It's a great big world out there. It is one of my favorite clichés, and it certainly applies to investing. Or should apply, I should say, because we are currently in a state of collective myopia among U.S. fund managers the likes of which I have never seen. No, actually I have seen this movie before. It was called the Tech Bubble, and it ended badly. Remember?
But we are doing it again. We have created this near-mythological "tech" dominance that just doesn't exist. The world extends beyond Palo Alto. We are not all in the 650 area code. Besides the fact that Big Tech is a horrible, horrible influence on society as a whole (please do not get me started on Twitter (TWTR) ) these companies are also driving the market to cycle-high valuations. Why? Because everybody has a cellphone now? So what! Get over it.
The fundamental principle of equity research is the fundamental principle of valuing anything, from a lemonade stand to major multinationals. Assets produce cash flow, and that can be valued. Try it, you'll like it.
So, yes, I am biased toward companies that have assets and use them to produce cash flows. Call me old-fashioned. That leads me to the natural resources space. In the globally hyperinflationary environment of 2021 (thanks, central bankers of the world) resources are once again hot. Hallelujah! I have kvetched in so many RM columns about my long-term Exxon (XOM) holding that I will spare you the self-congratulatory hosanna now that we are back at $64/share.
Why? A newfound sense of humility? Ha! No chance of that. Look at a long-term chart of XOM. Entering July 2021 in the mid-$60s feels good, and certainly better than the md-$30's level that prevailed last October, but we entered July 2014 at above $100/share. That's right XOM is still down nearly 40% from its all-time high. And it is still yielding 5.5% in a market that is, based on the S&P 500, now yielding a fat 1.34% according to multpl.com
As an "energy guy" I just shake my head... and keep adding to my XOM position. Someday the market will realize that the cash flows Exxon will produce in a world with $73/barrel WTI/$75/barrel Brent AND $3.64/mmBTU natural gas -- don't forget the last one, it is VERY important for Exxon's profitability -- are prodigious. The "woke'' media would rather focus on the composition of 25% of Exxon's Board, but those of us who live in the real world will continue to focus on the fundamentals.
One of the key phrases in the mission statement of my firm, Excelsior Capital Partners, is "We reject apocalyptic mythologies." Whether or not that fits in an ESG-obsessed world is not my concern. Making my clients rich is. So I will continue to buy XOM, and continue to look outside the U.S. for even more attractive energy plays.
I am focusing my new research coverage for the Sao Paulo-based firm with which I am working now, OHM Research, on what I call "Emerging Hydrocarbon" plays. Exxon is one of the biggest employers in the state of Texas, but if they didn't have the incredibly fruitful Stabroek play offshore Guyana, I would not endure the slings and arrows of owning XOM. There are purer plays on emerging hydrocarbons, most listed in Toronto, and I will feature those names in my RM column tomorrow.