ZagInvestor January 2021 Newsletter

January 2021 investment newsletter

Can’t stop. Won’t stop. GameStop.

That basically summarizes the month. The advent of r/wallstreetbets of Reddit opened up a whole new discussion, perhaps prompting that the world of investing is no longer dominated by solely institutionals.

Having been in both sides of the pond before, we share our opinion on the phenomenon in our macro section.

Additionally, this month has seen volatility that have never been seen since arguably the Dot-com bubble in the late 1990s.

More importantly, this is the first month since we started in April 2020, where we delivered a negative monthly performance and underperformed the market. A healthy pullback, we like to think. More on this in our portfolio update section.

There are no new additions to our portfolio this month as we continue to navigate through this already punchy stock market. Nevertheless, we continue to seek for new, yet to be discovered and attractive investment opportunities.

As usual, we start by providing an update to our portfolio holdings and update our view on what could play out going forward.

In case you’ve missed, here’s a list of articles we’ve published in December.



Table of Contents
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    Our investment philosophy

    We aim to own around 10 names and adopt a buy-and-hold bottom-up investing strategy, with a 3-5 years’ time-horizon (or earlier if fair value is achieved). Our current exposure to both US and UK stocks means our goal is to outperform the average total return of S&P 500 and FTSE 100.

    Our investment philosophy reflects our view of the global economy. We adopt a style-agnostic approach, which means we are solely focused in investing in the best companies, whatever the “style” of investing. We employ a bottom-up fundamental investing complemented with a macro overlay.

    We continue to avoid sectors with high dependence on interest rates, such as banks, especially those with a significant exposure to retail and commercial lending.

    Our view on the airline industry has not to change. As discussed in our article written in early June 2020, we expect further furlough and capital infusion in to the industry given the balance sheet weakness. We continue to think that the current valuation for airlines is unsustainable and consolidation would be inevitable.

    In the semiconductor world, we are paying close attention post the Intel meltdown, which also led to the “melt-up” of AMD and TSMC. Globally, we still see value in niche chip producers.

    Finally, with the ongoing electrification of vehicles and ever-increasing awareness on clean energy, we are seeking long-term opportunities in the metals/raw materials space, where demand will outgrow supply significantly.

    Portfolio updates

    Zaginvestor portfolio performance
    ZagInvestor Portfolio performance since inception.

    The portfolio delivered -4.2% in January (+13.5% in December), relative to S&P’s -1.1% and FTSE 100’s -0.8%. In alpha terms, we delivered -3.1% this month, with an above average annualized vol of ~16.5% and a portfolio beta of ~1.08.

    In the midst of global macro volatility, TSM is the only bright spot of the portfolio delivering +11.5% for the month, almost matching its previous month’s return.

    Other portfolio components underperformed the broader market, specifically, ATSG massively underperformed, returning -18.9% in January. While not many are comfortable with such volatility, especially on the downside, we remain confident in our investment thesis in ATSG.

    This is our first month of underperforming our benchmark. Nevertheless, we delivered a total return of +91.5%, since inception. This compares with our benchmark of +19.5%, equivalent to an alpha generation of >70%.

    Global equity markets performance in January 2021
    Global equity markets performance in January 2021.
    ZagInvestor Portfolio Stats for January 2021
    ZagInvestor Portfolio Stats for January 2021.


    Our worst underperformer this month, returning -18.9% for the month. Given its small market cap, we are not overly concern owing to market volatility. In our view, the current market provides a great entry point.

    Interestingly, there are positive news flows for the month. First, ATSG and Air Canada agree to sale, conversion and leaseback of two Boeing 767 aircraft. While small and not trying to read too much into it, this is positive nevertheless, given the environment we’re in.

    With Amazon’s upcoming results in February, we should be able to get a glimpse of the trajectory of global e-commerce volumes, which should further strengthen our case in ATSG.

    Direct Line Group

    • Next earnings date: March 2, 2021
    • Ex-dividend date: April 8, 2021
    • Investment case

    Direct Line delivered -6.0% for the month of January. There were little news flows on the name for the month other than its CFO taking a leave of absence, due to a family member undergoing a medical treatment.

    Tim Harris, Direct Line’s CFO, is expected to return to his post later in 2021, while deputizing his role to its Chief Strategy Officer.

    In terms of upcoming catalyst, we are looking forward to its upcoming results, which we believe will highlight its successful cost efficiency program and its underwriting excellence, which is what insurers value most.


    Disney suffered a healthy pullback after its fruitful Investor Day in December, posting -7.2% for the month.

    In a month of quiet news flow, we continue to monitor the progress of Disney+, which is the pillar of our investment thesis. We remain bullish on its growth trajectory and see greater value appreciation of the stock in the medium term.


    Peloton’s stock continue to wobble with the market deciding where the coronavirus crisis is heading. Despite that, the stock performed roughly in-line with the broader market, -3.2% for the month.

    As per most stocks, most companies are in a close-period, which essentially means news flow are likely to be minimal.

    Interestingly, for the month of January, insiders have sold ~180k stocks, or ~$30 million worth. Nothing alarming, but still something worth watching.

    S4 Capital

    S4 Capital posted -2.2% for the month and is one of the top “outperformer” for the portfolio this month.

    For those that follow us and the stock, acquisitions are a norm for the Group. Of course, this is true this month after announcing it intents to acquire creative agency Decoded Advertising and data-driven performance marketing firm Metric Theory.

    Interestingly, in its press release, it mentioned that it would now increase its pace of its growth strategy given that the Brexit uncertainty has been largely been removed.

    S4 Capital further noted that it was on track to deliver results in line with market expectations while forecasting strong double-digit revenue and gross profit growth.


    Our best performer this month, delivering an outstanding +11.5% despite the pullback of major equity indices. This is primarily driven by consensus-beating Q4 2020 results.

    Net sales for Q4 grew by +14% year-on-year, driven by 5G smartphones launches and HPC-related applications. Consequently, gross profit increased by +22.6% relative to similar period a year ago.

    Broadly speaking, TSMC reiterates it expectation that demand for chips in Q1 2021 to be driven by demand for high-performance computing. This is pretty much expected given the pre-cursors that have been building over the past 12 months.

    Additionally, it was also recently reported the Intel (INTC) plans to enlist TSMC for its services to manufacture second-generation discrete graphic chip for personal computers. We believe that TSMC is in a unique win-win situations for its clients through its independent pure-foundry business model.

    More interestingly, management is expecting the 2021 capital budget to be between $25-28 billion, which is massive given its leading market position. We hypothesize the two reasons for this.

    First, the greater and increasing demand for high-performance chips driven by computing, 5G, automation and the automobile industry. This is especially true since the Biden-era, given its clean energy push.

    Secondly, its competition with Samsung. While Samsung’s foundry capabilities trail TSMC’s, it’s growing at an immense speed. With talks of Apple in-housing chip manufacturing, it does force TSMC to further upgrade its capabilities and technology infrastructure, despite being the world’s most advanced chip maker.

    Overall, balancing the opportunities and threats, we think TSMC is a long term winner.

    Macro: How the stock market works

    The beginning of the Biden era, the US Capitol Riot, Dutch and Italian government resigning and the global vaccine drive, pretty much sums up the macro landscape for the month of January. But, that’s a side-show compared to the media-termed retail short-squeeze frenzy that have been targeting high-shorted stock.

    Nevertheless, the global stock indices retreated from its recent high, with the S&P 500 down 1.1% for the month. While some may argue that this is driven by the new US President and global political reset, we think the short-squeeze led by the Redditors have a lot to do with the overall market performance for the month.

    In fact, hedge fund generally have some sort of drawdown mechanism in place. This means that if they suffer a sudden drawdown, or sharp losses, some sort of risk mitigation measures will generally be triggered, whether manually or systematically.

    Firstly, as hedge funds employs leverage (some argue excessive) in their strategies, this could prove difficult to withstand for investors. As a result, hedge funds will generally unwind their position by either buying back shorts (which drive prices up) or selling its long positions, or a combination of both. The combined effect contributes to the negative January for global stock indices, in our view.

    Secondly, if 2008’s GFC taught us anything, it is that all financial institutions are still highly correlated to each other during times of stress. Generally, a small blow up in parts of the hedge fund world does not contain well. Consequently, this is the well-known domino effect.

    Whenever a hedge fund reduces its exposure by unwinding, which is buying shorts and selling longs, it adds pressure to other funds holding similar positions. One leads to another, and you can see how contagion is the impact in the world of investing today.

    The news of Melvin Capital, one of the larger shorts in GameStop, receiving ~$2.75 billion in cash infusion from Citadel and Point72 certainly highlights hedge funds’ inherent vulnerability during times of stress.

    Chart of the Month: The Game never Stops!

    We believe readers of our newsletter will be already plugged in with the week of short-squeeze. The group of stocks, which are highly shorted and popular among r/wallstreetbets, include stocks like Nokia (NOK), BlackBerry (BB), AMC Entertainment (AMC) etc and last but not least GameStop (GME).

    GameStop is a video game, consumer electronics and gaming merchandise retailer headquartered in Grapevine, Texas. Based on Feb 2020 data, GameStop operates ~5,500 retail stores across the US, Canada, Australia, New Zealand and Europe.

    At the time of writing, GameStop’s stock price grew by 15-folds in January alone! With a market cap of ~$23 billion, it rub shoulders with the likes of Southwest Airlines (LUV), one of the leading airlines in the US, Willis Towers Watson (WLTW), a global financial services and advisory provider, etc.

    GameStop stock price
    GameStop’s amazing ride “to the moon”. Source: Google Finance.

    While the GameStop saga has been covered extensively by almost every thinkable media, influencers, billionaires, millionaires, thousandaires, hundredaires etc, we’re more interested in the debate between pundits on whether this amounts to market manipulation.

    We have heard, read and listened to both sides of the story and struggle to be convinced by the argument of market manipulation by Redditors, as claimed by some in the media.

    We also think the so called amateur traders or “little guy”, as often referred to by Wall St, won the battle against the hedge funds. It’s definitely a David vs Goliath story and one that will remembered for a long time.

    In our view, the stock market is a free market, one that allows any market participant to freely reflect any views they have, irrational or rational it may seem. This is what constitutes a market.

    Some in the media, like Massachusetts Secretary of State, who broadly suggest investing based on speculation is not right and should be regulated.

    We disagree completely. Investing is a speculation of some sort. As investors, we too speculate trends to some extent ourselves, so we think his point is rather irrelevant. Moreover, as mentioned, the stock market is a free market that allows anyone to express any view they wish.

    On the question of market manipulation, we disagree too. Again, we think public forums that are well-managed, free from hate-speech, discrimination etc, is fair game, such as Reddit. Anyone can voice their views in any forums, so as long as they comply with the rules. Stock discussions, on the other hand, violates no such conduct.

    Sharing one’s view about a particular stock does not mean market manipulation. Furthermore, it is, at the end of the day, the choice of the reader to decide whether he/she should be investing. Compare this with hedge fund managers, who share ideas in the media or conference, there’s really not much different, other than the medium used.

    We also noticed that some pundits argued that regulators should step in to “protect the retail traders”. Again, we disagree. We strongly believe that investing (or speculating) in the market comes with risk that participants understand. Rather than regulating the core market, we think the regulators should target educating investors and raising awareness. It’s common sense.

    For now, it does seem that the hedge funds have lost their first of many battles against the up and coming Redditors from r/wallstreetbets.

    Till then. Can’t stop, won’t stop, GameStop.



    2 thoughts on “ZagInvestor January 2021 Newsletter”

    1. Sad to know that you are closing but guess you guys have another adventure. Wish you all the best! Thank you guys for generously sharing your knowledge and thoughts along the way!

    2. I started investing last fall and was lucky to stumble upon your blog. As a new investor, I really enjoyed reading your analysis. Its given me a better idea on how I should evaluate the stocks I am interested in. Thank you sharing your knowledge!

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