2021 February CAD

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3.99% MTD
7.52% YTD

Love it when a plan comes together...

Col. Hannibal Smith, The A-Team

Dear Partners,

For the month of February, the Caravel Capital Fund Ltd was up 3.99%.

In late summer of 2020, based on reports from drug companies, we estimated that a vaccine for Covid-19 was approximately two months away.  We used a conservative one year time frame to inoculate the G-7 nations, and then we went hunting for ideas that would benefit the most from these developments. 

The criterea:

1) Essential components of normal economic activity.

2) Ineslatic demand (when people want it, they will buy it regardless of its price).

3) Left behind by the broader equity rally of April-August of 2020.


At the time, West Texas Intermediate was trading around $40 per barrel.  As we mentioned in our December letter, we knew this would be The Grizzly Trade- we didn’t have to worry about the price of oil (i.e. the bear) as long as the companies we invested in produced oil cheaper than their competitors (i.e. the other hikers).  Our decades of experience watching market cycles taught us to balance between participating in the rise in the price of the commodity and the rise in the value of the producers.  We recall the phone calls in late August and early September asking analysts to send us the names of their favorite oil companies; ”Can you repeat that?”  We knew we were looking at a monster win if our thesis was even close.  We looked at production costs for companies in North America and determined between $55 and $70 oil, most companies were profitable. However, prices would need to stay there long enough to drill or to re-stimulate old wells that had been shut in during the period of low prices.  Which confirms that supply would remain constrained for some time. All of this told us $60-$65 oil was a reasonable target.  We entered into an option position for $0.50 with a maximum payoff of $5.00, or 10 times our investment, if oil was above $65/barrel by June of 2021.  Then we bought shares in the best oil producers in Canada and the US who were marginally profitable at $40 dollars. We knew at $60 they were swimming in money.  So how did we do?  The stocks have doubled or more and  the options returned 450 % .  We didn’t put a lot of capital into this strategy, we run a market neutral approach and we only take directional bets with a limited amount of our capital. We put about 3% of the fund into this idea in September.  We have been reducing this trade over the last few months and just sold the last of our oil calls when oil hit $66.  Why?  Even though we think oil is likely going to $80 this year, the trade now has a 50/50 return profile, vs. the initial 10 to 1.  We don’t do that, that’s not what you pay us to do. Betting $1.00 to make $1.08 is Fidelity and Investors Group game. You don’t pay us to behave like those neanderthals, they are money gatherers and we are money managers.  We still hold 2/3rds of the oil companies we initially bought, however we have written calls against 1/2 of our remaining positions, so the fund is almost done with the trade.  We are already hunting for the next idea.  For the record we feel this market still has upside but food for thought:

1 Year AgoToday
10 year US treasuries1.50%1.50%
1 year earnings forecast for S&P 500 $174$174
1 year GDP growth forecast 2.70%5.50%
US Govt stimulus$0$5 Trillion

Other than a non recurring injection $5 Trillion  (from borrowing), the stock market is worth 32% more?  We don’t necessarily agree, but it is important to note that the last $1.9 Trillion is just about to hit the economy (likely Robinhood and Ameritrade accounts). Get ready for a wild run of Reddit style rallys.  Afterwards, we think there is likely a bad hangover from this party.

We thank you for your continued confidence and capital.

Glen & Jeff - Caravel Capital

Monthly Performance (net of all fees)

JanFebMarAprMayJunJulAugSepOctNovDec YTD

Risk vs. Return Comparisons Across Indexes

Month Return YTD Return Volatility Sharpe Sortino Beta Best Month Worst Month Annualized
S&P 5002.7576%1.7118%15.57%0.991.220.112.82%-12.35%15.53%

Growth of $1000 since inception

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