2nd Quarter 2025 update and newsletter
As we close the first half of the year I want to highlight some of our successes as well as talk about where we see the opportunities today and in the future.
Since we manage individual accounts with various goals and risk profiles we can’t really cite a rate of return and use it for gospel across our entire clients base.
However i do think that it is informative to our clients to see how we are doing relative to the market. year to date our firm is up 12.6% collectively. The S&P 500 index has advanced 5.54% in the same time period. Most of our clients have resoundingly outperformed the market. I’ll talk a little bit about why a little later.
For those of you have underperformed that metric I would say that over time the rest of the portfolios will revert toward the mean and outperform at other intervals. Over a long period of time say 10-15 years these returns should be similar. outperformance tends to flatten out and under performing catches up. We don’t manage to a metric per se. Our goal is to select the best investments for each client at a particular point in time. Money invested this month might be invested a little different if brought in next month. It’s all about opportunity set.
THE MARKET
I’ve heard several people say this feels like a “casino” market. Where the riskiest junk gets bid up in hopes of unloading it later to someone else. It reminds me a little bit of the late 1990’s when internet stocks got bid to crazy valuations and quality “old world” businesses took a back seat.
This is not to say that you should have a sell mentality. The reality is there are fantastic investment options available today in areas that have been dismissed or ignored. Everyone wants to talk about Nvidia but they don’t seem to grasp the valuation concerns. When I say you could make 15% a year on a bus manufacturer that operates in a closed system with only 2 smaller competitors they yawn. The reality is investing is hard and often the seeds of great returns are planted well in advance. Which leads to our next subject.
NATURAL RESOURCE INVESTING: THE ONE SECTOR WHERE LIFE CHANGING RETURNS ARE POSSIBLE:
Nearly a decade ago I wrote about the attractiveness of investing in natural resources. To be successful in this sector one should look to industries or sectors where capital investments have been choked off or greatly reduced. For 2 decades uranium, metals, platinum, oil, natural gas and other elements required to run society and move it forward have underperformed. While the rest of the world has enjoyed a bull market many of these sectors have languished. Which has led to less investment into them. Over time our thesis has played out. This lack of investment leads to undersupply while the demand for many items has grown nearly every year. Eventually prices will exhibit the reality of the situation.
We added Cameco to many of our portfolio’s nearly a decade ago. CCJ is the largest uranium miner in the world and due to its size has cost advantages many in the industry do not have. We established a position in Cameco in 2016 and added over the next couple years. Our thesis was simple. Uranium markets run on cycles or better said super-cycles. Super-cycles can last for several decades and are very robust. Gains can be life changing. We started buying Cameco at 8-9$ a share. Today CCJ trades in the mid 70s. It took longer than I anticipated but the advance in price is not a surprise given the depth of the uranium bear market.
In that same vein, (that’s kind of a mining joke) we have been a pretty consistent buyer of Sprott Resources stock. We added Sprott in 2018 at prices in the low 20’s. Sprott is a very well managed asset management business. The business serves over 250,000 clients and has $35B under management. Sprotts investments focus is on precious metals and natural resources. They manage mutual funds, ETF’s, private equity, and debt management. They also are owners of gold, platinum, and silver. By my calculation Sprott is the 5th largest owner of silver in the world. The business is incredibly capital efficient. Meaning they require very little in capital or additional investment to keep the doors open. As they bring in more dollars to manage OR the funds do better Sprott makes more money. There is very little incremental cost to making these extra dollars. We think Sprott has the capacity to increase their stock 5-10 times. So far this year the Canadian traded stock is up 56%.
The cyclicality of Cameco eliminates it as a permanent investment. Expect this position to be strategically reduced over time. However Sprott is totally debt free and has excellent long term growth prospects. We will stay informed on both.
GOLD AND SILVER
No natural resource conversation should occur without the mention of Gold and Silver. We started investing in precious metals over a decade ago. Our gold mining roster has been less successful as an investment. In that time the precious metal has doubled compounding at 8.6% annually. In that same time several of our gold mining stocks have underperformed. Which reminds me that investing in gold mining stocks is really, really hard.
First of all gold mining is capital intensive. It requires lots of investments into equipment, people, studies etc. Many companies issue more shares or borrow to buy their competitors, expand the kingdom. The last mining bear market laid to bare many of these problems and have weeded out some of the worst offenders. I have come to the belief that investing in this area should be restricted to royalty companies and an asset manager (like Sprott). We do own Seabridge which is the largest deposit in the world. Seabridge is a little unusual in that they do not wish to operate their mine but would rather have another company operate their deposit in Canada and take a royalty stream as payment. The spread between the value of mine and the stock value is large enough to warrant a long term position.
My research shows that gold will continue to trend up maybe for a very long time. Since the freezing of Russian assets in Europe, central banks have been buying much more gold. Central bank purchases of gold have increased 5-fold since 2022. Emerging markets central banks have a much smaller allocation to gold than their peers in developed markets. I would expect them to continue to play catch up.
Silver
Silver is gold’s kissing cousin. While gold prices are up 30% this year silver is up 26%. But we believe the outlook for silver in the short run is much rosier than for gold. Let me explain.
One metric we follow over time is the gold to silver ratio. This metric is simple: it’s the price of gold divided by the price of silver. When the ratio is high silver is cheap compared to gold. The ratio today is nearly 100 to 1. Pretty close to an all-time high. Historically when the ratio is at high levels silver tends to do better than gold. The average 1 year return when the ratio nears 100 is around 40%. One thing to note is at these extremes gold still does pretty well. The average return has been around 10%. Also at the highest gold to silver ratios, silver is still higher 100% of the time one year later. Still probably not an absolute guarantee but a pretty high probability that a year from now silver is higher.
The other long term trend for metals, and natural resources is the retail markets hardly own any of these assets at all. I’ve looked at countless portfolios over the last few years and nary a single one had a meaningful allocation to these assets. According to data research less than 1% of investors own any natural resource assets. These are very small markets. What do you think will happen to the price when Morgan Stanley, Stifel Nicolaus and others decide their clients should own them?
AI
Much of the excitement these days is surrounding Artificial Intelligence and its potential for the future. AI stocks are the rage but are they worth it?
It could be that AI becomes ubiquitous and all the investment in this sector becomes a race to the bottom. In the end there is no pricing power because everyone has it, mostly for free. Like tap water. The winners win because they have scale or enormous distribution. In that game familiar faces are likely winners, Microsoft, Alphabet, and Amazon.
But we don’t know for sure, everything is still changing. In reality, every 15 years technology has a platform shift. The first was mainframes followed by the advent of PC’s. The next iteration was the web and open source. The last 15 years have been dominated by smart phone and cloud tech. The next is of course AI.
But I would argue that the competitive advantage or moat today is dominated by capital not ideas. In other words prior technology shifts were open to almost everyone. Today the big tech companies are investing mind boggling amounts of capital. Other companies simply can’t match that. That’s really different than the last platform shifts. So it will be interesting to watch and see if these companies can effectively monetize all this capital spending.
On to Something much easier to figure out.
DOLLAR GENERAL
One of the reasons for our performance to date is our investment in Dollar General. DG stock slid nearly 70% in 2023 and 24. Mostly due to reasons that we believe were structural and easy to fix. We also feel the market doesn’t really understand the competitive moat of the business. For one recent tariff worries has penalized the company. But DG’s exposure to tariffs are minimal. Only about 4% of items in a Dollar General store are subject to tariffs. They sell toilet paper, toothpaste, and consumable items. It’s competitor Dollar Tree sells more tchotchkes like items that are imported into the US. For comparison sakes about 50% of Target and Walmart items are subject to tariffs.
Additionally DG had internal issues that tanked their margins from 8% to 4%. That kind of drop was devastating to their earnings. But upon further analysis we continue to think that these issues are quite fixable and improvements could show up in 8-16 months. The stock is up 56% year to date which is nice since it is our 2nd largest holding. Continued margin expansion will lead to increased earnings and permanent gains for our clients. It’s quite conceivable that the stock price could revisit highs in the $200s in the near future.
Going forward I am optimistic. The media seems to focus on indexes and the top technology stocks. There are whole sectors which are being ignored by investors. That’s a great environment to find bargains and build a portfolio.
Until next time
C Steve Henry