home team. For whatever reason, the themes on my books simply didn’t trend; meanwhile I failed to properly capitalize on the trends that dominated the year. That said, 2022 was a painful year for many and a slight positive return certainly feels like a win—especially as I frequently run my book well over 100% net long.
In my mind, there are times like 2020 and 2021 when they literally give the money away, and then there are times when it becomes harder. The pros know the difference between the two and when it gets difficult, they pull back on exposure, score small wins, and wait for the easy times to return. Meanwhile, the amateurs get chewed up during the hard years and have no capital left for when it gets easy again. As the Fed became increasingly dominant in 2022, I continued pulling back on the exposure and risk side. Those who’ve followed this blog for some time know that I’m fast to ramp up market exposure if the narrative changes. Until then, my goal has been to avoid doing anything stupid, slowly stack my chips, and make it through to the other side for when things get easy again.
Fortunately, my roadmap for 2022 saved me from a whole lot of trouble. Admittedly, it was an incredibly contrarian and ballsy call (precisely the type of call that you’ve come to expect from this blog). I challenged orthodoxy by pointing out that after a decade of out-performance, Ponzi Schemes would have a rough year. That undertow would eventually drag down the Tiger-40 list of slightly more “real” businesses, and finally the rot would creep up into the “compounders” that a generation of investors had learned to buy without any regard for valuation metrics. I’m proud to say that I positively nailed this call.
Looking back on that call, I cannot believe how incredibly contrarian it was to say that investing in frauds would be a bad idea. In retrospect, this should have been obvious to everyone, but a decade of outperformance made everyone forget this simple fact. Unfortunately, the other side of my pair trade (value stocks) didn’t perform as well as I had expected. Many of them are up on the year, just not up as much as I had hoped. This is likely caused by an anticipated economic slowdown, due to rapidly increasing interest rates. One could say that the market is looking through a period of over-earning and penalizing their share prices—despite many of these companies trading at low single-digit earnings multiples on full-cycle earnings.
While my exposure remains subdued, I have an amazing shopping list of near-monopoly value names to purchase when The Pause comes, if it becomes obvious that the long end doesn’t completely panic. I’ve spent much of the year building on this list, but have done little besides continue to learn the names better.
Turning to other themes, my strongest held view is that 2023 is the year of oil crushing all other CUSIPs. I know I made the case in early 2022 for a similar outcome, but sometimes things just don’t play out on my schedule. In the months since then, there has been minimal spending growth on exploration, while global demand has continued to rebound and grow. The postponement of my theme was mainly caused by the unexpected purge of SPR inventory, along with China going offline due to germs.
These two trends seem destined to reverse during 2023. Meanwhile, Russian oil production is permanently impaired and likely in free-fall. When I tally these three components, I come to a mind-numbing swing of nearly 5 million bbl/d. Now, I know the swing cannot actually be this large—mainly because demand will suffer given the magnitude of the swing. However, demand will only suffer at triple digit oil prices.
While I was off on the price of oil, my energy investments mostly appreciated. I haven’t spoken about offshore oilfield services on these pages, but a pretty good chunk of my exposure is through Valaris (VAL – USA) and Tidewater (TDW – USA) and they’ve both been stalwarts in my portfolio during 2022. Given their valuations, I suspect that they’ll continue to lead the energy markets higher.
Of course, I also had an overweighted position in oil futures and futures options, and these did not appreciate as much as hoped, but maybe they’re just deferring my gratification until oil murders every other CUSIP. Once again, I think it’s important to repeat that if you haven’t stress-tested your portfolio for oil prices north of $200, you’re going to suffer dearly when that should come to pass.
My other core theme was a continuation of the housing strength witnessed during 2020 and 2021. On this score, I was wrong. Housing is now starting to roll over as interest rates take a bite out of affordability. I’ve since tossed my housing supply names, though they trade north of where I mentioned them. While I remain bullish, I’m going to wait for construction activity to bottom and begin its recovery. The demand is there, but not with current interest rates. As an inflection investor, I like to joke that the best inflections are the ones where I get the thesis horribly wrong, yet make some small money anyway, as I was disciplined on valuation. I know I won’t win them all, but not losing when the thesis is wrong, is a different sort of victory that isn’t spoken enough about.
With that waltz through the big picture completed, let’s go through all the positions I’ve publicly carried over from 2022.