Like most investors, my portfolio went for a wild ride in 2020. During the worst of the crash (for me, at least), on the morning of March 16, I found myself down approximately 51% on a year-to-date basis. By year's end, I'd clawed my way back to finish higher by 13%, including dividends paid.
I'd hoped for a calmer year in 2021, but that's not exactly what we've received.
Through the first (nearly) three months of 2021, we've watched retail investors on Reddit whipsaw dozens of heavily short-sold companies and/or penny stocks, and navigated through numerous triple-digit point swings in the tech-heavy Nasdaq Composite, which has been perturbed of late by rapidly rising Treasury bond yields.
These wild first-quarter vacillations have allowed me to buy two new stocks at what I believe to be an incredible bargain, while at the same time reducing my stake in, or completely exiting, two other stocks. Let's first take a closer look at the two companies I added to my portfolio in Q1.
Bought: Kirkland Lake Gold
It's no secret that I'm big a fan of gold stocks, with the industry home to plenty of deeply discounted value stocks. With the precious metal getting pounded in recent weeks, I took the opportunity to open a position in Kirkland Lake Gold (KL) on March 1.
The buy thesis on Kirkland Lake is macro and company-specific. On a macro basis, I like the prospects for the lustrous yellow metal to hold its ground or head higher. The Federal Reserve has pledged to keep lending rates at or near historic lows through 2023, and ongoing quantitative easing measures from the nation's central bank will continue to increase the U.S. money supply. In other words, the war on the U.S. dollar continues. Since gold and the dollar have an inverse relationship, ongoing dollar weakness should lead to a healthy and higher gold price.
But I like more about Kirkland Lake than the company simply benefiting from higher average selling prices. In particular, the company's three producing assets have some of the most attractive all-in sustaining costs (AISC) among mid-tier to large-scale mining companies. In 2020, the approximately 1.37 million gold ounces produced were done so with an AISC of $800 an ounce. That's an operating margin of more than $900/oz., based on the current spot price for gold.
Furthermore, no gold stock offers a more impressive balance sheet. Kirkland Lake Gold ended the year with $847.6 million in cash and no debt. In case you missed that, I said a mining stock with no debt! The company also spent $732.4 million last year repurchasing 18,925,000 shares of its stock, and tripled its quarterly dividend.
Currently valued at less than 7 times projected cash flow in 2021, Kirkland Lake looks like a no-brainer bargain.
Bought: Northern Star Acquisition
The other stock I piled into between late January and early March is Northern Star Acquisition (STIC). Northern Star is a Special Purpose Acquisition Company (SPAC) that's merging with dog-focused product and services company BarkBox. The merger is expected to close sometime in the second quarter.
Why BarkBox? The simple answer would be the unstoppable growth that surrounds the U.S. pet industry. Despite navigating our way through the dot-com bubble, the Great Recession, and the coronavirus pandemic, it's been at least a quarter of a century since consumers spent less on their pets, year-over-year. With the number of pet owners increasing significantly over the past three decades, companion animals (dogs and cats) are a steady source of growth.
More specifically, BarkBox's fiscal third quarter results showed it had roughly 1.1 million subscribers. That's up from the 663,000 it had nine months prior. To boot, the company's product retention rate was nearing 95%, marking an all-time high. In simpler terms, people are loving the themed monthly delivery for their dogs, and a vast majority of subscribers are sticking around.
What's more, BarkBox offers more than enough innovation to differentiate itself and foster sustainable rapid growth. Last year, the company introduced Bark Eats, a personalized line of high-quality dry foods for dogs, and Bark Home, which allows users to purchase collars, dog beds, and other basic-need accessories.
Northern Star (soon to be BarkBox) offers gross margin of around 60%, expects to effectively double sales between fiscal 2021 and fiscal 2023, and is valued at roughly a third the multiple to sales of its closest competitors. In my view, it's a screaming buy, which is why I've made it a top-10 holding.
Reduced: First Majestic Silver
I also used the market's wild swings to lighten my position in silver stock First Majestic Silver (AG -2.88%). In roughly a four-week stretch between late January and late February, I reduced my stake by about 40%. First Majestic has dipped one spot to become my third-largest holding, with a cost basis of just $2.06 on my remaining shares (it closed at $16.86 this past weekend).
Why sell? The primary reason had to do with valuation. Having covered the silver and gold mining stocks for more than a decade, I've come to believe that a multiple of 10 times cash flow (be it current or forward-year) is a fair valuation. Throughout parts of February, First Majestic's multiple relative to forward-year cash flow extended to between 14 and 17. That seemed a bit excessive and the perfect opportunity to lock in some long-term gains.
The reason First Majestic Silver rocketed higher is that it was one of the first stocks identified and targeted by Reddit's retail investors on the WallStreetBets chatroom. Among the roughly 50 publicly traded gold and silver stocks, First Majestic's short interest was far and away higher than any other company, which made it, along with physical silver, a target for retail traders looking to effect a short squeeze. When it initially popped, I made sure not to pass up the opportunity to pare down my position at an advantageous price.
But understand that just because I locked in gains, it doesn't mean I'm bearish on physical silver or First Majestic. Physical silver generally does very well in the early stages of an economic recovery as demand for goods picks back up. I simply felt I had too many chips on the table based on the cash flow premium First Majestic Silver was trading for.
Sold: American Eagle Outfitters
Finally, I gave retailer American Eagle Outfitters (AEO 0.20%) the boot this past Friday, March 19. American Eagle, which runs teen-focused, mall-based retail locations, as well as intimate apparel stores under the Aerie brand name, was a stock I purchased in March 2020. Following a nearly 250% return in a year and a week, I decided to lock in those gains.
Although I'm proud of American Eagle Outfitters' execution, and I've always valued the company's management team and its ability to quickly move unwanted inventory, there's also some historical precedence here. In more than 20 years, American Eagle's stock has seen the light of day above $30 only once (late 2006 into early 2007). Over the past 14-plus years, American Eagle has tacked on over $1 billion in additional annual sales, but it's yet to surpass the $1.70 in earnings per share it generated more than a decade ago. Paying close to 20 times sales for a mall-based retailer is less-than-ideal, in my view.
American Eagle Outfitters also leaned on debt to beef up its balance sheet during the pandemic. While this is a practice that a lot of companies used, it tarnished what had been a predominantly pristine balance sheet.
It's possible that growth from Aerie could make my sale this past week look premature. Aerie's digital sales in the fourth quarter shot up 75%, and comparable sales jumped 29%. But with a comparable sales drag of 8% from its flagship American Eagle stores, I believe locking in these gains was the prudent move. I still like the company, just not the valuation. It'll remain on my watchlist.