Time for a quick update on the “Fun Fund” for the first quarter of 2020. As a reminder, this is just a Roth IRA where I am planning to track my active investments/performance. As you may be able to infer from the title of this post, this quarter could have gone better.
As an introductory matter, I hope discussing financial matters will not seem callous. People are dying and losing their loved ones due to Covid-19. They are losing their jobs and homes and suffering great financial and personal tragedy. I am thinking of them and hope we all come through this time as well as possible.
I do focus this blog on financial matters, so hopefully this will provide a welcome diversion and/or provide some educational value to improve the financial outcomes for the author and readers. I hope all my readers exercise caution and we all come through this pandemic with our health intact.
With that said, this post is the first quarterly update I have done for the “Fun Fund” account. Great timing, I know. The markets, you may have heard, were down somewhat during the first quarter. Business is largely shuttered due to the global pandemic and effort to suppress the spread of COVID-19. That resulted in this:
The S&P 500 was down 19.45%. Foreign stocks were down even more. I managed to do far worse than that. I put up a -37.14% spot. So…not great.
In the chart above, I included a couple of value focused ETFs for some additional context. RPV is the Invesco S&P 500 Pure Value index and RFV is the mid-cap version. These indexes split the broad index and include only the cheaper stocks in the index and then weight by relative cheapness. They are much more “valuey” than the broader S&P 500 or S&P 400 value, which just split the index in half and then weight on float-adjusted market cap.
These portfolios are probably closer to mine (and what I intend my portfolio to be) than is the SPY. Both RPV and RFV were similarly smoked by the cratering in lower-quality, value stocks. I think most of the academics (and quants) would have said this experience fits with historical observations. In most past bear markets cheaper value stocks get smoked at the outset of a bear market.
RFV was down -42.44% and RPV was off -41.59%. So I did a little better than those, but honestly my stocks actually did about the same as these ETFs, because I am still about 10% in cash.
A Few NEW Bad Positions
To drill down a bit some of the positions in the portfolio which lead to this (sarcasm font) very material out-performance versus the relevant, appropriate, value benchmarks let’s go over a few of the positions/moves.
First, by the middle of January, I had redeployed most of my proceeds from the sale of BRX into ViacomCBS (“VIAC”) and Wells Fargo. I am now the not so proud owner of unrealized losses of over 50% in each position.
That’s sort of horrible. In an alternate reality, however, BRX is down ~55%. So if I had neither sold nor bought, I would be worse off (since I maintained about 1/3 of the proceeds in cash). Yet the timing of the purchases of the new positions could have been better.
I am still reasonably enthused about WFC. I liked Charlie Scharf’s appearance before Congress. I liked the letter and the changes to compensation in the proxy. I like that he bought ~$5MM of stock (at a better price than I got). I have been nibbling at it below TBV in other accounts. It appears to me that they are going to get the asset cap lifted (at some point). They have tons of room to improve their efficiency and ROE. It reminds me a lot of where BAC was back when I was buying the BAC-WTA in like 2011, but I like WFC more in the long-term.
WFC is not going to perform well in a “great cessation” with zero interest rates, but the role the big, oligopoly, banks are playing in the loan programs from the SBA (anti-fraud boots on the ground using their existing data and relationships…as far as I can tell) and distribution of Treasury checks via the existing data and how many households they touch, combined with their ability and the requirement to invest in “omni-channel” banking really make me appreciate their role/competitive positioning. I am still buying WFC (just a little….I’m a retail piker) below TBV in another account.
Viacom…yeesh. I do like that they were able to raise ~$2.5 billion in debt (due 2025 and 2031 at sub 5% rates). In times like this, you get concerned about liquidity. I mean losing march madness (and all live sports) is not ideal. But I suppose they are better off than many businesses which have ZERO revenue coming in. I find myself doing like cash burn calculations on companies that are not even silicon valley “hope” offerings (with zero chance of profits in the near future). Crazy times.
I’ve know people are concerned about their ~$20 billion in debt and it is not a strong position to be sure, but they should be able to generate some cash (just look at some of their licensing/arms deals). As a comp, they have modestly less debt than NFLX and their gross profit is almost 50% higher on TTM. Granted it’s a worse hand/growth profile than NFLX (especially in the $2 subscription category), but the valuations are very different as well.
Due to covid-19, VIAC had to shelve the proposed sale of their Manhattan office tower. Management had implied that the funds from this sale would partially be used for stock buybacks. Viacom did close on the purchase of Miramax. Seems like a decent library that they picked up.
I will say I am not at all enthused about the streaming strategy/offering. Mr. Market seemed to start slamming them after the first investor day/call following the closing of the merger where it seemed (to me) like they had no real plan for the streaming service(s). They didn’t even have like a “Peacock” strategy: just kind of a generic, “meh, house of brands”.
Speaking of that, I am trying out the 30 day free trial of CBS all access. I am at least going to watch the new Star Trek series: Picard. You can try it out as well through this Amazon link (I think I get like $.07, if you do).
So far, it seems like a very thin catalog available the service. There is not even really any kid content on the service (and these guys own Nickelodeon). I have to admit I never really liked most recent CBS shows. I think they are more targeted to an older demographic. They have some stuff that would draw eyeballs, however, like Big Bang Theory and SouthPark. Those are both currently licensed to AT&T for the HBO service (I think). I don’t see everybody loves Raymond on their either. I could see that being popular to stream. There are also like zero movies (not even the Trek movies) on the service.
We do get our local CBS affiliate (that’s the best local news outfit here) through the service, so that has some attraction for local news. It seems to me like they should put all their stuff together under the Showtime brand or something. I know it would be painful to cannibalize their current business (at least most of the re-runs/old dvd/NFLX filler business) but to me Disney has shown that “This is the way”.
I do like the advertising supported Pluto platform, which seems to be growing users fast. FYI it has a Bloomberg TV live stream offering (with no ticker). I also get trying to play “arms dealer,” but I would feel a lot better if they had a decent lifeboat with a solid consolidated streaming offering (or at least plans for one).
I also am sort of coming to understand what people are seizing upon with “linear” t.v. A set-up where like some person in Burbank “programs” what is on what “channel” at a given time and you either like that or not seems very antiquated versus like a YouTube or NFLX algorithm that serves you stuff you might like based on your history and or trends among other users who have some similarity in interests with you. I could even see like a TWTR or FB really becoming big players in this because your social network can probably do the searching/programming for you and it kind of reinforces itself with the interactivity (like the old water-cooler discussions about Seinfeld).
So, I’m not sure I would buy Viacom now, given some of the other opportunities available in this environment, but I have some rules that I am implementing in this account (I will probably write about these at some point) and I am not permitted to sell it.
what else went wrong?
In addition to these two new positions, I have about 10% of the portfolio in cash and I have some other crappy, value stocks that got killed, like $COTY and $NTCO. I will say like 40% of the account is now in $CAG due to the fact that it was a pretty big position and it has performed really well versus the market (and even better versus the other trash in my portfolio). I might lighten up on it a bit if it rallies more. I was trying to sell it above $40 last year, but I might adjust that down a bit just because it is highly levered and they have really benefited from all this food hoarding/quarantine time. I also might dump $NTCO on a good rally. I don’t know about a junk rated Brazillian C2C discretionary, beauty retailer in this pandemic. I also have started nibbling on a couple of other positions, but I want to do full posts on them later.
In conclusion, the fun fund was crushed last quarter, but I am thankful to be healthy and employed. I should have my personal finance net worth/investment update out later this week. I am co-working with two dachshunds and a toddler so it has been tough to find time. Thanks for reading. I hope you stay safe!