agri-business, Argentina, Boy's Own, CDS spreads, Cresud, Cristina Kirchner, drag queens, Falkland Islands, farmland, intrinsic value, Margin of Safety, nationalization, Repsol YPF, Sell in May, spring cleaning, Trinity Biotech, YPF
Remember that twisted Boy’s Own holiday you took with your mates a couple of years back? You know the one, when you ended up in that very dodgy club? Yes, yes, I know it’s all a little hazy. I mean the club where the performers turned out to have a little extra..?!
Remember that blonde & the brunette?! No, not like that, I really think it was more like this. Ah yes, it’s all coming back to you now… So, do you remember when that drag queen sat in your lap, wriggled and muttered something dirty to you? And you were terrified…but strangely aroused also? Yes, shameful, I know – now stop dreaming about it.
Well, that’s kinda how I feel too, when Cristina Kirchner is talking…
Since March, I’ve been feeling increasingly antsy about Argentina. Maybe I should have been keeping a closer eye on CDS spreads – that’s when they reached their recent nadir at just over 700 bps, before rocketing to today’s 932 bps. There’s been a steady ratcheting of anti-British rhetoric, and activity, from Argentina regarding the Falkland Islands - but that’s nothing new, so I tend to ignore it. Then there’s the ever-present threat of an over-heated economy, capital flight, an inflation rate that’s understated by a factor of 2 (or even 3) and, of course, rapacious and arbitrary government intervention. None of this is particularly new either… The final straw, however, was Cristina (Fernandez de) Kirchner’s latest announcement – the nationalization of YPF (YPF:US), by taking a 51% controlling stake. This would leave Repsol YPF (REP:SM) with just a 6% remaining stake, and a v uncertain compensation payment.
This nationalization’s straight out of the playbook of bankrupt (politically or financially, take your pick…) governments everywhere, and likely signals an accelerating descent into economic and political chaos…
I’m also conscious at this time of year of the old stock market saw ‘Sell in May, and go away‘. Barron’s just put up a rather stunning graph to illustrate this effect in the US. Wow! In a historical context (in simpler times) this saying makes perfect sense to me. As spring ended, and summer came on, crops were fully planted and money was tight - as September/October arrived, it was always v touch-and-go for a while, but then money started sloshing ’round the economy as harvesting was completed. These days, talk of bonuses being invested at the beginning of the year, and investors & hedge funds/prop desks then selling out for their summer holidays, seems a little too facile an explanation to me. But then again, my experience (and portfolio) definitely tell me there’s a lot of truth to this one..!
Interestingly, if you look again (at the Barron’s chart), a lot of people misinterpret the saying – on average, the summer months are not actually a dangerous time, they’re just dull! Regardless, as May comes ’round each year, I try to use it as a time of reflection. Sure, all my stock positions are wonderful (!?)…but what deserves to be pruned or eliminated? What stocks have deteriorating fundamentals, or face increasing micro/macro risks? What stocks are nearing their intrinsic value targets, and/or have a decreasing margin of safety? What stocks/investments have become increasingly/too correlated for their own good?
Call it a late spring clean - a tough exercise, and always painful to cut a stock (with such great potential..!). The best incentive I know of is to think of the freed up cash as firepower – to perhaps fund some great opportunities to pounce on as their share prices drift lower in the dog days of summer. At worst (or even better!), maybe you’ll have a nice lump sum come September/October – surely, the most dangerous time of year – to begin bleeding into the market! I’ve mostly pleasant memories of getting fully loaded up on stocks by end-November, just in time for Xmas!
So Argentina’s mess brings Cresud (CRESY:US) front and centre as the first spring cleaning candidate! While this is specifically a (severely undervalued) farmland investment, not an Argentina play, it is of course located slap bang in the Pampas! Despite the Argentina exposure, I argued that in the face of increased political risk, currency depreciation and high/hyper-inflation, real assets are what people seek out. They also tend to retain value best, both locally and in a global context (for example, retaining much of their USD value even when the local currency collapses). I still absolutely think this is true, but this is investing not Economics or Politics 101, I have nothing I need to blindly defend or prove here…
When I talk about retaining value, I’m talking about their underlying/intrinsic value over the medium/long term. Of course, that never stops market prices being marked down 20/30/50% in the interim when faced with a perfect storm of bad news and sentiment..! I’m not one for market timing, but I’m hopefully becoming more keenly attuned to obvious market threats/risks to individual stocks or my entire portfolio. There’s also the fact that CRESY’s trading right on top of key support around $10.70, followed by obvious support at the $10 level.
And if that level breaks (but note this is the ADR price, not the underlying ordinary share price), one can expect the US market obsession with actual $ share prices to kick in. Sorry, did I explain that correctly? In most parts of the world, people quite rightly don’t give a toss whether a share price is 20 cents or 20 dollars, but in the US the $10, $5 & $1 share price levels display an obvious psychological and/or tangible impact. I refused to accept this absurdity for a long time, to my cost, but now I bow down…it clearly exists!
This phenomenon’s also something I can hope to exploit, on occasion. Trinity Biotech (TRIB:US) ($10.72 currently) has steadily climbed from $2 in the past 3 years, but remains undervalued. In the past year, however, it can’t seem to properly break free of this $10 anchor. I’m v hopeful that if it can break $10.75-90 and the $11.75 five year high, it will finally pop up on the radar of many US private & institutional investors who have studiously ignored it to date. This could prompt the shares to rapidly jump to something like a mid-teens level.
On the other hand, a CRESY break of $10 significantly increases the odds of a cascade of sells, for a quick push to $9, $8 or lower… Putting all this together, I’ve bit the bullet and eliminated my entire CRESY portfolio holding. At the current $10.96 share price, this is a small 3% loss vs. my $11.30 Stock Writeup Price. However, I have an actual average net Entry Price of $9.20 on CRESY in my portfolio, so faced with current newsflow I’m happy to exit here with a 17%+ realized gain.
I’ll be a keeping a close eye on CRESY, but I’m not sure a cheaper share price would tempt me to buy back in, at least in the near term. I think I’d need to first see an appreciable lessening of Argentina risk (unlikely), or a cleansing collapse…and who knows how long that might take? Meanwhile, I lessen my portfolio risk, free up cash and I’m eying up other interesting agri/farmland (or other real asset) stocks that I might buy.