2023: A Year In Review
Performance Review & Positioning Updates (December 2023)
For the last 26 weeks, I’ve written on a new situation each week. It’s been an enjoyable process but a time-consuming one. I plan to take a break for the holidays so this will be my final post of the year. I’ll resume my regular weekly cadence of posting the first week of January next year. Thanks again for your support and happy holidays to you all!
Reminder—what this newsletter is about:
For those new to the newsletter, I write about complex situations that I personally find interesting. Typically, these involve credit/credit-like instruments (e.g., preferred equity, trusts, post-reorg equity, etc.). Consider these write-ups as real-time diligence journals summarizing complex situations that often require a credit investors’ perspective. Importantly, I tend to avoid names/situations that are already well-covered, even within distressed debt, because you can already find a plethora of information on these situations from the likes of sell-side, independent credit research, or even Twitter. Rather, this newsletter aims to systematically review companies that lack even basic coverage, in the hope that this might create mispricing opportunities. By definition, many of these situations are illiquid, not actionable in size, and/or have very wide bid/ask spreads. Almost always, these are low-quality businesses (i.e., #shitcos) which means they are NOT long-term investments but trades that must be monetized.
The process behind the madness:
Each week, I review a new situation using public information, typically without prior background in the company or often in the industry as well. My to-do list is derived from several pricing screens I run; occasionally, I investigate highly topical situations (e.g., Macy’s) that pop up in real time.
As you may have noticed, often there is no recommendation (in other words, a “pass”) because the bonds/stocks (or instruments in question) don’t seem particularly interesting as either longs or shorts. In credit, which generally experiences negative convexity (capped upside, 100% downside), avoiding the “losers” is often just as important as picking the “winners.” If I had a high conviction trade idea every week, you would (and should) question my credibility. In my experience, I have only a few very solid ideas a year, so expecting a well-thought-out and highly actionable idea every week is unrealistic by any standard.
Note that each situation is typically brand new to me, and I spend no more than a week on each; therefore, I am bound to miss some information. Hopefully, I cover most of what’s needed to form an opinion, but I can imagine missing things like industry commentary from competitors. My goal is to provide enough relevant information for anyone looking at the situation to quickly get up to speed with the key areas needed to make a decision, or at the very least, to give them a narrower and more focused path for further due diligence.
Performance review and methodology:
In the following post, I review and provide an update on the 26 ideas I’ve posted since June 2023. The average long position has returned 18%, and the median long has returned 11% (note that these are total returns, not annualized figures, i.e., IRR). Among the more seasoned write-ups (excluding any posts from 4Q’23), the average and median long positions have returned 25% and 17%, respectively. Conversely, the average and median short positions are down 17% and 21%, respectively. Please note these are simplistic calculations and in no way a recommendation, endorsement, or an official track record. This is NOT financial advice and for purely informational purposes only. I have provided links below to each original post so you can (a) audit the time-stamped posts for yourself and (b) reference the original thought process.
This batch of write-ups includes some notable bond outperformers (+30-50%), including one double (+100%). Admittedly, there has been one significant mistake where the bonds are down 17%. There have also been a few instances of “passes” which ultimately proved to be correct decisions, as those bonds/stocks have been wiped out (e.g., the FTCH converts). Overall, I am satisfied with my decision-making process this year, with some notable outperformers in, generally speaking, low-quality companies. This is what we call #shitco investing.
Regarding return attribution methodology, I am using end-of-day prices as of the publishing date or the last trading date (if published over the weekend). These returns are all approximations, and I am using the Bloomberg Total Return function for consistency. Pricing on some of the preferred/illiquid instruments is challenging (given wide bid/ask spreads or no pricing at all), so I’ve had to manually calculate them. I haven’t double-checked these, so there may be some errors, but directionally they should be correct and should not change the magnitude of relative outperformance. Please note that these returns include interest/dividend payments but do not include borrow costs on short positions, which can be high in some instances. I’ve also provided the total returns of the S&P 500/Russell 2000 and IG/HY indices over the corresponding periods for benchmark comparison purposes.
What to expect in 2024:
A few weeks ago, I sent around a survey to better understand you all. It is a bit challenging writing for a mixed audience that comprises both institutional and retail investors, especially since the latter is likely unable to directly transact in corporate bonds. I’ve tried to find a sweet spot in the form of exchange-traded debt or “baby bonds” but please note, there is adverse selection in these credits. Moreover, there are not that many of them to begin with and the ones with attractive pricing are few and far in-between.
Regarding topics, I have a list of interesting small-cap credit situations I want to explore further. I plan to review these systematically and write about them in a style similar to my previous posts. There may not always be actionable items in these cases, but in either scenario, I will provide my preliminary views on the situations. If there are any noteworthy situations/companies you’d like me to investigate and look into further, feel free to respond directly and I will consider it.
Moving forward, providing a quarterly update on every single write-up is quite time-consuming, especially as I plan to review a new situation every week. This would mean nearly 80 names to update quarterly by the end of 2024. In light of this, I may either (i) limit these quarterly updates to semi-annual ones, (ii) provide real-time updates in the subscriber chat, or (iii) highlight the most notable price changes (e.g., top/bottom 5 performers).
Lastly, I will be increasing prices by 17% at the beginning of next year (January 1, 2024). Anyone subscribing before then will be grandfathered into this year’s prices. If you have any other questions, comments, or feedback, please let me know. Would love to hear your thoughts over the holidays!
Disclosure: The information provided is for informational purposes only and should not be considered as investment advice. Any investment decisions made based on the information provided are at your own risk. I may have a financial interest in the securities discussed, which could influence my views. It is essential to conduct your own research and consult a qualified financial advisor before making any investment decisions. Investing involves risks, and past performance is not indicative of future results. By using this information, you acknowledge that you are responsible for your own decisions and release me from any liability. Seek professional advice tailored to your financial situation and objectives.