"In terms of WPL, what are your current views in terms of exit strategy?Reading your analysis I would think on a fundamental investment case basis youare holding onto your allotment as crunch time hasn’t arrived yet.However, keen to know if you think its wise to lock in some profit now and letthe rest run."@Clueso,
These always tend to be "how long is a piece of string?" questions for which the answers are always specific to each individual.
For starters, I think portfolio construction is very important for risk management purposes, so the overarching answer depends on how much of one's capital one has exposed to a single company.
I used to run highly concentrated portfolios (12-15 stocks) when I was younger and had more appetite for risk, but these days I maintain a far larger portfolio spread (45 -50 stocks, sometimes more given the opportunity set at any given point in time).
My portfolio is constructed based roughly on the following matrix that provides a guide as to what % of each stock should be in my portfolio, by setting investment return potential against the riskiness of an investment, i.e., how much conviction I have in that envisaged return being delivered:
View attachment 4189415In effect this is a risk-adjusted return tool for ranking stocks and it is obviously merely indicative, as opposed to being prescriptive, of the sort of portfolio holding levels to have.
For example, when I first acquired WPL, my valuation assessment pointed to the stock having the potential to more than double, but at that stage the supply-demand thesis was still in its infancy, and the company had serious questions about how Scraborough was to be funded, and so my level of conviction was somewhere between "LOW" and "MEDIUM", therefore a ~2% position was initiated.
But something dramatic changed not long after I first bought the stock: The merger with BHP's petroleum business was announced, which will have the effect of totally de-risking WPL's balance sheet.
In the middle of 2021 WPL was project-rich, but capital-constrained while BHP was generating surplus capital but didn't really have many internal projects to which the capital could be deployed.
So merging project-rich; cash flow-poor Company A with cash flow-rich; project-poor Company B was eminently sensible and it took away a number of conviction headwinds.
So I now had HIGH conviction in the investment idea (doubly assisted by the increasing signs that the global oil demand recovery accelerating and with clear evidence that the supply side was hamstrung.)
At that point the matrix readings were ">100% POTENTIAL UPSIDE" with conviction level now "HIGH".
So I duly dialed up the portfolio weighting to the 6% max.
Fast forward to today and around half of the upside that I envisaged has been delivered, so I think there is still some 50% upside potential. Conviction remains HIGH, obviously.
In that case the matrix guides me to a 3% or 4% portfolio position.
But because of the outperformance of the stock, it now occupies a position around 7%.
So I am currently double overweight WPL, which means that I will need to start reducing my position commencing at some point in coming days.
The reason I have bored you with this long history is because your question about when I will sell WPL doesn't have a nice crisp mechanistic answer.
There is the process I've described above and then there is also the personality trait of me being a bit of a stock hoarder by nature, with a general reluctance to sell stocks unless something out of left field occurs that busts my investment thesis (in which case I sell hard and fast). In general I tend to be a "quick buyer", but a "slow seller"...in the past I have found this has served me well.
But what I would never do is "lock in profits and let the rest run" without having some sort of thought-out framework on which to anchor.
As for WPL "retracing a tad", I never let that sort of thing concern me; when we are talking about making 100% returns on investment, a few % retracement at various points along the way is little other than "noise", in my opinion.
As for your comment, "
Its almost a daily challenge to ignore the news snippets of the day and focus on the longer term under supply which will come home to roost at a larger scale than most people believe," I'll leave you with this thought:
It has taken the better part of 20 years for the structure of the energy world to get to where it is today; it is going to take more than just 20 days or 20 weeks or even 20 months for the imbalances to get sorted out. Some days the politicians and the media reports will pitch it as though the energy shortage is getting sorted out, but it won't be.
Because, during a financial crisis, you can simply print money to stop the pain; but if an energy crisis hits, you can't simply print energy.
Energy creation requires long lead times, measured in years; and that's even when there is multi-partisan willpower to create new energy.
Today even that willpower is distinctly lacking.
Which makes this time different to previous times.
[*] "This time is different": one of the most dangerous phrases when it comes to investing. But this time really is different.
PS. I'll take the coal stock discussion on notice and respond before too long on the appropriate stock forum.
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(20min delay)