September 2024 Portfolio Review: Part 1
We just closed the books for September and Q3 2024. Please note our returns for the month, quarter, and year-to-date below:
September: +9.47%
Q3 2024: +11.67%
YTD 2024: +43.36%
This compares to the S&P 500’s returns of:
September: +2.02%
Q3 2024: 5.25%
YTD 2024: +20.81%
We don’t trade against a benchmark, and our strategy doesn’t fit into any “style box.” That said, the S&P 500 remains the global standard for next-best available options for 99.99% of investors. So there you go.
This week, we examine a few monthly stock charts and update our valuation models. Spoiler alert: our best performers still have a long way to go!
We alerted our Macro Ops Collective members to each of these stocks before they made their 100%+ runs.
Speaking of our Collective … This week, we opened enrollment to our Macro Ops Collective.
The Collective is our full-kit soup-to-nuts service that provides research, theory, and a worldwide killer community of dedicated traders, investors, and fund managers.
We’ve been told that there’s nothing else like it on the web. If you’d like to tackle markets with our group (which, I should note, has been having a great year in markets), just click the button below and sign up.
As a Collective member, you’ll learn all about our Trifecta Lens approach to markets. The one that allows us to confidently trade any market, any instrument, in any market regime.
This post describes a few examples of our numerous trades this year, which have allowed us to outperform the market since 2020.
If the Collective sounds like a group you want to call home, join us at the link below. Spots will fill up fast.
Alright, let’s get after it.
Monthly Stock Charts: The 30,000ft View
“Price action is far more important than any other information, and if you sacrifice some of what it is telling you to gain information from something else, you are likely making a bad decision.” - Al Brooks
There are two benefits to using monthly time frames for tape reading:
It orients my technical views with my fundamental views (i.e., a longer-term fundamental trade should coincide with longer-term technicals)
It removes all the noise of shorter-term, less meaningful price movements (i.e., As long as the trend remains intact, who cares about daily price action if I plan on holding the stock for 18-24 months?)
Starting with the A’s …
Andean Precious Metals (APM.V)
APM closed September with a monthly bull breakout bar above its upper Bollinger Band for a confirmed VBO. Notice the compressed Bollinger Bands from January until September.
The price is now outside the congestion zone. The next bullish target is a tick above September’s high of ~CAD 1.50/share.
We’re up ~73% from our cost basis with an average R-multiple return of 5.86R between our two legs. However, there’s still plenty of upside left.
As I mentioned last week, APM has more cash than before the Golden Queen acquisition. The Golden Queen asset pays for itself; it’s earning ~$4/oz in pure profit from its silver operation, and the company keeps buying back stock.
PM investing legend Eric Sprott bought another 700,000 shares this month, too.
Despite its share price increase, the company trades for <1.3x cash, 0.6x revenue, and 1.5x EBITDA.
I ask monthly, “Does this position still meet our Trifecta Lens criteria?” If it does, I look to add on pullbacks. If it doesn’t, I start thinking about trailing stops and taking profits.
Does APM.V meet our Trifecta Lens criteria? Yes.
Fundamentals: Very cheap, growing production, not getting credit for Golden Queen acquisition or gold/silver price increases
Technicals: Monthly VBO on above-average volume
Sentiment: Everyone still hates precious metals junior miners
Let’s review the valuation (see below).
Another way to think about it is you pay ~3x Golden Queen's cash flow and get APM’s silver operations (which generate $16M in cash) for free.
The combined mining operations generate a 46% FCF yield or $0.38/share in pre-tax profits.
Here’s where things get interesting. If the junior miner market heats up, APM will fetch 5-10x cash flow multiples. That’s not a stretch. They’re a multi-asset, bimetallic producer with net cash, high insider ownership, and a history of buybacks.
That leaves us with another 200%+ upside potential (see below).
This is nice because my original assumption was that we’d get a double, maybe a little more. Now, APM has a path of 3-5x in 2-3 years.
Upcoming Catalysts:
Q3 2024 Earnings: Golden Queen AISC will be the most critical metric.
Renewing NCIB: The fact that they haven’t done this yet makes me think they’ll …
Buy another mine: Tier-1 or 2 jurisdictions at a great price, something like Golden Queen, with a mix of cash and debt (no need to dilute with their balance sheet).
Upcoming Risks:
Metals price crash: Would take a considerable drop considering AISCs and silver margin business model
Bad terms on future mining deal: Don’t think management would take a poor deal when they can buy back their stock at 40%+ FCF yields
Stock issuance: I don’t want to see it. Even in an M&A deal, the reward must be tremendous to dilute. Plus, management owns 50%+ of the common, so it is doubtful.
Idaho Strategic (IDR)
IDR has been our best-performing investment across any asset class. It’s up 150% from our original entry for a 7.24R profit.
We’ve written extensively about the company here, here, and here. I also had CEO John Swallow on my podcast, which ignited our buying.
When we first bought the company, IDR was a $60M market cap gold producer with no following and no social media presence. Since then, they’ve added $151M in market cap, gained a larger following on Twitter/X, increased gold production, revenues, and profits, and spoke at Ian Cassel’s MicroCap Club conference … *breathe*
The chart speaks for itself. I don’t know what else I could add. IDR, specifically John Swallow (and his son!), exceeded all expectations.
Holding this stock has been the most challenging part of the year. I can’t tell you how often I’ve texted Alex, “Hey, I think we should take some profits, even if a little; the stock just looks overextended.”
Each time, Alex managed to yank my finger off the trigger.
A stock’s price will converge with its long-term earnings power. So, let’s think about valuation.
My IDR thesis is that the company will ramp production from 5,000oz/year to 20,000oz/year in an inflecting gold price environment.
Let’s assume they hit 20Koz/year with a $2,700/oz gold price and $1,300/oz average AISCs. How much would you pay for this business? Tier-1 jurisdiction, small share count (12M), low float, highly profitable, with the US’s most extensive REE land package.
In a raging bull market, 15-20x EBIT is normal. At 15x pre-tax profits, IDR is worth $420M, or 200% upside from the current share price (see below).
Again, this model is very simplistic (read: rough), but it helps me hold during the ride-up.
A quick note on the technicals. IDR broke through its double top at $10-12/share. The last bit of resistance is the prior all-time high of $17.50/share from April 2006. I have no idea where IDR trades from here. It has an equal chance of pulling back 20-40% as it does blasting past $18/share.
Mineros S.A. (MSA.V)
MSA is a mid-tier gold mining company operating in two countries, Colombia and Nicaragua. We bought our shares at CAD 0.81 for a CAD 243M market capitalization. Today, the stock trades at CAD 1.23/share for a $342M market cap.
Check out our research on the company here, here, and here.
Here’s what I wrote about MSA.V in our most recent earnings recap (emphasis mine):
“Q3 will be MSA’s “show me” quarter. I don’t want to make snap decisions based on one quarter’s data. However, we have many ideas for recycling our capital with higher shareholder yields.
APM.V may deserve this capital.
MSA is on a short leash. We’ll exit the position if we get another poor quarter. Until then, we’ll collect our dividends and await management’s earnings call tomorrow.”
We’re still in the “show me” stage and awaiting Q3 2024 results. However, there are two reasons for optimism:
1. Depreciating Colombian Peso: MSA.V sells its gold in USD and pays expenses in Colombian pesos.
So, an appreciating peso increases AISCs and reduces profitability. We should see the depreciation benefits flow through this quarter (USD up ~10% against the peso since June).
2. Tax payment unwinds in H2 2024: MSA.V frontloads their tax payments during the first half of the year, which means fewer tax payments in H2 2024. That should provide more incremental free cash flow for dividends and buybacks.
Let’s look at the monthly chart.
Since its March breakout bar, the stock has traded sideways in a seven-month flag/rectangle. After such a significant move, we should expect this digestive price action.
Also, we have a clear risk point at the September low to either reevaluate our position and add or cut if fundamentals deteriorate. Either way, the worst-case scenario is we exit with decent gain (barring any massive gap-downs … knock on the nearest wood, please).
Let’s look at valuation.
I get $149M in pre-tax cash flow on a $247M EV company (60% yield). Suppose the market values MSA.V at a ~20% yield, which seems conservative. But it's a Colombian alluvial operation.
That gets us another 189% upside from the current price with a target EV of $712M.
However, we have a tight leash on MSA.V and will cut if Q3 2024 disappoints on AISCs and margins.
Hemisphere Energy (HME.V)
HME is a textbook example of a leader leading. The stock is up 64% over the past year, while crude oil returned 19.30% during the same period (see below).
You can read our original write-up here.
The company has everything you want in an E&P stock.
They own low-decline, high-quality production assets, have no debt with minimal abandonment liabilities, and use free cash flow to buy back stock and pay regular/special dividends.
Plus, management owns 19% of the company.
It’s a boring story. But we love boring. Look at the latest buybacks.
And just last week, the company announced another special dividend (emphasis added):
“Given the strong financial position and performance outlook of the Company, Hemisphere is pleased to announce that its board of directors has approved the declaration of a special dividend of C$0.03 per common share, in accordance with its dividend policy.
The special dividend will be paid on October 25, 2024 to shareholders of record on October 11, 2024, and is designated as an eligible dividend for Canadian income tax purposes. It is in addition to the Company's quarterly base dividend of C$0.025 per common share.”
HME is one of the cheapest oil stocks globally, trading at 3x NTM EBITDA (see below).
Quality matters, and eventually, the market will realize HME’s above-average capital allocation, balance sheet quality, and management team and re-rate the company somewhere around 5-6x EBITDA (or another double from here).
Conclusion: Leaders Lead
One thread connects each of these positions: They all have the highest relative strength in their industry/peer group and outperform their underlying commodity.
Over time, our biggest winners have been the stocks with the highest relative strength against their industry—the ones consistently making new highs, not new lows.
The market is filled with ideas like APM, IDR, MSA, and HME. Our job at Macro Ops is to find them, analyze them, and alert you to them before anyone else realizes the opportunity.
Our Trifecta Lens approach to the market is repeatable, durable, and able to withstand any market cycle or regime.
We’ll be out with Part 2 of our Portfolio Review later this week. Stay tuned!
