Wednesday, April 15, 2020 2 comments ++[ CLICK TO COMMENT ]++

Oil stocks look interesting

One of the most interesting sectors for contrarian investors is oil. Oil stocks have crashed and oil price itself has not recovered in the last few weeks (although oil stocks are up 50% from bottom so some positive economic recovery is priced in).


Current WTIC oil price is around $21. It should be noted that oil price is even lower than it was a few weeks ago even though OPEC, Russia, USA and others have agreed to reduce production. This goes to show how political oil is--hence unpredictable. But if you think oil is low, the unpredictability is not a big risk since upside near a bottom is higher than downside (in fact, there is probably higher chance of it going up due to political events; this is obviously not true if oil price was high or during normal price).

Shown below is the WTIC futures curve from 1 month to 80 months:


Source: ERCE, https://www.erce.energy/graph/wti-futures-curve


Futures are forecasting above us$35/bbl (WTIC) beyond 2 years. You can't blindly follow the futures curve but it does indicate what is a highly probable outcome assuming no major events materialize.

Anyone that can survive $35 oil might be worth looking into. The industry is not good for value investors but similar to cyclical industries, it can work out for contrarian-type investing.

Even some high cost Canadian oil
sands might work out and I'm looking into them because:

# long reserve life
# low sustaining capex needed
# hated by investors (cheaper than supermajors and other popular oil companies)
# declining c$ automatically reduces costs (vs oil sales in us$)

The hard thing I'm running into is figuring out the breakeven price for oil production at various companies.






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Sunday, March 29, 2020 4 comments ++[ CLICK TO COMMENT ]++

Thoughts on the stock market - March 2020

Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8.

Source: WSJ market Data

If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15.

Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average.

Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E.

The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to:

  • Wait for market to fall another, say 30%, and buy high quality companies
  • Buy now those distressed ones that have fallen a lot


You can also do a bit of both but you need to decide on portfolio allocation way ahead of time. It’s very complicated to compare good companies that are slightly undervalued versus distressed cheap ones while you are in the middle of a bear market and prices are fluctuating all over the place. So it’s better to think about your allocation, risk tolerance, portfolio weight, etc, ahead of time- do it nowif you haven’t before.
If you want to deploy capital now, it’s probably best to look at the distressed ones. They fall into one of the following:

  • Directly impacted by covid -19 coronavirus: eg. Airlines, cruiselines, hotels, movie theatres, etc. These are extremely cheap but have high bankrupty risk. You have to analyze politics, govt bailouts, future customer retention, and debt risk.
  • Indirectly impacted by virus: eg. Real estate firms, entertainment companies, retail, etc. These can be safer but you really need to understand the industry dynamics and future customer outcomes. For example, is a portion of a real estate company permanently impaired or not?
  • Oil & Gas: Hard to believe but while the virus pandemic is unfolding, we have a major oil economic war is going on. Production is being ramped up at the same time demand is collapsing, have oil prices and associated companies have fallen off a cliff. This is a very unique opportunity. A lot of companies may go bankrupt but if you can pick the right ones, you will make a killing.
  • Distressed industries with no long-term virus impact: Due to indiscriminate selling, I think, industries that struggled before the stock market crash (with possibly secular decline issues) have fallen drastically. Two industries I’m researching heavily are media and automotive parts. This category is interesting because I don't think the long-term business is impacted by the virus or a recession .


If I get some time, I’ll write up some stocks I’m researching. If you have some suggestions, email me or reply on twitter.

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Friday, March 27, 2020 3 comments ++[ CLICK TO COMMENT ]++

I'm tweeting more now... Check my twitter feed also

Now that we have entered a bear market, I'm following it more. I'm tweeting more nowadays. I'll still post long articles or investment evaluations here.


For quick thoughts and articles I reference, follow my tweets at username @sivaram_v. QR code below.



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Sunday, October 6, 2019 7 comments ++[ CLICK TO COMMENT ]++

Good interview with Louis Vincent Gave - 2019

Have always been a big fan of Louis Vincent  and ran across this good interview with theMarket.Ch (thanks to Jesse Felder for bringing this to my attention).

Below are some responses I found worth quoting. There is a lot more discussed and I recommend that you read the whole interview.

Q: What's ailing the automotive sector? 
Louis Vincent Gave: There are a number of structural issues, but the most significant development has been the realization that the Chinese car market is done growing. For years, the Chinese market has been growing by two to three million cars per year. Financial markets have just extrapolated this kind of growth into the future. But that turned out to be wrong. The Chinese car market has probably hit its limit at 25 to 30 million units per year. In most parts of the world, the auto sector has stopped growing. It’s no surprise then that Germany has seen such a collapse lately. 
...

You mentioned that in every bubble there is the belief that there will be another sucker who will buy the assets at a higher price. Who is that sucker today? 
Central banks. Bond investors think that the ECB, the Bank of Japan, now also the Fed again, will always step in and buy bonds. They don’t care if the yield on German Bunds is minus 50 or minus 200 basis points. The ECB will buy them.

And you think this belief will turn out to be wrong? That’s the big question: Will central banks continue to buy bonds regardless of what happens? And that brings us back to the subject of inflation. To me, this question is linked to energy. If energy prices stay where they are, central banks can continue with their crazy monetary policy. But if energy for whatever reason starts to shoot up, it will be much harder for central banks to say there is no inflation and therefore we can continue with our negative interest rate policy. 
...


How will that war be played out?  
Washington has decided to move the battle onto technology, because that’s one of the fields where the US has a competitive advantage. If this was really just a trade war, would the US government tell the semiconductor manufacturers not to sell to Huawei anymore? Of course not. If it was just a trade war, the Americans would want to sell more stuff to the Chinese. So, the battlefield of the new cold war is technology. The US government tells the American companies to divest from China. Meanwhile, China invests hundreds of billions of Dollars into building new tech competitors and into developing its own semiconductor industry.

What will this mean for tech stocks? 
This is massively bearish for the tech sector. You get government intervention on both sides, that undermines their entire business model. It strikes me as crazy that the large US tech stocks are still performing so well. The battle field for the new cold war will be technology, and yet, investors go and buy tech stocks. This is insane. That is like buying real estate in Alsace in July of 1914. You don’t want to own the battlefield. 
...

What’s a more intelligent portfolio? 
I would buy equities with an underweight in US, and I’d hedge them with energy stocks. Instead of buying bonds, I’d buy the likes of Total, BP and Royal Dutch Shell. They will give you the hedge in case energy prices go through the roof. Plus, they offer a decent dividend yield of 5 to 6 per cent. So, in a way, I see energy stocks as the new bonds.

How about gold? 
I’m not a gold bug at all. I never liked the idea of owning something that does not produce any cashflow. But we have to accept that the global rules have changed. In the past year, we moved to a world where central banks, which have been net sellers of gold for 25 years, have become net buyers of gold again. This is an important change. For 25 years, we had two marginal sellers of gold: central banks, and the gold miners. We have moved to a world where the only sellers of gold are the mining companies, and because of their dreadful stock market performance, they have not been able to invest much capital into the development of new mines. This is the kind of world where we can see a large upward move in gold like we saw this summer. And mind you, this was in an environment of a rising Dollar.

...

Which equity markets do you like? 
I’m fairly bullish on emerging markets for the coming year. Look at what’s happening there. India just cut its corporate tax rate from 30 to 22 per cent. Look at the tax cuts in China, the interest rate cuts in Russia, Indonesia, India, Brazil. Don’t forget, emerging markets are still the places where cutting taxes and interest rates has an effect. When interest rates in Europe go from minus 40 to minus 50 basis points, that does absolutely nothing to the economy. But if interest rates in India go from 7 to 5 per cent, that means more mortgage demand, that means more people borrow money to buy motorcycles, and so on. This has a big effect.

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Saturday, October 5, 2019 1 comments ++[ CLICK TO COMMENT ]++

Purchase: Ming Fai International Holdings (HK: 3828)

I will try to write up my evaluation when I get time but here are intial thoughts:

  • cheap stock in highly competitive market
  • micro cap
  • insiders and prominent investor ( David Webb) owns huge stake
  • no moat
  • vulnerable somewhat to US-China trade war (20% sales and 25% profit from USA, China slowdown)
  • good long term growth from China tourism growth
  • strong balance sheet
  • high dividend 

Purchase price (HK:3828): HK$0.81

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Purchase: Lion Rock Group (HK: 1127)

Not sure if timing is right--world economy slowing, China-US trade war likely to get worse, etc--but decided to take a position in two Hong Kong microcaps.

You can find low P/E stocks in HK and unlike Japan, where you can also find low valuation , capital allocation is better (many actually pay out dividends instead of sitting on cash) and try to grow (may Japanese companies are facing deflation and population shrinkage). However, fraud risk is higher is HK compared to Japan.

I will try to write up my evaluation when I get time but here are intial thoughts:

  • out of view micro cap
  • rolling up in big fragmented industry
  • insiders and reputable investor (David webb) own big stake
  • low tax (Bermuda and HK have no witholding tax)
  • competitive industry
  • no moat
  • low growth but potential for China growth if they decide to enter market
  • strong balance sheet
  • high dividend 

Purchase price (HK: 1127): HK$1.18

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