OFS Basket Review Q1 2024 Part 1 (of 2)
A check-up on how things are going
I have mentioned a few times that I own a basket of OFS companies rather than my usual concentrated microcap positions. I thought I would write a post to hold myself accountable and potentially (and very selfishly) get ideas/feedback from my readers.
Part 1 will focus on how the specific trades have performed. In part 2 I will go over the specific companies and my assumptions for the rest of 2024 and beyond.
This is the second time I have taken a top down approach to OFS. The quick and dirty is that I think we have underinvested in carbon based energy production and will rely on it far more than most care to acknowledge.
Look I get it, these aren’t great businesses. This isn’t VISA, MSFT, XPEL, AAPL, etc. So if you want extremely high quality business/compounders/stocks-that-only-go-up then this post isn’t for you.
I’ll take a look at performance from a few different lenses.
Was it a wise time to invest in OFS cos in general relative to an index?
Within the sector, did my picks outperform?
Did my picks outperform the market overall?
Overall conclusion.
For this I will using the XEG.to ETF to track performance for OFS cos. I will benchmark this against two ETFs, XIU.to (TSX 60) and QQQ (Nasdaq). I didn’t take currency swings into account so keep that in mind. I did my best to factor in dividends. How I did this was that every time I purchased a position in an OFS co I tracked the price of each of these ETFs. This includes when I sold positions. This isn’t perfect. but it’s the best I can do.
1) Was it wise to bet on OFS in general?
This tells me if my instincts were correct from a top down standpoint.
Here are the results of the different indexes. The average holding time was 1.25 years or 5 quarters. The top chart is the open positions and the bottom is closed positions.
The XEG (OFS index) returned on average 17.2%. This is better than the average TSX 60 return of 11%. Both of these are well below the return of the Nasdaq, which had an average of 37.2%.
Conclusion is that purchasing the XEG was better than the XIU. This is somewhat positive as it made sense to put capital into the energy sector. However the index that just don’t quit, QQQ, was better than XEG.
2) Did my picks outperform within the O&G sector?
Here is the chart including my picks.
The average return of my picks has been 39.5% vs the 17.2% of the XEG. So far, I have picked better companies than the index I use to track the sector.
3) Did my picks outperform the market overall?
So this puts things into perspective. I have on average outperformed the QQQ. With the average holding time of 5 quarters, I will let you decide if this has been a smart decision.
Below is a chart of the Nasdaq over the last 5ish years with the orange dots representing when I added to my OFS basket.
Did I take on more risk? Was I lucky? Will I ever deadlift 600lbs again? These are questions that we don’t have answers to.
4) Overall conclusion
I am happy with my choices so far relative to the XEG.
Having said that, I could have done almost as well buying the QQQ.
Another miss is that I should have been more aggressive purchasing shares in OFS in 2021. Though I didn’t put much capital to work at the peak of the XEG, I could have waited a bit longer for a better entry point.
As far as the stock picking side, the largest miss by a mile was buying QST. I was warned and ignored it. There were other companies that I was looking at adding that I felt had similar dynamics and I chose QST. Bad choice as the other companies have performed well. Thankfully within the basket QST was always the smallest.
The OFS has slightly outperformed the remainder of my portfolio in aggregate for what that’s worth.
The numbers are what they are. I would give myself a B for this so far.
Looking ahead
I will continue to hold my basket, though I am going to make some minor shifts within it. I will likely pivot toward companies that are directly exposed to market sentiment. Will that be wise? I guess we will find out.
Many investors are adverse to cyclical companies. If you owned O&G companies in 2021 you made good money as judged by XEG.to being up over 70% but nobody cared because it wasn’t SaaS, crypto, a SPAC or somehow disrupting an industry. If you owned XEG.to in 2022 you made money while the market was down and you were a rockstar. Since mid 2022 things have been sideways to down for O&G investors. It’s probably been even worse for any microcap companies.
The majority of my portfolio is concentrated in microcaps, so this gives some diversification and/or diworsification.
Thanks for reading. Feel free to comment or shoot me a message.
Dean
Nicely done! I do like cyclicals when no one is interested in them.