He who dares not offend cannot be honest. Thomas Paine wrote that in Common Sense, and according to the Internet, Instagram and Meta (FB) have been banning that phrase this week. In yesterday's column I took on the cadre of ESG-addled market savants who seem to dominate the media these days with the introduction of my HOAX model portfolio. Today I will look back before I look forward. My Real Money Top Pick for 2021 was Air Products and Chemicals (APD) .
At yesterday's closing price of $303.89, APD posted a 13.31% gain for 2021. Adding the $1.50 per quarter 2021 dividend rate gives an annualized return of 15.5% for APD in 2021. Solid, but about half of the S&P 500's ~31% return for 2021. Creating economic value, but still lagging.
For 2022, do I try to keep up with this extraordinarily overvalued market - as measured by forward P/E, dividend yield, the Buffett ratio, etc. - or do I, as Fleetwood Mac would say, go my own way? You can guess the answer to that rhetorical question.
But can I offend... and still outperform? I don't think anyone is offended by Air Products, and APD's green angle was one of my main motivations for granting my 2021 Top Pick status. APD's hydrogen is a very valuable energy carrier, but it lagged the market this year. If it is even possible, I need to be more offensive!
After introducing HOAX yesterday, and taking gratuitous shots at the faux-wokies who compose most of Wall Street's and seemingly all of Financial TV's stock market coverage, I think I need to be nastier to win in 2022. I want to be offensive. I don't care about a few Extinction Rebellion protesters dancing outside a company's HQs. No, I want a name that is truly out of favor, and therefore truly undervalued.
In doing research for this column, I came across this website. The polar bear on theimpactinvestor.com's homepage is now my spirit animal. To determine whether there are now more polar bears than there used to be, a fair question, I went to the website of the Polar Bear Specialist subgroup of the International Union of the Conservation of Nature and learned that:
The Polar Bear (Ursus maritimus) is currently classified as Vulnerable (VU) on the basis of a projected reduction in global population size due to loss of sea ice habitat. Loss of Arctic sea ice due to climate change is the most serious threat to polar bears throughout their circumpolar range but action to mitigate this threat is beyond the ability of either the IUCN SSC Polar Bear Specialist Group or the five governments that comprise the Polar Bear Range States.
Is the polar bear population growing or shrinking? Short answer: they don't know. And that's the point. It was also the point of my column yesterday. Let's just stop listening to people who don't know what the hell they are talking about, especially when it comes to something as important as our portfolios.
My RM Top Pick for 2022 is one of theimpactinvestor.com's least favorites: Norilsk Nickel, usually known as Nornickel (NILSY). NILSY is off most U.S. investors' radar screens, but does sport a $45 billion market cap, and, as I mentioned, I believe the U.S stock market, as a whole, is wildly overvalued. So I cast the net wide to find value, and let's take a quick look at Nornickel.
Nornickel produces palladium, which represented 42% of 2021 revenues, platinum (4%) and copper and nickel (21% each) from its mines in Russia and Finland, many of which are located north of the Arctic Circle. Nornickel's website is a veritable cornucopia of media describing its ESG bona fides, and clearly, despite what polar bear lovers might think, this company is hip with the investment community's zeitgeist heading into 2022.
A quick look at Trading Economics shows that prices for copper and nickel have gone stratospheric in 2021, while palladium prices have pulled back in 2H after a jump in 1H. Higher commodity pricing catalyzed torrid results for NILSY in 1H 21. Revenues rose 33% to $8.9 billion and the company produced an almost incomprehensible 64% EBITDA margin. A full 20 pages of NILSY's 78-page 1H report are dedicated to ESG themes, but I just can't stop thinking about that EBITDA margin. Inflation rules!
That's what I want in my portfolio for 2022. Companies that benefit from inflation, not lose because of it. Norilsk's positioning, with Ni/Cu and Pd representing equal proportions of its revenue mix, gives exposure to both legs of the vehicular powertrain value chain. Nickel and Copper are hugely important for EV architecture, especially in higher-energy density battery cell configurations like NCM and NCA, and palladium is the key ingredient in catalytic converters. So, NILSY would seem to be naturally hedged toward either outcome in the electrification/non-electrification of automotive powertrains.
I am buying Nornickel today. I want that cash flow... and that inflation hedging.
