Old West Investment Management Q2 2022 Letter to Investors


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Dear investor,

As we go through mid-2022, financial markets around the world are in the midst of a correction. The S&P 500 was down 21%, the NASDAQ 30% and just about every other asset class was down sharply in the first half. As you can see from your attached statement, although we had poor results in the second quarter, our year-to-date numbers are well ahead of our benchmarks.

Our All Cap portfolio was down 16.7%, our Small Cap portfolio was down 19.1% and our three LPs performed well on a relative basis. If you consider that all of our portfolios grew by 50-67% each of the previous two years, I’m glad we’ve limited our losses.

It was the S&P 500’s worst first half in 70 years. Some of the worst performing stocks were Amazon (AMZN) down 36%, Meta (META, Facebook) down 52%, Tesla (TSLA) down 36%, Nvidia (NVDA) down 48% and Netflix (NFLX) down 71%.

In recent letters, I warned that the stock market was dangerously overvalued. However, the 11% fall in bond markets in the first half is unique to this year, the worst first half on record. Add to that the money lost in cryptocurrencies, with Bitcoin down 60%, and billions of dollars have evaporated from US balance sheets.

So where do we go from here? The stock market is still overvalued. Total market capitalization to GDP (the Buffett indicator) rose from 220% to 169%, but remains 33% above its long-term trend. The market is still dominated by technology stocks with high multiples, and this is where we have a huge advantage. We are value investors and conduct extensive analytical research on each of our holdings, so our clients will be protected over the long term by owning companies whose stock prices are well below their intrinsic values.

Inflation has been a huge problem this year, with the consumer price index at 9.1%. Now you can see how ridiculous the Fed was for not being convinced that inflation was below its 2% target. The Fed is largely responsible for the inflation spiral. Many economists predict that the United States could enter a recession in 2023, and even though I am not an economist, I think there is a good chance that we are already in a recession. Skyrocketing prices for gasoline, food, housing, medical bills and utilities will force Americans to rein in spending.

The first quarter GDP figure was negative, and if the second quarter figure is also negative, we are in a recession. What is unique about the current situation is the tight job market. Although I hear of more layoffs, the labor market remains extremely tight, with job vacancies doubling the number of unemployed. It would be very rare to have a deep recession when so many Americans are gainfully employed.

The recent University of Michigan consumer confidence index was the lowest on record for 45 years. I think there is a good chance that consumer spending will slow down and the inflation rate will come down moderately over the next year. However, I don’t see inflation going down to the Fed’s desired 2% rate for several years. The cost of energy is so important in daily life (if you bought it, a truck brought it) that higher prices will prevail for some time.

Over the past few years, cryptocurrencies have received a lot of attention. The reasons given for owning cryptos were very similar to the traditional reasons for owning gold; a distrust of government-manipulated fiat currencies and uncontrollable money printing leading to currency depreciation. At Old West, we have long believed that gold offers protection against the aforementioned risks, and I have long kept a skeptical eye on cryptos. The price of gold is down 3% year-to-date in one of the most tumultuous years in memory. With bitcoin down 60% year-to-date, this should put an end to the argument that cryptos are a store of value.

We have a basket of top gold mining companies in our portfolios. With the price of gold down slightly to $1,750 an ounce, shares of the mining company are down 20% on average. Our gold miners have an average production cost (all in sustaining cost) of $1,100 per ounce. Mining companies are springing up cash, paying large dividends and buying back stock. The delta between the price of gold and the stock price of miners is extremely high.

We expect the price of gold to rise and, more importantly, the stock price of miners to rise much higher in the second half of this year and beyond. There is enormous uncertainty in the world with war raging in Europe, inflation persisting, debt levels rising again and political unrest. All good reasons to have gold exposure.

In each quarterly newsletter, we like to highlight one of our portfolio holdings. Lockheed Martin checks all the boxes of what we look for in a business.


As I sat in the theater watching Top Gun: Maverick, it gave me immense pride to know that we are shareholders of Lockheed Martin (LMT). When the Top Gun: Maverick team was looking to push the envelope and stay true to Maverick’s need for speed, LMT’s Skunk Works was their first call. With Skunk Works’ expertise in developing the fastest known aircraft and its passion for defining the future of aerospace, LMT is at the epicenter of our nation’s defense.

Based in Bethesda, Maryland, LMT is an American arms, defense, information security and aerospace technology company. LMT employs 115,000 people worldwide, including 60,000 engineers and scientists. LMT is the largest defense contractor in the world. They manufacture the F-16, F-22 and F-35 fighter jets, Sikorsky Black Hawk helicopters, Skunk Works technology, Javelin, Himars and Tomahawk missile systems and much more.

When evaluating a potential investment, we spend a lot of time analyzing financial data and performing in-depth valuation analysis. What sets us apart from other fund managers is our focus on the people who run the business, and in particular the CEO. We want to ensure that our financial interests are properly aligned with management, and we seek genuine leadership capabilities and a track record of allocating capital in a shareholder-friendly manner.

I was surprised that Jim Taiclet applied for the position of CEO of LMT in 2020. Over the years we have invested in American Tower (AMT), the owner of cell towers, and the stock has performed extremely well. During Taiclet’s 17 years as CEO of AMT, revenues grew from $675 million to $8 billion. Net income rose from a loss of $1.1 billion to a gain of $1.8 billion, and the stock price rose from $10 per share to $260 per share.

LMT had been very ably led by Marilyn Hewson from 2013 to 2020, and Taiclet had served as a board member during that time. Taiclet accumulated significant wealth as CEO of AMT. I guess it was the challenge of leading the greatest defense contractor in the world that made him throw his hat in the ring.

Another reason may have been his admiration for LMT as he graduated from the US Air Force Academy and served as an aircraft commander. He flew several missions in a Lockheed C-141 jet during Operation Desert Storm. Taiclet was 60 when he became CEO of LMT, so this is the perfect way to complete his career. Bearing in mind that he’s only been CEO for two years, Taiclet owns $21 million worth of LMT stock. His compensation is heavily stock-based where he accrues an additional $15 million worth of stock per year, as opposed to an annual cash compensation of $1.7 million.

We bought LMT stock in 2020 for $350 per share, and the stock is trading at $414 today. Revenues increased by 9% per year and net profit by 12% per year. The stock sells for 13 times earnings and has a dividend yield of 2.6%. The company is expected to generate $6.7 billion in free cash flow this year, giving it a free cash flow yield of 5.8%.

Generating that much free cash flow allowed the company to repurchase $4 billion worth of stock last year, and the dividend has increased 12% per year over the past ten years. LMT also has a fortress balance sheet with $9.1 billion in net debt, or just 0.9 times EBITDA.

Another exciting aspect of LMT’s business is their business in space exploration and tourism. In 2022, their space systems generated over $11 billion in revenue and over $1 billion in profit. LMT’s status as a trusted supplier to the Pentagon and NASA is likely to retain it as a preferred contractor in the future.

LMT is currently the prime contractor for NASA’s Orion spacecraft, designed for long-duration human exploration in deep space. The Orion craft is also the command and control bridge for Mars base camp. The concept is to fly astronauts from Earth, via the moon, to a science laboratory orbiting Mars and confirm the ideal location for landing humans on the Martian surface in the 2030s.

As you can see, LMT is a large and complex undertaking that is essential to making the world a safer place. The Old West team is confident that under Jim Taiclet’s leadership the business will thrive in the future.

For investors in our three limited partnerships, we would like to inform you that effective July 1, we have transferred our prime brokerage relationships from Jefferies to Goldman Sachs. We have been with Jefferies since we began operations in 2008, but we have reached a point in our growth where we will be better served by a larger organization with greater trading capabilities in foreign markets. ALPS will continue to be our third-party administrator.

Thank you for your continued loyalty and support, and we look forward to navigating today’s turbulent waters with a steady hand.


Joseph Boskovich, Sr. | President and Chief Investment Officer

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.


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