Portfolio Highlights and Lowlights
Considering how poorly most asset classes performed in 2022, Contra the Heard had an excellent year. The Vice-President’s Portfolio was up 11.7% thanks to a combination of good stock picking, a significant cash buffer, and big wins. Since its inception in January 2010, the total return has been 270.6%, for an annualized gain of 11.6%.
Posting excellent results in an up market is one thing, but beating the market in a downturn is exceptionally important to the preservation and growth of wealth over the long run.
As the good ship Contra sailed upstream against the bearish currents, a fair bit of cargo was discharged in lucrative fashion. Century Aluminum was sold for a 415.1% gain in February.
This outcome was wonderful, of course, but we immediately kicked ourselves when, in the wake of Putin’s invasion of Ukraine, the shares spiked past our $18.39 sell price to a high of $30.36. The trajectory quickly reversed itself, however, and in September it hit a low of $5.27.
Next up were a pair of sales of Cameco, for returns of 217.0% and 240.6%. Then Bel Fuse was dispatched in three tranches, netting 106.9%, 130.7%, and 180.9% — plus dividends. As a further bonus, these gains were realized in months rather than years.
Among those holdings that stayed in the fold, Shawcor was up 179.8%, while many others were ahead by double digits.
Ah, but some rain managed to fall on our parade. Caesarstone and Ampco-Pittsburgh fell by about half, while Credit Suisse cratered 68.5% — those bankers keep shooting their toes off. In the President’s Portfolio, Mobile TeleSystems evaporated, delisted after the Ukraine invasion.
Long-time subscribers will be aware that the portfolios have historically been boosted by takeovers. Between 2011 and 2021, a hefty 16 Contra positions were acquired. That is a significant figure, given our concentrated investing style.
The past year was unusual in that there were no mergers in either portfolio, which was not for a lack of effort. Rogers’s takeover of Shaw is still clearing regulatory hurdles, and the Yamana acquisition remains pending. Hopefully, 2023 will see these deals close and a handful of other ones appear.
North American Equity Markets
One of the most acclaimed motion pictures of 2022 was Everything, Everywhere All at Once, and without a doubt, that phrase describes the economic backdrop in 2022: inflation at multi-decade highs, rapidly rising interest rates, an ugly yield curve inversion, the largest land war in Europe since World War II, and rising geopolitical tensions. Amidst the chaos, Wall Street had its worst year since 2008.
When it comes to measuring the performance of markets, Phil prefers to use total return indexes as a yardstick over the more widely followed composites, which track price movements. In the States, the total return indexes include the Dow off 6.9%, the S&P 500 down 18.1%, the Nasdaq lower by 32.5%, and the Russell 2000 down 20.4%.
Closer to home, the TSX Composite and TSX 60 total return indexes declined 6.6% and 7.0%, respectively. As one would expect, the price-only indexes — which exclude the influence of dividends — were even more diminished. No matter which benchmarks you prefer, the picture in 2022 was ugly.
Global Equity Markets
Farther afield, most countries’ exchanges were also in negative territory. The biggest developed market losers were Ireland, Austria, and the Netherlands, which fell 22.4%, 23.9%, and 24.6%. The only national stock exchanges to achieve modest gains were in Portugal and the United Kingdom.
Among emerging markets, South Korea, Taiwan, China, Hungary, and Poland all declined more than 22.5%, but some saw gains. The Greek exchange was in the green, as were another dozen or so nations, including Brazil, Chile, Egypt, Indonesia, and Kuwait.
The winner for 2022 was Turkey, with an impressive 159.2% return in local currency, or 83.9% in USD. This explains why the TUR ETF in Phil’s personal portfolio and Turkcell in Benj’s did so well.
Stocks were not the only investments that took it on the chin. Bonds had their worst year in decades as yields shot higher. This changing dynamic in the bond market, along with the return of significant inflation, has had profound impacts on those drawing a fixed income.
Real estate turned on a dime, too. The era of easy credit and widespread bidding wars has been replaced with crickets as buyers stay away. Though home prices have corrected slightly, higher interest rates have zapped any semblance of affordability. Consequently, the odds of a recovery in the housing market in 2023 are low.
Bonds and real estate had nothing on crypto, though, which crashed and burned in a fire of fraud and financial folly. Is crypto cheap now? Who knows? Who cares?
Even commodities had mixed success, despite their reputation for strength when prices are rising. WTI was up 7.6%, Brent crude leaped by 11.4%, natural gas soared by 19.0%, and uranium locked in gains of 11.9%. Lithium jumped 91.9%, while king coal more than doubled, up 129.3%.
Metals were mixed: gold, silver, and iron were basically flat, while copper and steel were down by double digits. Rice and soybeans enjoyed majestic hikes, but wheat was as flat as the prairies where it grows. Rubber, coffee, and lumber were all big losers, down 25.6%, 26.0%, and 67.4%, respectively.
Contra’s 2023 Outlook
Valuations are lower than they were a year ago, but are still high historically, which is not exactly a good sign.
Moreover, Benj first warned of a possible recession early in 2022, when few others where making that call. Now economic analysts, economists, and consumers generally agree that a contraction is in the cards.
With good reason: an inversion in the bond yield curve is one of the more reliable indicators of an economic downturn; the deeper, longer-lasting, and more geographically widespread it is, the worse the ensuing slump tends to be. The current inversion has been deep and long, and has been observed in many other countries besides Canada and the US.
Bear in mind that central bankers may prefer a recession to continued high inflation. It is their version of the trolley problem: in a hobbled economy, companies shed workers, and while the pain of unemployment will be profound for those few, the sting of rapidly rising prices is felt by everyone. So, pick your poison. Economics is a cruel discipline.
If there is a silver lining to this gloom, it is that it is often better to buy when the economic news is getting worse. It is also rare for indexes to weather two significant annual drawdowns in a row, much less back-to-back annums where the benchmark loses more than a fifth of its wealth. Note also that the third year of the presidential cycle is often the best for stocks.
Low investor sentiment and high insider buying go into overdrive whenever the market takes a leg down as well. The terms “smart” and “dumb” money get thrown around a lot, and definitions for each vary, but a strong argument can be made that insiders represent some of the best-informed individuals out there, while ordinary market participants are some of the worst informed. Therefore, investors should be heartened to see insiders buying while others sell.
Our Annual Top Picks
Always up for a challenge, Benj and Phil have entered the MoneyShow’s annual stock-picking contest, which asks participants to submit one income-oriented pick and one growth-focused selection.
Benj, hot off his 2022 win in the Uncommon Sense Investor’s contest, has gone with Quarterhill and Caesarstone. Phil has put forward Orange and SSR Mining. These names should be well known to subscribers, and here is to hoping they excel in the year ahead.
Changes in Contra Land
No matter what 2023 brings, the merry Contra team will stay the course. We will continue searching for unloved companies, buying into stocks with a reasonable chance of recovery, and managing the portfolio’s cash balance through economic cycles.
It means relishing crashes or sell-offs, and buying while others clam up, freeze, or flee. It also means sitting on our hands once stocks land in the portfolio and selling into optimism and momentum.
This approach is imperfect and is always being refined, but at its core, the strategy employed by Contra the Heard since the 1990s has worked well over many business cycles.
While Phil is now officially in charge, his responsibilities are largely unchanged thanks to a methodical transition built over many years with the company. This edition marks the first time that Ben and Benj have not been involved in the writing, but fear not, the founders are keeping busy with analysis, Globe and Mail columns, and administering the business side.
It is also the first edition where most of the PP positions and all the VPP holdings have been merged into a new portfolio Phil manages called the “Contra Portfolio.”
Bill MacGregor, who has been contributing for many years, has stepped up and will be writing about the former President’s Portfolio positions not included in the Contra Portfolio. (We will cover these in a new section called “Legacy Positions.”)
In the background, Lloyd Davis remains at his post, where he has been since October 2000. We are always grateful to Lloyd for catching our mistakes, improving Contra’s readability and sharpening our content.
We thank you for subscribing, and special thanks go out to our long-term readers for your ongoing confidence in us and our approach. Contra’s journey into the unknown continues!