"Hard to Kill." I surprised myself by choosing a Steven Seagal film title for this column's tagline. Much like Seagal's epically heroic character, Mason Storm, however, there are companies - and stocks - in this market that have been left for dead that are in the process of re-animation.
Energy is one such sector. As of this writing, front-month oil futures are quoted with Brent at $71.40/barrel and West Texas Intermediate at $68.93/barrel. There is no oil producing company in the world that is not grossly profitable at that level of commodity pricing. As lockdowns are lifted and governments continue to unwisely limit production - as with the Biden Administration's decision to cease handing out permits for drilling on U.S. federal land and effectively close Alaska's ANWR to development drilling - demand is going to grow. When demand rises faster than supply... yes, you know the rest. Prices rise.
That is the key point. As the mainstream media regales us with stories of the death of Big Oil because self-styled climate activists may now control 25% of Exxon's Board (the final vote tally for a potential third Engine No. 1 seat has not yet been released despite Engine No. 1's self-congratulatory press release. Exxon has a 12-member Board) they of course don't mention the makeup of the other 75% of the Board. Even excluding another XOM Board member constantly feted by the press, self-styled activist investor Jeff Ubben, Exxon still has management-friendly folks controlling eight of 12 Board seats. So what will that change? Day-to-day operating decisions are not subject to Board purview at any public company, let alone one as big as Exxon. Much ado about nothing. Ignore the noise and focus on the cash flow. XOM is about to be floating in it.
But what is even harder to kill than hydrocarbons? Innovation. And that's why I am constantly chasing big ideas in far-off places as I am in Brazil now. The world of transportation is decarbonizing. No ifs, ands or buts. It is going to take much longer than the average feckless person who "follows" Tesla (TSLA) as a sell-side analyst (my old job, I know good research when I see it, and I don't see it on TSLA) would have you believe, but it IS happening.
Those people and their activist investor buddies and the woke drones in the mainstream media will never understand that the world is large enough to support two modalities. That's right. There are going to be more BEVs on the road every year for the next decade... and the world's need for hydrocarbons will increase. At the same time! Cathie Wood's (ARK Innovation (ARKK) ) head just exploded after that last sentence. Most of the growth in hydrocarbons will occur outside the U.S and Western Europe, to be sure. I guess that's why Exxon's two most important exploration projects now are natural gas in Papua New Guinea and oil off the coast of Guyana and Suriname. It's almost like XOM management gets it. I am not enamored of their balance sheet management, but I do believe they are good oil men and oil women.
It is true, though, that companies that can build a better mousetrap in any industry will always win. And just as true that Wall Street will always miss that transformation. Fire up Google (Alphabet: (GOOGL) ) and check out research reports on what was then known as Research in Motion (now BlackBerry (BB) ) from the weeks surrounding Steve Jobs' epic introduction (he was already very sick, apparently, but pulled it off like a trooper) of the iPhone in January 2007. But that's where we stand now in the world of transportation.
The Nissan Leaf (Nissan Motor (NSANF) ) was introduced in December 2010, but the world seems to focus only on Elon Musk's introduction of the Model 3 in July 2017. But that's the point. They are both old products, and when it comes to tech, even auto tech, and you had better watch out for the new guys.
Because I don't want to have to refer to myself as a feckless buffoon, I watch EV registrations every day from the countries that report them that way, mainly Norway and the Netherlands. CSFB put a mild dent in TSLA's valuation this week by noting that the company's global BEV market share plummeted in April (timely research, as always, from that bank) but my research is showing that in June, the Ford (F) Mustang Mach-E is absolutely blowing Tesla out of the water in Europe. Volkswagen's (VLKAF) ID.4, ID.3 and the Audi e-tron continue to sell well, also.
So, there you go. Innovation comes from unlikely sources... but unlikely only to those that don't pay attention. Ford was founded in 1903 and VW was founded in 1937, but those companies have something that Elon never will. Highly profitable (in prosperous years) internal combustion engine-powered cars to fund their move into battery-powered cars. Yes, those ICE cars run on products supplied by XOM.
It all comes full circle in investing. Those that understand innovation are few in number but those of us that understand valuation are even fewer, and not very popular at dinner parties. But we nerds know that companies that procure real, accounting gimmick-free, cash flow are indeed hard to kill and that their stocks will always be easy to own.