28 01/22 28/01/2022

Weekly Newsletter Week 4

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WEEK 4 | JANUARY
WEEKLY NEWSLETTER

 

OVERVIEW

  • Financial Markets & EconomiesQuality Companies
  • Good to KnowThe Effect of Rate Hikes on Stocks
  • Your portfolio highlights Höegh LNG Partners (Solar USD Bond Fund)
  • In other news: (1) Markel Announces Conference Call, (2) Brookfield Renewable Acquires Premier Renewable Developer Urban Grid, (3) Berkshire Hathaway Pitches $3.9 Billion Iowa Wind and Solar Project, (4) Buffett plans in-person Berkshire annual meeting
Financial Markets & Economies

There was increased volatility these past weeks sending markets into correction territory (when markets decline by 10% or more from a recent high). This is usually seen as a good time to buy additional shares to average down on costs. This however is only recommendable for fundamentally strong companies where the underlying value remained unchanged. The fear of interest rate hikes (now confirmed by the Fed) and slowing growth together are the cause of the recent selloffs.

According to YahooFinance, the financial data speaks for itself. The only way to protect ourselves in this environment is by buying quality. Quality is defined here as cash flow generating, margin growing, well-capitalized companies. Companies that are able to grow despite high inflation and interest rates hikes. According to a Goldman Sachs research, quality companies outperformed their counterparts by a whopping 24% during the last Fed hiking cycle. There is a clear rotation to quality going on. As most of these quality holdings hold their grounds in this volatile market, most of the less quality holdings are not faring very well.
 

 

 

How the gap between pure growth (ARKK) and pure value (BRK-B) converged in 1 year
 
Good to Know

Although quality companies outperform their counterparts in times of interest rate hikes, the stock market in general has historically closed in the green during those years. To go through the equation backwards, the Fed announced it will hike interest rates this year to slow down increasing inflation. High inflation in principle is caused by strong economic growth. Aggregate demand in this case expands faster than aggregate supply due to various reasons. Be it re-opening of economies, supply chain constraints or labor shortages.

Fast expanding aggregate demand is generally good for businesses as it enhances corporate profits and positively affect the stock market. Stocks have risen at an average rate of 9% during the 12 Fed rate hike cycles since the 1950. The markets closed positive 11 out of those 12 years. Therefore, statistically speaking, 2022 is likely to end in better shape than it started. By transitioning to high quality holdings one can enhance returns even further.

 
Your Portfolio Highlights
 

Höegh LNG Partners is a Master Limited Partnership (MLP) that provides floating liquid natural gas services under long-term contracts. The partnership owns and operates floating storage and regasification units, liquid natural gas carriers and other infrastructure assets which are all under long-term contracts of 5 years or more with major energy and utilities companies. ​Höegh is one of the most experienced operators of liquid natural gas carriers with a 40-year track record. The company is also one of the few operators of regasification units in the world. Despite the pandemic, Höegh LNG Partners is 100% operational and recently closed a new 10-year contract in December 2021. Höegh’s contracts has an average of 9 years remaining and almost all of these contracts have been extended several years prior to the contract ending.
 

MLPs explained
MLPs are all about cash flows. In essence, an MLP is a business enterprise that historically has been measured largely by the stability and predictability of its cash flow. As a tax passthrough entity, the amount of cash flow is enhanced, as the MLP itself does not pay any Federal income taxes. These tax savings contribute to the lower cost of capital enjoyed by MLPs. With all this being said, Höegh LNG Partners is a great cash flow generator that is a good addition to any fixed income fund or portfolio. The company returned +10.26% so far this year for the Solar USD Bond Fund.


*Please visit the Höegh LNG Partners website for more information or click on the picture below for their latest presentation.

The Solar USD Bond Fund (SUBF) is a bond investment fund investing primarily in high yield corporate bonds of U.S. issuers with a minimum S&P rating of CCC. The fund may also invest in USD bond funds. The Solar USD Bond Fund aims to generate a stable long term cash flow. The generated cash flow will not be distributed but reinvested. The Asset Allocation is diversified into different asset classes, market sectors and maturities of industrial and consumer products and services companies. The Solar USD Bond Fund analyzes the credit quality of the issuer, the issuer's potential for success, the credit rating, the economic risks and the current and potential future valuation. The SUBF returned
-0.61% ytd.    
 
 
In Other News
  • Markel Corporation (MKL) announced that it will hold a conference call on Thursday, February 3, 2022 beginning at 9:30 am (Eastern Time) to discuss quarterly results, year-end results, and business developments. Investors, analysts and the general public may listen to the call free over the Internet through the Company's website in the "For investors" section. A replay of the call will also be made available from approximately one hour after the conclusion of the call until Monday, February 14, 2022.
     
  • Brookfield Renewable (BEPC) acquired the clean power developer Urban Grid and its high-quality pipeline of projects comprising approximately 13,000 megawatts of utility-scale solar and 7,000 megawatts of energy storage capacity for $650 million. The addition of Urban Grid’s projects approximately triples Brookfield Renewable’s U.S. development pipeline to approximately 31,000 megawatts of capacity, making it one of the largest renewable developers in the country.
     
  • Berkshire Hathaway is proposing to spend $3.9 billion to bring more wind and solar generation to Iowa in a project that could be among the renewable industry’s biggest. The “Wind Prime” renewable-energy project would bring 2,042 megawatts of wind generation and 50 megawatts of solar power. That could produce enough to power about 600,000 homes. The firm is also planning to fund studies about technologies that could help with carbon capture, energy storage and smaller nuclear reactors.
     
  • Berkshire Hathaway plans this year to let shareholders attend the company's annual meeting for the first time in three years, amid signs the Omicron wave may have peaked in the United States. The event will also be webcasted for a seventh straight year on Yahoo Finance on April 30th. 
 
We wish you a pleasant weekend and hope you stay safe.

Kind regards, 
Shernel Thielman 
Investment Manager 

www.lunarasset.com | shernel@lunarasset.com 
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