Post Mortem Nabaltec AG – Beware of “short-term fundamental bull trap”

Background:

As mentioned in the comments on the original post, I left Nabaltec a few days ago to fund a new position. There’s no getting around the fact that it wasn’t a good investment. In fact, in the 13 years of this blog, it qualifies as the 4th worst investment in terms of total percentage loss in my “hall of shame,” which I proudly list in this chart:

Of course, there will always be bad investments, but I think it’s important to analyze what I could have done better to avoid repeating the same mistakes.

So what went wrong?

The original thesis about Nabaltec was that it was a boring old school specialty chemicals company with a decent track record and an interesting story when it came to EVs and batteries (the “Boehmite story”).

  1. Bad Timing / Ukrainian Invasion

The first thing that went wrong was the timing: I posted on February 3, 2022, 3 weeks later Russia invaded Ukraine and the entire energy price landscape was clearly changed forever. However, this was clearly bad luck in my opinion. Very few people saw this at the time, although the increase in Natutal gas prices in the previous months was quite strange.

I included “anti-pitch” in the opening write-up, which clearly indicated that this would cause problems:

In my first “Panic post” after the invasionI correctly identified Nabaltec as a potential critical position, but also assumed that it might be balanced by better traction on the EV side:

In terms of EVs, one clearly unexpected outcome is that petrol prices are now very low again, making ICEs clearly more cost competitive at the moment. AND it doesn’t help that the German government just killed EV purchase subsidies. Now there is clearly a risk that EV adoption in Europe in particular will be slower than I expected.

2. “bull trap”

Looking at the chart we can see that the Nabaltec initially moved in line with the market, the real gap only opened in 2023:

One thing that was very unique was the fact that initially Nabaltec seemed to benefit from the whole issue, as I stated in a June 2022 post. At the time, I interpreted the Q1 results as evidence of Nabaltec’s price strength and increased the position to “full”, but at a significantly lower price than the original position. At the time, I didn’t even consider that this would only be a very short-term effect of “panic regrouping” of clients.

In the July Q2 2022 review, I mentioned that a potential shutdown of Russian gas could be a problem for Nabaltec:

Looking at the comments, I traded the position a lot more than usual. I originally sold way down as in June 2022:

But then I bought back, fueled by continued good earnings throughout 2022, as in November 2022:

I think the first tangible indication of this bull trap was the very cautious outlook in March 2023:

In any case, after Nabaltec warned for 2023, it was clear that 2022 was really only a short-term exception and that they would be fighting for some time.

3. “Boehmit Story” broke out early

One topic that I apparently didn’t pay enough attention to was the fact that the “Boehmite story” failed to come true. The increase in profits seen in 2022 was based on short-term gains in the traditional business, but Boehmit’s increase did not materialize and as it now looks, EV adoption may be slower than previously thought.

Also, many potential battery manufacturing projects were delayed and/or moved to the US, where Uncle Sam received very generous IRA subsidies.

In my opinion, this creates a problem that even the track is shortened for this applicationbecause, for example, batteries of the new generation (Solid state) do not require Boehmit. Toyota is now planning solid-state mass production in 2027/2028 and the Japanese are not normally known to exaggerate like Elno.

4. Putting it together

With a new situation (no Russian gas) Nabaltec has a VERY different risk profile than before. It may turn out better if LNG prices remain low, but Nabaltec will be subject to fluctuations in LNG prices. From what I’ve heard they have fixed gas prices for 2024 but after that they have to buy from the market wherever the price is.

It doesn’t help that there is very little renewable energy development in the area where they are located. With rising CO2 prices, they may take some hits there as well. Combine this with very short order cycles, you get a much more volatile business model than in the past. So the assumption that the past is a good predictor of the future may not apply here.

Given all of this, I should have sold earlier on a fundamental basis because my original case no longer applies. Psychologically, one always hopes for a twist. Things are currently looking better for chemical stocks, but that could change quickly. In any case, I sold now because I needed the money to fund a new position and my process is to sell where I have the lowest conviction.

Interestingly, one of the positions I sold to fund Nabaltec was Agfa. I sold Agfa at EUR 3.65 per share because it was my lowest position at the time. It is now trading at €1.34. One might argue that I avoided an even bigger loss by taking Nabaltec. TThe point is that over time the process dominates the outcome.

So in summary, the two major mistakes from a fundamental standpoint were not reacting more quickly to the changed fundamentals (natural gas) and the failed Boehmite story.

The main lesson for me is that one really needs to understand that short-term positive developments could be a “bull trap” in an overall deteriorating environment.

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