Before I address these questions, let me tell you that I welcome such feedback and push-back. It not only makes me refine my thought process, it also forces me to be clear when presenting my ideas. Thank you! It’s a great pleasure to have subscribers like you.

Now, to the reasons that led me to reduce the position: 

First and foremost, in the last couple of months, I’ve been thinking about what I still don’t know about Aercap that could pose a risk to the thesis. You see, Aercap is a financial company, in many ways similar to a bank, and it uses money as its raw material. Without the access to cash, the company can find itself in a very bad place. 

So far, the company has been able to tap the debt markets, even while people feared that it might not. There has clearly been strong appetite from debt investors to lend money to these companies (Aercap has issued new debt several times during 2020). That’s a good thing. 

But the thing is, I’ve come to the realization that I know very little about these debt markets and how they work. On top of that, I’ve been hearing more and more investors whom I respect talk about too much enthusiasm (bubble) in the debt markets.

Now, I’m not one to get scared when someone calls “Wolf!”, I like to do my own research and reach my own conclusions. But the fact is that I’m still a long way from having sufficient understanding of this subject as to build my own opinion and being able to assess all of the risks linked to the debt markets.

When Jorge Cordeiro asked me if I was thinking about increasing my stake, I was already second guessing myself. I should’ve come clean with it and explain why I wasn’t increasing Aercap’s weight in the Portfolio.

But this isn’t the only reason why I’m selling half the position. By the way, I’m selling half of the current position, not half of the initial position.

2nd reason

As mentioned on yesterday’s post, the share price has gone up considerably, and as this happens, the risk/reward balance shifts more towards the risk and less to the reward. Let me put it this way. If I believe that at $69 the company is fairly valued (I believe $69 to be at the lower end of a fair valuation), and the company is trading at $69, there’s no money to be made and there is no margin of safety.

At $24,89, when I bought it for the Portfolio, Mr. Market was offering us a stock with a huge margin of safety trading at a price that could hardly be justified by the fundamentals. At today’s $50 per share, although still undervalued, the margin of safety isn’t that high, nor is the potential for price appreciation. 

As the gap between value and price narrows, so does the potential for appreciation, while the downside gets bigger. 

I liked Aercap because, at those prices, the downside was well protected. At these prices, I prefer to take some of my gains off the table.

The third reason for me to reduce the position of Aercap in the portfolio is tightly connected to the second reason. The stock price is almost as high as where it was before the pandemic. Although I’m not one to take historical prices as a yardstick, it’s important to ask what the price is telling us.

At the current $50 per share, Mr. Market is implying that everything is well, and that the outlook for Aercap and the aviation industry is as bright as it was back in 2019, when there was no pandemic in sight and air travel was at its all time peak. 

Now, I’m an optimist by nature (aren’t all investors?), and I welcome the good news we’ve been hearing about the vaccine efficacy. This fills me with hope that soon things will go back to normal. And although I believe we might be seeing a craze about travelling, flying, eating out, and what not, I also believe that we’re way far from having any certainty about the near future.

Having said all of this, I still believe that Aercap will likely come out of this pandemic in a good position while its competitors leave the space, and I still believe that Aercap might become a great investment opportunity in the long run. That’s why I’m keeping half of my stake. 

But I’m also more cognizant of what I don’t know, and I don’t feel comfortable having 8% of the Portfolio in a company whose biggest risk I don’t fully understand.

I hope I have now made my reasons clear to all of the subscribers, but if I haven’t, please reach out to me with your questions and push-back. Thank you.