When I write these letters, I tend to focus on what went wrong or could have gone wrong. My personality leads me to downplay positives and to worry about negatives. That is a useful mindset for investing. Legendary investor Joel Greenblatt wrote “look down, not up.” Warren Buffett’s #1 investing rule is “don’t lose money.” If you avoid big negatives, the natural momentum of the market tends to work in your favor over time.

After a very good year in the markets and for our portfolios, I want to reverse the polarity of this letter. I’d like to look at the positives in my 2023 stock market review. I’ll explain how we got here, and what I’m watching out for in 2024. That will, inevitably, circle us back to negatives and worries.

This marks the first official Middle Coast Investing letter. These letters discuss what happened in the last quarter and what we did or did not do in our portfolio. I publish every quarter, usually in the first week or two of the new quarter – January, April, July, October. If you’d like to receive these in your inbox, as well as more regular posts on the market throughout the year, you can sign up below.

Please pay attention to the notes around performance in that section.

2023 Stock Market Review: Here Comes the Bull

We end 2023 in more or less back where we ended 2021. The S&P 500 starts 2024 exactly where it started 2022. Most other indices are within touching distance, one way or another, of all-time highs¹. Recent history would suggest this bodes ill – 2022 was a bear market year, after all.

It’s not the destination, it’s the journey, though. I talked about this in a video and post a few weeks ago, but the essence is:

Category	December 2021	December 2023 (most economic data from November)
Inflation (source)	6.8% / 4.9% Core	3.1% / 4% core
Direction of inflation	Heading higher	Going downward/flatlining
Interest Rates	0-0.25%	5.25-5.5%
Direction of Interest Rates	Going up, and fast	Flat/projections of cuts
Q3 GDP (Source)	3.3%	4.9%
Unemployment Rate (Source)	3.9%	3.7%
Nasdaq performance for prior 2 years	74%	-4.1%
Bitcoin price in $$	47306	42732

The four economic indicators (inflation, interest rates, GDP, and unemployment rate) are both better on an absolute basis and in their direction than in 2021. The two market indicators – the Nasdaq and bitcoin’s price – are not quite as out of control as in 2021.

Consumer Price Index change (i.e. Inflation), YoY, last 10 years. Source

Whenever things go fast in one direction in the market, my knee-jerk impression is that things are going to flip. This year has had a few violent rallies – the start of the year, the post Nvidia AI rally in May/June, and the end of the year, small-cap led rally – which engenders caution.

When things go hard in one direction, it can change behavior. I could say my biggest mistakes were not buying fast enough. That could lead to me overcorrecting, or the market resetting as millions of investors overcorrect.

I am wary. But, I emphasize that January 1, 2024 feels different than January 1, 2022. I don’t expect 2024 to be a repeat of either 2022 or 2023. And while all that doesn’t directly affect how we invest, it’s important to remember that things can go right just as much as they can go wrong.

_{1 –} The exception is small-cap indices, which are still about 10% below the start of 2022. The Russell 2000 is 17% below its all-time high.

2023 Portfolio Review: Coming Up Heads, A Lot

Our portfolio had a lot go right in 2023. Our portfolio grew 47%, adjusted for deposits and withdrawals², vs. 24.2% for the S&P 500 (before dividends) and 15.1% for the Russell 2000.

What credit we can take for this is unclear. We benefited from certain market tailwinds. Excitement over investment in artificial intelligence computing boosted our holdings in Axcelis Technologies (ACLS), VMWare (VMW), Broadcom (AVGO), and Taiwan Semiconductor (TSM), along with many semiconductor companies. Growth stocks that suffered in the bear market recovered as their growth or industries proved more resilient – Arlo Technologies (ARLO) and Booking Holdings (BKNG) – or as they recommitted to profitability – Spotify (SPOT). The small-cap rally at the end of the year boosted a lot of our stocks, especially those in the financial sector.

We were also lucky that the effect of most bad news our stocks saw faded quickly. The March regional bank crisis gave us an opportunity to build a full position in F&G Annuities & Life (FG), our biggest winner of the year. It also led us to buy Charles Schwab (SCHW), which is part-way recovered from selling off heavily in said crisis. I mentioned Discover Financial and Progressive Corporation’s drop-offs last quarter; both had strong Q4s as they resolved issues. The Mexican airports problem I discussed last time also seems to have resolved itself in just over two months (more on which below).

And then there were right place, better time than expected investments. The HNI (HNI) buyout of Kimball International (KBAL) in Q1 made KBAL a top 10 performer for us even though we sold it all in March. We rolled much of those proceeds into Steelcase (SCS), another office furniture maker that almost doubled, a pleasant surprise. We had pleasant surprises across our new stocks – we bought 5 new stocks with a bigger than 1% position, and 4 of them are up double digits, with FG doubling and SCS coming close. That’s not how we plan it, but we’ll take it.

A lot of people had great years this year, of course. I don’t know how much credit we can take. I will say we didn’t deviate or ‘cheat’ to earn these results. We only own one “Magnificent Seven” stock – the 7 tech stocks driving the market, for example. That company, Apple Inc (AAPL), was the 12^th biggest gainer for us this year: not trivial, but hardly essential. And while we were quite active investors over the course of the year, we maintained over 20% of our collective portfolio in cash or short-term bonds/bond funds. That % is only as low as it is because of how much stocks went up: our sales of stock in 2023 were worth 13.8% more in dollar value than our purchases of stock, meaning we were net sellers of stocks.

₂ – I adjust for deposits or withdrawals by assuming they were made at the beginning of the given quarter; annual performance is then just four quarters multiplied together.

2024 Outlook: What to Worry About

The year end is just a marker. Nothing magically changes on January 2^nd, when the markets open for 2024. If stocks have gone up, that means, all things equal, they are less likely to go up in the future⁴. All things might not be equal, but for us to find attractive stocks after such gains, in our portfolio and across the market, we may have to either look harder or compromise – maybe more debt on a balance sheet, maybe a higher starting valuation. Or we will have to increase our patience. This is where the wariness is important, figuring out how to balance patience and opportunism, evolution and sticking to what works.

The economy shouldn’t function in a negative feedback loop way, but things have a way of balancing out. Russia’s invasion of Ukraine helped accelerate 2022’s problems. The world is no calmer since, and a U.S. presidential election looms as well. Interest rates are quite high, which could still have a lagged effect on the economy. And just like many economists expected a recession in 2023, many economists becoming optimistic for 2024 could be a contrary signal.

I don’t expect another year like 2023. It doesn’t really matter, though. What we’ll be doing, to our best abilities, is investing in stocks of companies with decent to good prospects, strong balance sheets, and attractive valuations. We want to find places where we don’t get burnt too badly if things go wrong, and where the stocks could go up meaningfully (loosely, 50% is what I look for) over the coming 2-3 years. I am cautiously optimistic that we will be able to find a few more stocks like that in 2024.

₄ – I.e. I believe stocks trade in the long term based on earnings. If a stock price goes up without earnings changing, the price should eventually revert.

Performance Disclaimers/Notes

Before launching into Performance numbers, a few things:

This is unaudited. I perform the calculations myself, and while I double/triple-check them, it’s prone to error. Individual accounts performance is accurate, and I will work on improving this process (mostly to save me time while still ensuring this is correct).

Past performance is not indicative of future results, and nothing in this performance is a promise for future results.

Results are, at least for now, pre fees. I only started charging in Q4, and don’t charge all of the accounts I manage. Maximum fee is 1% of assets, for reference. If I change how I report these, I will make the change clear.

Starting in Q1 2024, I am managing a new client account that is relatively large compared to our current portfolio. It has large existing positions, namely Amazon and Apple, which will become our two largest positions as a result. I haven’t decided the best way to represent this performance in future letters, but will do so transparently.

For the portfolio stats on price to earnings and free cash flow, they’re not meant to be taken too literally, both for possible calculation error and as I make adjustments. For example, AerCap’s earnings still adjust for adding back its major impairment for planes in Russia and Ukraine. First Citizens’ earnings adjust to remove its gain for buying Silicon Valley Bank. And, both companies being financial companies, free cash flow is somewhat nonsensical. I track them just to give us a moving gauge of how ‘expensive’ our portfolio is.

Our Q4 Performance

	Q4 2023	2023	2022	2021	2020
U.S. portfolios	10.1%	47.0%	-13.4%	16.8%	12.0%
S&P 600	14.5%	13.9%	-17.4%	25.3%	9.6%
Russell 2000	13.6%	15.1%	-21.6%	13.7%	18.4%
S&P 500	11.2%	24.2%	-19.4%	26.9%	16.3%
Nasdaq	13.6%	43.4%	-33.1%	21.4%	43.6%
European Portfolios	8.9%	13.4%	-15.3%	4.5%	18.3%
Euro Stoxx 50	8.4%	20%	-11.7%	21.0%	3.5%
DAX	8.9%	19.2%	-12.3%	15.8%	-6.3%

• Our portfolio level price to earnings for trailing 12 months (TTM) was 19.4³, or a 5.1% yield. Our price to free cash flow TTM ratio was 15.2, or a 6.6% yield. This compares to 19.15 and 14.6 P/E and P/FCF at end of Q3.
• Cash and equivalents (the ETFs MINT, JPST, SGOV, and BIL, and 13-week U.S. treasuries) was 20.5% of our quarter end portfolio, with an average yield of 4.4%. This compares to 19.8% of our portfolio and 4.6% yield at the end of Q3.
• We sold 36% more equity positions than we sold in Q4. For 2023, we sold 13.8% more equity positions than we bought.

Our 10 biggest equity positions at the start of 2024, not counting new accounts, are:

• ACLS – 7.2% of our portfolio
• FG – 6.1%
• PGR – 6.1%
• OMAB – 5.5%
• Dropbox (DBX) – 5.4%
• DFS – 5.1%
• Atkore (ATKR) – 4.2%
• AVGO – 3.7%
• BKNG – 3.7%
• AAPL – 3.5%

_{3 –} I mentioned adjustments to earnings, and want to reiterate them. AerCap, FCNCA, using FG’s adjusted net earnings, and using Berkshire Hathaway’s operating earnings are the biggest adjustments.

Q4 Winners / Losers

Winners	% Gain	Losers	% Loss
FG	3.2%	ACLS	-2%
DFS	1.3%	ARLO	-0.3%
PGR	0.9%	RWM (Short Russell 2000 ETF)	-0.1%
VMW	0.9%
SCS	0.7%
SCHW	0.7%

2023 Winners / Losers

Winners	% Gain	Losers	% Loss
FG	5.8%	Juniper Networks (JNPR)	-0.2%
ACLS	5.6%	LICT Corp (LICT)	-0.1%
ARLO	3.0%	Honeywell (HON)	-0.1%
VMW	2.6%	Mosaic Co (MOS)	-0.1%
OMAB	2.3%	RWM	-0.05%
SCS	2.3%	Black Knight (BKI)	-0.03%
BKNG	2.2%	First Citizens Bank (FCNCA)	-0.02%
KBAL	2.0%	Short Nasdaq 100 ETF (PSQ)	-0.02%
DBX	1.9%
SPOT	1.8%

New Stocks

The shape of Q4, with a bad October followed by a couple big months, as well as a lot of cash in two of our accounts freeing up from a merger deal, made this a very active quarter for new ideas. Here’s what we bought:

Eventbrite (EB) was our biggest new purchase. The company is an online ticketing and events platform. It is mostly for smaller venues and creators – average paid tickets per event is about 40 – and a leader in that niche. It is also close to real profitability, growing 20%+ a year, and has a management team that took a long time to figure out what they should focus on, but seems to have figured it out. I wrote this up in more detail, but it reminds me a bit of Spotify a year ago. It also reminds me of Duolingo, and that lesson pushed me to open an initial position at slightly higher prices. Which is good, because the stock has just gone up since, for no specific reason.

Broadcom (AVGO) is our biggest new position. The distinction – it came to us via merger from VMWare, not a fresh purchase. After causing much angst, China’s State Administration for Market Regulation approved the deal. Broadcom is a leading semiconductor company that benefits from AI investments. Its stock is expensive, but the company is likely to do well. I am not buying more shares, but expect we’ll hold most of our shares in the year ahead. More on what I think about Broadcom.

First Citizens Bank (FCNCA) is our newest purchase, and a 1% position so far. It is the bank that bought most of the remains of Silicon Valley Bank, putting the North Carolina bank on many investors’ radars. I bought its shares 90% higher than it started the year, which is unusual, but the gains FCNCA made in its SVB purchase are also unusual. The company trades at just above its tangible book value, while earning a good deal more than banks which trade for that value, usually. FCNCA is one of the banks that would suffer from rate cuts, so that is a risk to watch out for, but it has a great reputation and track record, and at a fair price it seems like it is worth fitting into our portfolio.

I bought shares in Worthington Industries before it split into two companies – Worthington Enterprises (WOR) and Worthington Steel (WS). Unfortunately, unlike Eventbrite, I did not push to buy enough shares, and so this is a tiny position so far. Worthington Enterprises makes products out of steel for consumers – building frames, helium gas tanks, water well tanks, camping fuel canisters. Worthington Steel takes raw steel and processes it into steel used for cars, construction, and electrical equipment. I’m interested in adding well run industrial companies that don’t share the same opportunities or risks as other companies in our portfolio. Though in Worthington Steel’s case, it benefits from similar growth drivers to Atkore (upgrading our electrical grid, green energy initiatives) and Axcelis (electric vehicles).

Worthington Enterprises is more expensive and viewed as the ‘higher-quality’ company, as its prospects are not as directly tied to the price of steel; Worthington Steel, as the spin-off, may see the more volatile trading and thus, perhaps, the more interesting opportunity.

Closed Positions

We sold all of our shares in Juniper Networks after the company’s earnings report. Not out of any specific reaction to the earnings – shares popped higher – but because I lost the conviction that Juniper was anything more than an average company. It had built up a huge backlog of orders the last couple years. In theory, the market should have rewarded the realization of those orders and the positive free cash flow that resulted. But it just looked past them to future order rates. We took a mild loss on shares for this year, though overall it was a break-even.

I sold Levi Strauss shares after its earnings report. I bought a small number of shares before fully believing the story. Nothing in the report (especially, inventories continuing to grow) made me want to buy more shares. We sold at no loss. Shares have since risen nearly 30%; I suspect that is mostly market excitement, but I’m continuing to watch the company.

I again sold out of our Bassett Furniture position at a modest gain.

I only short in personal accounts, and tiny positions to date, to gain experience. Our second ever short was in Vicor, and I closed it in Q4. I missed out on Vicor’s big fall, but still locked in a small win.

Lastly, the Broadcom takeover of VMWare closed, as mentioned above. VMWare was one of our biggest winners on the year both because of the excitement over Broadcom’s position in AI and because the discount to the merger consideration closed as the deal finally was approved. But it wasn’t an easy ride at the end.

Other notable events

Mexican Airport Resolution?

I mentioned the Mexican airport stocks, Central Norte (OMAB) and Pacifico (PAC). I was just starting to buy new shares in those companies when the news broke about the Mexican government unilaterally changing terms of the companies’ airport concessions. This was bad both for the changes themselves and what they implied about the government’s appetite to intervene.

Those companies’ earnings calls in late October suggested that most of the changes were either not that big a deal or would be compensated for in the next negotiation of a master development plan (MDP). And when the third Mexican airport’s MDP came out in December, apparently proving this point, the stocks bounced up to where they started October, basically.

We added a decent chunk of OMAB shares and a smaller chunk of PAC. I later sold some PAC shares on the December news. I took this whole event as an opportunity to revisit both companies closely. PAC’s balance sheet, low free cash flow, and policy of paying out more in dividend than it had cash flow to cover had been bothering me, and its passenger growth has basically slowed to 0, burning off all the post-pandemic recovery. We still own PAC as it has an attractive business overall, but I am more confident in OMAB’s prospects and valuation proposition.

Discover Starting to Fix Things

I mentioned Discover has resolved some of its issues. The credit card company hired a new CEO; it avoided a fine from the FDIC for one of its outstanding compliance issues; it announced plans to sell the department that was the source of another outstanding compliance issue; and its earnings were ok. The last major event is for the company to resume its share buyback. There’s still worries of bad credit on its books that it needs to work through, but the company’s messaging has been that the problem peaks in 2024. If that’s right, it remains a cheap, growing company.

Axcelis’s year of two halves

Ignore the journey, and Axcelis had a great year. The company’s revenue so far this year is up 25%, its operating income is up 20%, and its earnings per share is up 40%. It sells tools to semiconductor companies like Taiwan Semiconductor to help those companies produce semiconductors. While much of the industry has been in a slump, Axcelis’s sales have grown: its machines are useful for building out plants that can develop less sophisticated semiconductors used in, for example, cars.

Shares of Axcelis were rewarded, up 63% for the year. But the journey was bumpy. Axcelis soared as much as 150% (300% from its October 2022 low) through July 31st. It then dropped 35%. Which is how it’s been our biggest loser two consecutive quarters and our second biggest winner for the year.

I sold 30% of our shares at various stops on the way up. The move was too much, and a big leg of ACLS’s share price jump came from AI related hype. ACLS doesn’t directly benefit from that sort of investment, not the way it does electric vehicles.

We are close to the point where I think it’s worth buying again. The valuation is reasonable, and the company should have at least a couple years of growth ahead of it. There are risks – will the growth sustain after all the new chip plants ACLS sells to are built up? What happens if things get worse between the U.S. and China? What if ACLS wastes its cash pile on a bad acquisition? At less than 16x my conservative estimate of next year’s earnings, adjusting for ACLS’s cash, those risks are reasonable to take on. I have started to put out buy orders a bit below the current price.

Interested in more from Middle Coast Investing? Or in talking to us? Get in touch.

Disclosure: I am long or short all positions as mentioned in this letter. I may change positions at any time. I have no immediate plans to make major changes. This is not investment advice. Investing is risky. Any investing decisions are your own responsibility and should be taken after speaking with an advisor or at your own risk. This is not a solicitation to buy or sell anything. Past performance is of course no promise of future results.

Disclaimer: I calculate performance and all portfolio figures myself, manually, so it may be prone to error. The accounts I manage may deposit or withdraw money over the course of a quarter. I account for that in my calculations by adding/subtracting that money to/from the starting amount at the beginning of the period. This means withdrawals intensify performance and deposits dampen it. For half-year, 9-month, and full-year performance, I multiply quarterly performance by one another to control for deposits/withdrawals. If there’s a better way to calculate, please tell me!

Please read our full performance disclosures.