We introduce Petrobas ($PBR) to the Babylon Burns portfolio at $18 on September 17th, and added more at $19.92 on September 1st, making it the portfolio’s largest position.
It closed Monday at $24.14 having returned 34% in 7 weeks on the initial investment, and 30% overall on the full investment.
It has climbed to a 6.5% allocation in the portfolio.
When I first bought the stock in the Babylon Burns portfolio, I added the note to members:
“Deeply discounted cash flows and a payout that hands most of them back. A rerating to peers gets us paid with oil going nowhere. Higher oil is the bonus.”
On Monday crude oil fell. While I believe there is a very good chance the worst is past us when it comes to spot oil, and that the back-end of the strip will continue to rerate higher, Petrobas didn’t need any of it to increase by 11.5% on the day.
On Sunday, Brazil voted in the first round of its presidential re-election, during which Jair Bolsonaro upset the incumbent president, Lula, with 47% of the vote versus 45%.
That was in big part, why I liked Petrobras so much: we could buy its cheap stock that handed us back cash in droves, where there was a good domestic story for a re-rating without any help from the commodity.
Now, the unflattering part is that, despite this, the portfolio is currently flat since inception.
You should note that with this kind of strategy, where many small positions are taken and then turned over as stops are hit or I decide that they are not worth taking, this kind of behavior is to be expected in the inception months (during which the winning trades haven’t fully had time to play out). The losing trades, which are validated much faster, drag the portfolio down.
But there is one of our stocks which has been doing extremely well, and it is up 45% since we added it to the portfolio in mid-August. It has made up for most of the losses that we have realized on small stop losses and any other unrealized losses. At this point, I still expect to ultimately resolve and go my way down the line. Of course, that won’t be the case for all of the positions, but what I mean to say is that I like where the book is positioned right now and will continue to generate more ideas.
Paid members get a full portfolio report below. Every position I closed and what it cost. The September decision that turned a 3% gain into a 3% loss in four weeks, and why that was still the right decision.
They also get the whole book. All 30 positions, with the winners and losers named and sized. That includes one stock that’s up 54% since August and has nothing to do with oil.
And they get what I’m doing with Petrobras before Brazil votes again on 25 October.
Plenty of newsletters will show you the winners. This one shows you EVERYTHING. Winners, losers, PNL.
Of course, until it’s been a year or two, there is little value in measuring the behaviour and performance, but if anything, the preliminary data is showing that the strategy is at the very least a great diversifier to the S&P 500. My expectation is that the alpha is still all there to be unlocked, making this a wonderful time to join Babylon Burns.
