Within the last 2-3 months I have bought most of Eric's Top 10 picks. In a recent twitter post Eric [somewhat tongue-in-cheek] refers to himself sitting on his hands, not buying or selling. I see the commodity super cycle lasting AT LEAST another 8-10 years [as historically commodity cycles last 10-12 years]. I bought Eric's picks as minimum 3-5 year holds as each company (1) buys back shares (2) uses the FCF to pay increasingly large dividends and (3) as the per share free cash flow multiple re-rates share prices higher, from 2 or 3 to 6 or 8. If we assume a recession is hitting world economies in the next 6-12 months, my limited view of things tells me that (1) to (3) will continue but at a slower pace. I see a $150 price for WTI as a given sometime this year, which will drive O & G picks and prices per share even higher. Would the author like to comment on these remarks? Am I missing anything and if so what? and what do I need to look at more closely to fill in the gaps in my understanding? I just don't see a recession derailing my thinking ... or the super cycle. I do see a recession lengthening the time period for (1) to (3) to drive price per share of energy companies higher. Thoughts and other points of view would be appreciated
Eric's picks are all good bets. I don't think you are missing anything except possibly the looming risk of a major economic collapse as interest rates surge to contain rampant inflation. Such collapses are generally short term and stock prices rise sharply as the economy recovers. I like the energy trade and agree E&P stocks will persist to use FCF to pay dividends and buy back stocks. The multiples are likely to fall in a recession, however, since all boats are affected by the same tide. I think the 8 to 10 year horizon is optimistic (but not impossible).
I think buying Eric's choices directly rather than through a fund will produce superior returns to those of the fund. I have always been a bit concerned that Eric touts his relationship with CEO's of investee firms as a basis for his success - that runs the risk of regulatory intervention if there is a whiff of insider trading. Eric is a capable analyst with good instincts and I follow his thinking as well, but do my own analysis and make my own choices which overlap his but do not align completely. Eric is bullish on oil and I prefer the macroenvironment for natural gas. Good luck with your holdings.
Thanks, Michael, for your kind remarks re my O & G positions. I filled my tank at a local Costco [Pacoima, CA] today and price for regular gas was $5.99/gallon and I asked the attendant about the price and he said it was a highest ever price at their pumps.
One follow along question, if you will allow me, and this has to do with natural gas. Perhaps you could give me some names to look into that are primarily natural gas producers. I'm not looking to look over your shoulder at your own portfolio, but I'm just looking for a handful of names in the space you think I might want to look into. I'm new to the nat gas space and, honestly, just don't know where to start with my research and DD. If you don't mind me asking. My regards,
Why do you prefer NG. Is it because, like gorozen, you expect the North American prices to meet international prices without gas demand destruction? Is it also because you fear demand destruction in oil?
Natural gas is a local market, not a world market. I prefer natural gas since the supply gap is large and storage is low, so I expect higher prices in some N.A. hubs this winter.
Essentially the hypothesis that the local NorAm NG market is becoming more linked to the international one because
1) USA is now top LNG exporter 2) coal is a worldwide market and serves as a substitute 3) energy intensive industries move e.g. steel manufacturing or fertilizer or copper has dropped in EU and picked up in USA.
Obviously this is speculative, and not a perfect arb, but it would explain why the HH price is quite high, and why inventories are low. It's another potential upside to gassy producers, yay.
Hi Michael, Since S=P(1+i)^n, taking logarithms gives ln(S/P)=n ln(1+i). Therefore
ln(I+i)=(1/n) ln(S/P). Next raising to power of exp gives, 1+i = exp[(1/n)ln(S/P) so that
i = 1-exp[(1/n)ln(S/P)]. This is the formula without approximations. But because i is much smaller than 1 we get that ln(1+i) =i -i^2/2 + ... and neglecting the second term gives approximately i=(1/n)ln(S/P), which is your formula. This is a quicker way to arrive at the nearly correct value, and what I have above makes the difference at the second digit after the decimal point. Be well, I enjoy your columns. Sincerely, Seppo K.
Spend a moment thinking about the power rule of natural logarithms. The natural log of x raised to the power of y is y times the ln of x. The formula I used produces an identity - the continuously compounded return is the natural log of the wealth ratio. Less algebra, more calculus. Log return is one of three methods for calculating return and it assumes returns are compounded continuously rather than across sub-periods. It is calculated by taking the natural log of the ending value divided by the beginning value.
Sure. I was clear I was using continuous compounding in the article. Returns on stocks are log-normally distributed (Black,Scholes,Merton) and continuous compounding is consistent witht the distribution of returns where dividends are excluded. I didn't need a math lesson, and I don't think you do either.
Probably is a classical question, but do you have 2/3 book recommendations to grasp the basics to understand/evaluate the quality of a business? (or any guideline without being specific)
There's also the challenge of Eric Nuttall becoming a victim of his own success. His fund has over $2 billion in assets making it increasingly difficult to be nimble or to build a meaningful position in anything but the more liquid larger cap names. Given his track record of 400% turnover and preference for mid cap names, I can see additional challenges ahead if he doesn't cap his fund.
Within the last 2-3 months I have bought most of Eric's Top 10 picks. In a recent twitter post Eric [somewhat tongue-in-cheek] refers to himself sitting on his hands, not buying or selling. I see the commodity super cycle lasting AT LEAST another 8-10 years [as historically commodity cycles last 10-12 years]. I bought Eric's picks as minimum 3-5 year holds as each company (1) buys back shares (2) uses the FCF to pay increasingly large dividends and (3) as the per share free cash flow multiple re-rates share prices higher, from 2 or 3 to 6 or 8. If we assume a recession is hitting world economies in the next 6-12 months, my limited view of things tells me that (1) to (3) will continue but at a slower pace. I see a $150 price for WTI as a given sometime this year, which will drive O & G picks and prices per share even higher. Would the author like to comment on these remarks? Am I missing anything and if so what? and what do I need to look at more closely to fill in the gaps in my understanding? I just don't see a recession derailing my thinking ... or the super cycle. I do see a recession lengthening the time period for (1) to (3) to drive price per share of energy companies higher. Thoughts and other points of view would be appreciated
Eric's picks are all good bets. I don't think you are missing anything except possibly the looming risk of a major economic collapse as interest rates surge to contain rampant inflation. Such collapses are generally short term and stock prices rise sharply as the economy recovers. I like the energy trade and agree E&P stocks will persist to use FCF to pay dividends and buy back stocks. The multiples are likely to fall in a recession, however, since all boats are affected by the same tide. I think the 8 to 10 year horizon is optimistic (but not impossible).
I think buying Eric's choices directly rather than through a fund will produce superior returns to those of the fund. I have always been a bit concerned that Eric touts his relationship with CEO's of investee firms as a basis for his success - that runs the risk of regulatory intervention if there is a whiff of insider trading. Eric is a capable analyst with good instincts and I follow his thinking as well, but do my own analysis and make my own choices which overlap his but do not align completely. Eric is bullish on oil and I prefer the macroenvironment for natural gas. Good luck with your holdings.
Thanks, Michael, for your kind remarks re my O & G positions. I filled my tank at a local Costco [Pacoima, CA] today and price for regular gas was $5.99/gallon and I asked the attendant about the price and he said it was a highest ever price at their pumps.
One follow along question, if you will allow me, and this has to do with natural gas. Perhaps you could give me some names to look into that are primarily natural gas producers. I'm not looking to look over your shoulder at your own portfolio, but I'm just looking for a handful of names in the space you think I might want to look into. I'm new to the nat gas space and, honestly, just don't know where to start with my research and DD. If you don't mind me asking. My regards,
SDE.TO TOU.TO NVA.TO PEY.TO BIR.TO ARX.TO CNQ.TO are the best bets for natural gas.
This is a very helpful starting point! Thank you for sharing!
Why do you prefer NG. Is it because, like gorozen, you expect the North American prices to meet international prices without gas demand destruction? Is it also because you fear demand destruction in oil?
Natural gas is a local market, not a world market. I prefer natural gas since the supply gap is large and storage is low, so I expect higher prices in some N.A. hubs this winter.
That makes sense. If you haven't checked out the gorozen letter you will like it a lot http://info.gorozen.com/2022-q1-commentary-the-gas-crisis-is-coming-to-america?utm_campaign=2022%201Q%20Commentary
Essentially the hypothesis that the local NorAm NG market is becoming more linked to the international one because
1) USA is now top LNG exporter 2) coal is a worldwide market and serves as a substitute 3) energy intensive industries move e.g. steel manufacturing or fertilizer or copper has dropped in EU and picked up in USA.
Obviously this is speculative, and not a perfect arb, but it would explain why the HH price is quite high, and why inventories are low. It's another potential upside to gassy producers, yay.
Micheal, you forgot to exponentiate the final number. So the return is 7.65%
I forgot nothing. The calculation was correct.
Hi Michael, Since S=P(1+i)^n, taking logarithms gives ln(S/P)=n ln(1+i). Therefore
ln(I+i)=(1/n) ln(S/P). Next raising to power of exp gives, 1+i = exp[(1/n)ln(S/P) so that
i = 1-exp[(1/n)ln(S/P)]. This is the formula without approximations. But because i is much smaller than 1 we get that ln(1+i) =i -i^2/2 + ... and neglecting the second term gives approximately i=(1/n)ln(S/P), which is your formula. This is a quicker way to arrive at the nearly correct value, and what I have above makes the difference at the second digit after the decimal point. Be well, I enjoy your columns. Sincerely, Seppo K.
Spend a moment thinking about the power rule of natural logarithms. The natural log of x raised to the power of y is y times the ln of x. The formula I used produces an identity - the continuously compounded return is the natural log of the wealth ratio. Less algebra, more calculus. Log return is one of three methods for calculating return and it assumes returns are compounded continuously rather than across sub-periods. It is calculated by taking the natural log of the ending value divided by the beginning value.
I was using yearly compounding and you are using continuous compounding. A small difference. cheers, Seppo
Sure. I was clear I was using continuous compounding in the article. Returns on stocks are log-normally distributed (Black,Scholes,Merton) and continuous compounding is consistent witht the distribution of returns where dividends are excluded. I didn't need a math lesson, and I don't think you do either.
Probably is a classical question, but do you have 2/3 book recommendations to grasp the basics to understand/evaluate the quality of a business? (or any guideline without being specific)
Thanks!
No. Business valuation is complex and there are no shortcuts.
There's also the challenge of Eric Nuttall becoming a victim of his own success. His fund has over $2 billion in assets making it increasingly difficult to be nimble or to build a meaningful position in anything but the more liquid larger cap names. Given his track record of 400% turnover and preference for mid cap names, I can see additional challenges ahead if he doesn't cap his fund.
High turnover limits his success. Buy and hold produces better returns, even if it requires patience. The relatively high MER reflects trading costs.
Cheers Michael. Especially appreciate the commentary on market crashes since many of us "youngs" haven't been through many.