Noahs' Arc Q3 Newsletter
And we're back...
Hello and welcome to our 3rd Quarterly Newsletter! As you can see, we’ve officially settled on Noahs’ Arc Capital Management, LLC (“Noahs’ Arc”) as the title of our venture.
No aspect of this material is intended to provide, or should be construed as providing, any investment, tax or other financial related advice of any kind. You should not consider any content herein or any subsequent services provided to be a substitute for professional financial advice. If you choose to engage in transactions based on the content herein, then such decision and transactions and any consequences flowing therefrom are your sole responsibility. Noahs’ Arc does not provide tailored investment advice to any person directly, indirectly, implicitly, or in any manner whatsoever.
Executive Summary
Portfolio Update: On Monday, September 20th, we re-entered the market under the official banner of Noahs’ Arc, an investment firm founded by Noah Jacobs and Noah Cox.
Macro Outlook: Two trends that have informed our stock picking are inflation concerns and the fear of a weakening China. With that in mind, next are the sectors we’ve selected and a brief explanation for each.
Sector Selection:
Hard Commodities - With inflation fears, these capital intensive businesses provide direct exposure to potentially rising commodity prices.
Consumer Staples - Our three consumer staple picks tend to do particularly well in recessionary periods, providing a counter cyclical hedge to the other two sectors.
Financials - These names expose us to a net increase in interest rate spreads while also providing us with returns in the event of continued economic growth.
Summer Review: Noah Cox completed an internship at Citi while Noah Jacobs traveled around the country and studied for the FRM exam. We both traveled to Iceland together at the end of the summer.
Macro Outlook
Two trends that have helped inform our sector selection are inflationary concerns and fear of a further Chinese correction. It is important to emphasize that these two points are not essential for the success of our portfolio - each stock selected is meant to stand on its own, regardless of whether or not these potential events come to fruition. However, they are still two larger assumptions that guide us towards areas that may be more favored by large scale events and trends.
Inflation
We’ve already explained our inflationary concerns in depth in our last newsletters - you can click here and here to check them out. We feel that the underlying inflationary pressures remain from the first half of this year, even with the rise of the Delta variant. This is evident by high inflation readings in August (higher than what we saw in the late May-June time frame, when we last wrote) and the continued increasing of the money supply.
China
Between the impending Evergrande collapse, the Chinese crackdown on big tech, and the approaching 2022 pending term extension for Xi Jinping, we question the stability and long term strength of the Chinese economy. While we will not provide a definitive belief in regard to the future direction of the economy, we believe that there is more uncertainty involved with the future of the nation than we can reliably interpret from a Western vantage point. For these reasons and others, we have sought out investments that have some sort of insulation from the Chinese economy.
This has been particularly interesting in the hard commodities space; at the end of the day, we decided against some otherwise sound investments due to large revenue exposures to the Chinese economy. This is no surprise, seeing as China consumes around half of the world’s supply of steel, copper, nickel, and cement. While the space is inherently commoditized, so that a drop in Chinese demand results in a drop in global price and therefore revenue for each company, we would still prefer companies with pre existing relationships with US end users of the goods, rather than ones centered in China.
Sector Selection
With the north star of the above concerns, we were able to find and select 3 sectors that complement each other to craft quite a robust portfolio. One consideration that we’ve taken is the way that the sectors may be inclined to respond to larger moves in the economy. While financials and commodities used for construction tend to move up with economic growth, our consumer staples and precious minerals mining companies tend to do well during points of economic contraction. This way, our portfolio becomes less directionally biased than it otherwise might be. You’ll also notice the capital intensive nature of the businesses - all have substantial moats that reduce the chance of a competitor’s entry.
Hard Commodities
The capital intensive nature of resource mining and refinement makes it a difficult one for upstarts to disrupt; moreover, the direct exposure to commodity prices speaks to our inflation concerns. About 40% of our exposure to the sector is to gold, providing a counter cyclic offset to the more cyclical steel and copper exposures. It is worth noting that we have chosen gold over Platinum Group Metals like Platinum and Palladium due to the fact that they are largely used in catalytic converters, and, as a result, their values are in part tied to the traditional automotive industry.
While China does consume a large portion of global commodities, we have ensured that the companies in our portfolio have limited exposure to their market. Seeing as the goods are commoditized and reduction in demand anywhere can easily lead to overall reduction in price, this is not a perfect solution. However, when coupled with decreasing Chinese production of commodities like steel and now difficult to remove tariffs designed to prevent Chinese dumping into American markets, hard commodity companies provide a strong cornerstone for our portfolio.
Consumer Staples
Supplementing the counter cyclical portion of our Hard Commodity exposure, we haven invested in consumer staples that are inherently more economically resilient to downturns and have as of now demonstrated rigidity during the ever pressing disruption from Amazon and larger retailers like Walmart and Target.
Asides from the security of simply being in stable businesses, we believe that as inflation rises, firms with large bases of capital intensive assets (real estate) will benefit from increased valuations. Additionally, any fixed interest rate debt will become less meaningful to the balance sheet, making the firms even healthier.
Banks
After re-examining our positions from earlier in the year, we’ve returned to the familiar basket of names in the financial sector that we had initially selected.
While their prices have increased since our original investments, we still believe that they provide an attractive value proposition and enable us to structure a diverse exposure to the financial space: the service end of the spectrum with investment banking; the more capital intensive loaning business; and the custodial area, as well.
Of course, loan portfolios should become more lucrative as interest rates begin to rise, and with the Federal Reserve starting tapering at the end of this year banks should be able to lend more capital out at higher rates.
Summer Review
Over the Summer, Noah Cox completed an internship at Citi. Noah Jacobs studied material for the FRM exam and went on a camping trip from California to Washington, as well as completed a Work Away experience in Maine.
At the end of the Summer, we both traveled to Iceland for a few days before we resumed work on Noahs’ Arc.
Going Forwards
Stay tuned for more updates and our fourth quarter newsletter as we continue to build out our business. In the meantime, we will continue trading with the strategy we outlined in our first post.
Thanks for reading - if you have any questions, don’t be afraid to reach out to either of the Noahs, and if we haven’t chatted in a while, we’d love to reconnect!
If you’re new, don’t forget to subscribe!
Cheers,
Noah Cox
Noah Jacobs
DISCLAIMER:
> The information and opinions contained in this newsletter are for background purposes only and do not purport to be full or complete. The information herein is not personalized investment advice or an investment recommendation on the part of Noahs’ Arc. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
> All investments involve the risk of a loss of capital. Noahs’ Arc believes that its proprietary investment program and research and risk-management techniques moderate this risk through the careful selection of portfolio investments. However, no guarantee or representation is made that our investment program will be successful, and investment results may vary substantially over time.
> Certain information contained in this document constitute “forward- looking statements,” which can be identified by the use of certain terminology, such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof, or other variations thereon or comparable terminology. Any projections or other estimates in this document, including estimates of returns or performance, are “forward- looking statements” and are based upon certain assumptions that may change. Due to various risks and uncertainties, actual events or results, or the actual performance of any investment vehicle, portfolio or product described herein may differ materially from those reflected or contemplated in the forward-looking statements. Actual events are difficult to project and often depend upon factors that are beyond the control of Noahs’ Arc.