The old year closed with a look back (and an interview), the new year starts with an outlook. While it is not my job to try to predict the future per se, I have to make some thoughts and position myself accordingly, which influences my stock ideas – new ones, but also how to handle the published and active ones. This is what I want to discuss – risks, but of course also chances for stock pickers!
Summary and key takeaways from today’s Weekly
– My strategy remains the same: stock picking and rather little correlation to broader markets.
– Besides tailwinds in the sector and / or business, I want to see strong finances, attractive valuations and I am also open to special situations.
– I tell you in this weekly where I stay away from and where I feel comfortable.
I am not the one and only to write an outlook and certainly not the first one. In fact, I am even rather late, as many colleagues have already published what they think about investing in 2024.
What many less serious experts and pundits without skin in the game do is just at best
entertaining guesstimating something without any accountability or at worst, they’re influencing other people and their investment decisions – whether intended or not. The worst crop is the one that constantly and every year spreads fear about a coming crash the world has not seen before and only gold will be the remedy.
The world and certainly the stock market do not function this way.
For my part, trying to be the best I can what I call a “risk-focussed realistic-optimist”, I am presenting concrete stock ideas for every market environment (which are meant as a kick-off for more due diligence and an own research process, because I can be wrong like anybody else).
This means that I am measured by concrete results. I cannot say “oops, bad luck”.
That’s why I went inside myself in order to sort my thoughts about how to tackle the new investment year. Luckily, the basic approach, i.e. my strategy, does not change. It is about fine tuning and taking arising chances or closing on increasing risks.
Rather little surprisingly, as a stock picker with the goal to beat the market, one has to have some sort of flexibility, but also the stickiness to do absolutely nothing. Sitting tight aggressively and waiting is often the better choice than to get emotional and do silly, imprudent things.
However, we cannot plan a full year in advance.
What this first piece of the year is meant to be is more a setting the sails and waiting for the wind to come – be it tailwinds or headwinds. We then react and maneuver.
I don’t like to spend too much time on macro stuff, because most of it is already outdated as soon as it gets published (assuming it can be taken at face value). Or do you remember the Chinese Caixin index number from last August? Maybe the job numbers in the US even from last month? This is all noise you shouldn’t care about.
Investing in stocks is about the future and big structural trends, not what happened in the last quarter and sometimes even month.
However, sometimes it is needed, especially regarding cyclical businesses. But it’s more about looking at the big picture in the business environment and the frame around you, not micromanagement of useless figures. The more stable an underlying setup in a sector or a certain area of operation, the better.
Therefore, I decided to write in a top-down way my thoughts first about the macro environment, then about sectors and also to name a few of my stock ideas that I presented to my members.
Of my in total 19 published ideas since September 2022, 13 are still active. I am convinced that the fundamentals of those businesses – we are investors in businesses – continue to be favorable. Should something change, I’ll be ready to pull the plug.
Besides this, I am curious and excited to find new stock ideas. Let’s kick 2024 off.
The average total return of all my best stock ideas is +14%, beating the S&P500 and the iShares MSCI World ETF.
as per 03 January 2024 market close
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My big picture thoughts (adaptive)
As I wrote in the intro section, I do not want to spend too much time on macro stuff.
The important pieces are interest rates, asset classes, supply and demand of commodities as well as a basic assumption about the economies that could affect my stock ideas. But more important are favorable business setups (businesses not in perpetual decline or even out-growing their sectors), balance sheets and valuations.
Generally, my ideas are more uncorrelated and thus not in line with broader market developments. Of course, if there’s a bigger slump in the markets, most of my ideas likely won’t propel higher, either. But the basic idea is to not lose much and to outperform through risk management, especially avoiding “unforced errors” like high debt or valuations, but also the “fallen angels” (see here) that fell for a reason.
Add to this a portion of special situations and stuff that’s almost immune to general developments.
My stock ideas and also the universe where I am doing research mostly circulate around commodities and the US, however, not necessarily the broader economy (discretionary and cyclical consumption) itself.
The first key is to be invested in areas that have “an own life”, being mostly decoupled from the economy and even more so political influence.
I think that the “soft landing” almost everyone sees should be questioned. It’s true that no meaningful damage has been done so far in the sense that higher rates haven’t bankrupted half of the economy, but I do not expect a major economic recovery, either.
Public finances are unsustainably stretched. These are not even more words, as the FED chairman himself said so (see here) – something rather unprecedented, as central bankers usually don’t criticize the government, directly or indirectly.
Debt does not get repaid and cost of debt has increased meaningfully. This can always influence any intervention into the economy, business and personal taxes and subventions or tax rebates. On the private side, many companies over-levered their balance sheets, so they will have to deal with bringing that in order. Cutting costs in R&D, sales and also firing people are the results and unlikely to stimulate growth.
The reason why I am not expecting a big stock market crash in a weak economic environment is the people have massively lost confidence in governments.
Just look at two things and you know what’s up: government bonds with long durations cannot be placed anymore (those auctions failed miserably, see for example here) and in many countries polls of the reigning parties are collapsing or completely new governments are put in place.
Just look at the US or Germany for the former and Argentina, the Netherlands, Italy, Sweden, etc. for the latter.
Money, especially big money from deep pockets, has to go somewhere.
You can’t sell everything and wait. No one holds just cash and nothing else, especially not institutions that often have minimum requirements for investments and where there is a seller, there has to be a buyer, otherwise without a bid you won’t be able to get rid of your holdings. There’s no vacuum.
If everyone wants out through the same door, something like in early 2020 happens. Yet, someone keeps holding those assets, anyhow.
When the pretend safest of all asset classes fails, namely government bonds, only equities remain to absorb the freed capital.
Don’t get me wrong, it’s not that I expect all money from gov bonds to shift into stocks.
However, only equity markets are big and liquid enough – small drops are already enough to raise the sea level, respectively prevent it from falling too much. I seriously doubt that this traditional “flight to quality”, namely from stocks to bonds, does work anymore. The debt issues are too serious and this is by no means just affecting the US.
Both “solutions”, inflating debt away or defaulting are both setups where you don’t want to own bonds.
Crash prophets repeating their nonsense constantly (and not investing themselves) don’t tell you this. You can forget that gold or properties will absorb all of this money.
The reasons are size and liquidity, maybe also paired with some dividend income.
This also aligns with why I am not seeing the US market being the one most in danger, quite to the contrary. Rather, this is a very limited and one-dimensional perspective that has nothing to do with reality. There isn’t just the US and nothing else. There are markets and economies doing worse, just have a look at Europe.
The US is more the least dirty shirt in the laundry as they say.
And please have a look at this – the numbers likely are even more dramatic by now.
The US market is the most liquid and biggest sized market not only by far, but more than all others combined so that it deserves a premium compared to other more fragile, less secure and less liquid markets. In US equities, you can park big money and easily get out again.
Is there any other market you can do this on a grand scale?
China, where you don’t even own the equities directly?
Of course this does not rule out that many stocks or even sectors are overvalued and thus not investable according to my standards.
I would also not rule out a second inflationary wave. Energy prices were the main driver behind the first run higher, followed by higher wages. Energy prices have retreated, but there are many hot areas ready to escalate which can send energy prices higher again immediately.
It does not have to come this way, but one should be prepared.
As for interest rates, it is communicated that some cuts will come. However, I doubt that 4–4.5% in the US will be that far better than the current level. It’s still too much for every heavily leveraged entity.
In general, I expect and I am preparing for a rather tough and volatile year where most sectors and companies continue not to be of interest. By determining them and creating a blacklist (watching the developments), I can focus my investment universe on the really attractive areas.
Where I am definitely staying away from are
- electric vehicles and batteries, including materials, because I think that a clean-up is overdue, leading to many bankruptcies; recent headlines that used BEVs don’t sell are not motivating me
- “green and organic” like the failed meatless
chemical cocktails“food” producers
- German industry, at least the conventional way, which has been pushed against the wall (energy-intensive businesses) or just rested on their laurels like the auto industry which planned to “drive with a diesel into the next century”
unrealiablerenewable energy, this is a sector that in big parts cannot finance itself and stand on its own, begging for more taxpayer’s money; higher materials prices and financing don’t help either; lower stocks do not mean cheap or attractive opportunities
- companies where the business model is ESG and / or something with “clean and green”
- richly valued tech stocks, even though they could continue to trend higher, the risk reward is not attractive
- everything bragging with AI, self-explanatory
- consumer staples, including tobacco, the former safe havens for tough economic environments, because no growth meets high valuations and in the case of tobacco structural problems that make it harder and harder to just achieve stable sales
- Big Pharma and hyped up Pharma sub-sectors, the former having high debt and expiring patents, forcing them to do big M&A to replenish the shelf, while the latter aims at hypes like the diabetes and weight-loss drugs
- banks, these are black boxes for me, low interest rates were not good for them, high aren’t either, only maybe in a panic situation. Also, if you looked into the linked article about the failed bond auctions, they wrote that “dealers” had to absorb more of the government bonds, because investors didn’t want them – guess who the dealers are?
- US oil producers, because I don’t buy into the sustainability of the increased production (more below)
- stocks where every second YouTube channel and / or Fintwitler cries to buy the dip on a “once in a lifetime opportunity”
- everything complicated I don’t understand or feel comfortable with
As to other markets, I don’t care that much, because I am looking at sectors and companies, not broader economic numbers. This leads us to the areas and also a few companies I see as the cornerstones for the investment year 2024:
- commodities, especially uranium, silver, met coal and oil (producers and offshore equipment)
- special situations with cheap valuations, being takeover targets and / or going through reorganizations, spin-offs, asset plays, etc.
- growing and uncorrelated medical companies, though certainly not Big Pharma with its own problems (see here)
- turnarounds with strong fundamentals
Speaking of commodities, I am looking for structurally undersupplied sub-areas and / or such where production costs are close to market prices.
As I wrote on numerous occasions, supply is slow-moving and thus better to predict than demand which can fall off a cliff suddenly and is more based on guesstimates than on hard facts. While I continue to avoid copper (see my article here), I continue to see good setups for uranium, silver, met coal and also oil.
Uranium is clear, too little supply hitting too much demand, even not counting growth through numerous new reactors being constructed. US and European utilities have to replenish their uranium supplies and there’s a good chance that at some point a buying panic sets in.
As uranium has dramatically rushed higher and supply is around one third lower than demand (without growth), this is like a musical chair’s game. You want to make sure you’re fast enough to take your seat.
Met coal – not to be confused with thermal coal – is the stuff that’s needed to produce coke for steel production. Whether ESG or not, steel is needed everywhere and especially China, India and Brazil will easily make up for what is being closed or phased out in Western countries, if at all. The leading stocks are valued at some 5–6x free cash flow multiples, are highly profitable and have even clean balance sheets.
Pressure from the ESG crowd made them even asset-light business models, meaning that they invest only what’s necessary. Besides, this limits supply and makes sure that a nasty bear market is unlikely, at least for now. Some of them buy back own stock really aggressively – 10 to even 15% in a single year are not uncommon (no typo).
Regarding silver and oil – we can group them together – I picked and continue to keep active only low-cost producers (a must) and where possible add a growth component to it.
In silver, I picked one of the lowest-cost producers available. It is an attractive takeover target for those who can afford and it’s buying back its own stock, while having a big net cash position.
Oil, I have to split into two groups. The first are producers, however, no Western majors. They are barely growing and due to not having done meaningful investments over the last decade, they have to buy reserves like in the case of Exxon (ISIN: US30231G1022, Ticker: XOM) and Chevron (ISIN: US1667641005, Ticker: CVX).
As with every M&A, there’s the risk of overpaying and writing down assets.
Also, they have higher valuations as well as lower yields left for shareholders.
My two picks are Petrobras (ISIN: BRPETRACNPR6, Ticker: PBR.A; everyone knows its Petrobras by looking at the cover) due to its gigantic reserves and very low production costs as well as a smaller company operating in the Argentinean shale field “Vaca Muerta” (exclusive for my Premium PLUS members) or “dead cow” in English.
Both companies mainly produce oil, have low costs and are growing their output.
The reason why I am skeptical about the sudden production increase in the USA is that the companies prior had barely upped their investments, respectively had to increase them mainly due to inflationary pressures, because equipment got more expensive, however, without creating more output volume-wise.
Plus, the shale fields either have peaked or are close to peak in the case of the Permian.
Rig counts have not increased meaningfully and also the fields become more gaseous, meaning that less oil and more gas are being extracted from the fields.
This can be seen by comparing some published material by the companies themselves.
Here are some screenshots from publicly available material from Pioneer Natural Resources (ISIN: US7237871071, Ticker: PXD), the biggest independent fracker with a sole focus on the US.
First observation: PXD streamlined itself from several areas of operation into a focussed Permian play which both used names of the projects “Spraberry / Wolfcamp” in 2012 and “Midland Basin” now are.
Then, let’s have a look at the shares of oil and gas from their production.
You can clearly see that the share of oil declined in the Permian area from around 66% to just a smidgen above 50%. Also, total BOE (barrel of oil equivalent) production went up by about 8x between 2012 and 2022, while oil only by 7x and gas even by 12x.
To prove that this is not a random anomaly, please have a look at the Eagle Ford field (below on the left), which is a way older and more mature field that clearly peaked already.
Oil production is far away from pre-2020 levels, not to mention 2015 levels. Gas output has increased.
There’s a good chance that the Permian will experience the same. However, currently the Permian is dropping 5x the amount of oil that the Eagle Ford does. It is by far the single most important location. And even though productivity increased in the Permian recently a bit, rig counts did not.
source: latest EIA Drilling Productivity Report – December 2023 (see here)
I also read that in summer the definition of what oil produced is was changed in the sense that so called natural gas liquids are suddenly counted as oil (there are / were three extracts, oil, natural gas liquids or NGLs and pure gas).
Another good sign that Ms. Guerrero mentioned is that suddenly many shale companies are selling themselves to the majors. Usually, M&A on a bigger scale does happen either at the bottom or at the top. Do we have a bottom? 2020 was a bottom. But now?
Pioneer Natural Resources which I for about a year had as an active idea for my members (until I switched to PBR.A) is the most prominent example which Exxon is going to acquire. By the way, my switch was the right choice as since then PXD’s stock barely moved while Petrobras is up by almost +36% including dividends.
Besides the long-time CEO stepping down, there’s a good chance that PXD is selling itself close to the peak and not at a too cheap valuation. It would not be Exxon’s first too ambitious takeover, just think of the XTO acquisition. But also Chevron and Buffett’s holding Occidental Petroleum (ISIN: US6745991058, Ticker: OXY) are active. Are they maybe all a bit too late?
Goering & Rozencwajg published very sophisticated and convincing arguments in their reports. It is more likely that the Permian will peak than that it will massively grow. This would likely shock the markets and send oil prices higher, but also benefit my other picks that have growth prospects for many years to come.
The second part is offshore energy drilling.
However, compared to colleagues preferring companies that lease traditional drilling equipment, I chose a company that has more special tasks and equipment in this sector. And as just one of a few, it did not go bankrupt during the last decade, thanks to strong leadership and defensive finances.
Investments are flowing massively into this sector.
Oil majors are investing in so called deepwater projects in Brazil, Guyana, Namibia, Norway, Australia, the Gulf of Mexico and also the Middle East. As long as oil prices stay above 50–60 USD, these projects are rather safe, because the production costs on average are about only half compared to shale in the USA (est. 20–40 USD compared to 60–70 USD).
Regarding special situations, as every case is different, it’s tough to generalize.
What they have in common are low valuations, paired with the chance to either be acquired and / or to raise hidden values trough a business reorganization. One such case where I made the name public, is thyssenkrupp (ISIN: DE0007500001, Ticker: TKA). But I also found a company from the luxury sector that is insanely cheap and a realistic takeover target for a bigger luxury house.
Another special situation or rather turnaround story arose in the hated office sector.
There is a company that has a strong balance sheet and it’s even benefitting from the issues and challenges in the sector. So far, my pick is up by close to 20% with rather limited risks. Though some peers have shown higher returns since I published my report, they are dealing with other problems like expiring leases in unattractive markets on a grand scale and huge debt loads.
I am sure that there will be more such cases to be found in 2024.
The last group are medical companies with their own set of tailwinds. No close patent expiries, little competition and strongly growing markets.
Both rather don’t care what the economy or broader markets will do.
A topic I want to also bring on the table is gold.
I want you to understand one thing: gold has nothing to do with inflation or all the other stories that are told. Gold is a political barometer and a neutral place to park money. If political tensions rise or the financial system is on the brink of a collapse, then gold jumps. Everything else is random.
As politics are not necessarily to calm down, there’s a good chance that gold will have a good year. But so far, I haven’t published a report about a miner, because my silver case was way more attractive.
As my picks have so far shown good results and beaten the market on average, i.e. the S&P 500 and the iShares MSCI World Index, with just truly two picks where I was and am not satisfied (one closed, one active), I will stick to this type of selections.
Strong financials, some sort of tailwinds in the business and / or sector as well as not dumb management teams are my requirements. If the valuation is compelling, too, then I will write a report for my members.
I am pretty sure that valuations will continue to remain relevant again.
A mania like during most parts of the 2010’s which culminated in the nonsense up until the end of 2021 (for some earlier), is rather unlikely to repeat, because many young investors burnt themselves.
Staying calm and realistically optimistic is the way to go for me – I just feel comfortable this way.
My strategy remains the same: stock picking and rather little correlation to broader markets.
Besides tailwinds in the sector and / or business, I want to see strong finances, attractive valuations and I am also open to special situations.
I tell you in this weekly where I stay away from and where I feel comfortable.
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