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3 Ideas for 2022 (only 12 days late)

In an attempt to be more disciplined in my investing, I'm adopting the following approach before making any significant moves in my investments:

  1. Consider the market innocent until proven guilty; that is, assume market estimates of individual security value are almost always better than my own estimates
  2. If I really do think I know better than the market, and want to make a trade or investment on that basis (which is to say, buy anything that's not an index fund), I have to write up my reasoning for why I think the market is wrong

So here's what I'm buying (or have recently bought) now, and why:

  • Energy: once burned, twice shy

    • Energy is the textbook definition of a cyclical industry; if you know where you are in the cycle, it’s trivial to make money. The problem is, it is often really hard to know where you are in the cycle. Right now, though, we are in a rare sweet spot: energy stocks have underperformed over the last 10, 5, and 3 years, and yet outperformed over the last year. This is historically a good place to be in a sector rotation generally. More specifically, since the negative oil prices in 2020 pretty clearly marked the bottom of a cycle, and energy cycles tend to last more than 1-2 years, it seems very unlikely that we are currently at the top.
    • Why is the market wrong? 10 years of pain in a sector is enough to really turn some investors off, and I don't believe that 1 year of good performance is enough to completely rinse out that bad taste. In other words, I believe there are significant pots of dollars simply unwilling to look at energy stocks right now, holding valuations down.

  • Big China tech: victims of forced selling

    • There has pretty clearly been some forced selling in Chinese stocks over the last year. Legitimate fears of delisting will do that. The setup reminds me of European sovereign debt (and banks) in 2010-2011, and Russian equities / debt in 2014-15. Anytime you have fund managers getting calls from their investors asking “what’s our exposure to ___?” there will be non-economic selling pressure, and that’s an opportunity as long as the assets in question are really worth something. At least for the big 2 (Tencent and Alibaba), I’m willing to bet they are.
    • In the case of Alibaba specifically, the increased regulatory attention could even be a blessing in disguise. My main worry with this particular stock in the past has been that Jack Ma might decide to keep all the profits to himself. While that’s still a possibility, I think that if anything, Ma will now be more likely to shy away from the most egregious brand of self-dealing shenanigans when there is already a regulatory target on his back.
    • My main play here has been Naspers, thinking that even in the unlikely event that Tencent ADRs are delisted from US exchanges, Naspers ADRs won’t be, and the South African company’s Tencent stake will still be worth something (at a discount for sure, but it’s already at a huge discount). That’s been the wrong move so far, as Tencent ADRs have outperformed those of Naspers over the time I’ve held, but I still like both going forward.

  • Roku: the next (the last?) major device platform, not yet appreciated as such

    • Why is this undervalued? One, it has a history of being undervalued; the stock is up roughly 10x since a relatively unheralded IPO less than 5 years ago, growing gross profit 4x over that period. Yes, I'm considering it a good thing that the stock is up a whole lot in a short time, although that's not a good enough reason on its own.

    • Second, there are reasonable worries about Roku's business in the short term, but I don't believe they will ultimately matter.

      • The primary bear case is that other larger, deeper-pocketed tech companies (Google, Apple, Amazon) will squeeze Roku out of the Connected TV / TV Operating System market. I’ve seen this before, and I’m always willing to bet on the more focused player rather than the player with more resources. It sounds ridiculous now but similar arguments were made that more established players (Nokia, Motorola, Research in Motion) would beat out upstart Apple in the smartphone market once they got their act together. They never did.

      • To be clear, I’m not calling for Roku to be the next Apple, because the CTV / TV OS market will not be as big as the smartphone market, but I do expect them to win, whatever this market turns out to be worth. And I suspect it will be worth a lot, as the OS owner will, one way or another, be able to extract a good deal of the value from the advertising that goes on within their systems. They to control the identifier used for advertising, which is the most valuable strategic asset in programmatic advertising. Look no further than Apple's mucking with IDFA and the waves of panic sent out through the app install ad market to see who's in control of that ecosystem.

      • A second negative thesis is that the largest TV manufacturers will refuse to partner with Roku. Who cares? TV hardware is a commodity; if Roku has the best software, consumers will buy TVs with a Roku OS regardless of the manufacturer; if they don’t have the best software, they will lose anyway regardless of hardware partners.

    • Finally, this is still fundamentally a software market, and therefore likely a winner-take-most market, and Roku is still the current market leader.

    • All that said, I’m less confident in this one than the first two. The more words I need to type to make my case, the more suspicious I am of it. But given the asymmetric outcomes (up 5x if I’m right, down a maximum of 1x if I’m wrong), I am still making this bet.

Disclosure: I am long TCEHY, BABA, NPSNY, ROKU, and a variety of energy stocks including CNQ, EOG, SU and CVX