Wednesday, April 15, 2020 9 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,

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.

Sunday, March 29, 2020 64 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.

Friday, March 27, 2020 6 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.