A FTSE 100 Easter-egg hunt

I have spoken about buying cheap, being contrarian, and buying value. Today I’ll go into a bit more detail – about sectors and stocks. Some companies I can describe but not name, by the way, and nothing below constitutes a formal recommendation, merely avenues of interest.

The gas man cometh

Most oil majors are trading at a price-to-earnings (P/E) ratio of around ten.

There are good arguments for why this may not be the end of them though. A surge in private vehicles demand, for example, or online shopping demand leading to more delivery fleets.

The decarbonisation of oil and gas which is occuring in the sector will allow oil firms to produce oil much more efficiently, and with lower emissions per barrel of oil equivalent. Natural gas will be a huge transition fuel, with some even predicting its use needs to triple by 2050.

It’s not a huge leap to see a return to pre-corona levels for the oil and gas majors.

Then there are midstream companies – who operate between the oil producers and consumers. Lots of these operate under the MLP business structure, which means all profits being paid out as dividends, and you buy units rather than shares. Dividends of this magnitude and security are hard to come by at the moment, you may have noticed…

One company which is merely a gas pipeline operator is trading on a P/E ratio of around 6 with a dividend yield of around 15%.

Another cut its dividend in half and still yields over 20%. It paid it out last week, and next quarter it’ll do it again.

Finally, one teensy, UK-based company is down 90% from its peak a few years ago, trading on a P/E of 3.

It operates some coal plants mixed with solar (moving in the right direction) in India, and has basically seen flat revenues and flat net income (positive) for the last four years, bar one bad year in 2018. The company hasn’t changed dramatically, but investor sentiment turning has given you an 80-90% discount.

It’s an uncomfortable one to buy, but uncomfortable because it’s too cheap and everyone hates it, not because it’s too expensive and there’s no juice left to wring out of it. That’s the right kind of discomfort, in my opinion.

Vorsprung durch Technik, Deus ex Machina

Last year, pre-pandemic, some people were already tentatively suggesting that global auto sales might have already peaked. Manufacturers needed a bolt from the blue to save them.

Coronavirus could be the saviour of the car.

I obviously prefer electric vehicles (EVs). But the petrol car industry could get a resurgence too.

Bicycles have pretty much sold out in London, as people seek alternatives to dangerous public transport, where people are crammed together in giant, mobile test tubes. Cars could be next.

One stock which has been mired in scandal, suffered falling sales and has now been whacked by corona is VW. But it’s leading the charge on EVs. For example, despite coronavirus it just announced aggressive investment in its Chinese EV subsidiary.

Or you could look to France, which has just announced huge stimulus for EVs and the wider auto sector. One major is trading on a P/E ratio of just over 4, another is trading just below 3. Consider that Tesla is trading at huge levels on negative earnings.

Even on positive earnings forecasts for 2021 (which are by NO means guaranteed), Tesla is valued at an astonishing 97x earnings.

There are problems with investing in the auto industry to be sure.

One major concern is the number of cars now being bought on finance – monthly or annual payment plans – which can’t be repaid if the debtor loses their job from the virus.

Another is that petrol car sales may have already peaked.

Experts at Bloomberg New Energy Finance’s e-mobility division have tentatively suggested that this may have already happened, even before coronavirus struck.

Ironically, the virus may reverse that trend. Huge stimulus, and a powerful new demand driver, as supply is cut short… Successful car makers could make a mint, contrary to popular belief.

Lightning doesn’t strike twice

Everyone thinks that banks are the worst thing ever because of the financial crisis, when banks were at the epicentre of the issue.

But lightning doesn’t strike twice and it’s pretty similar with crises.

Banks have been forced to be far more resilient than they were before the last crisis, and governments are much more aware of the risks.

Remember, a higher perception of risk = lower risk. If you’re very scared about something, you’ll take extra care to make sure it doesn’t happen.

Not only are banks in okay shape now from a survival perspective, but they are also much less beloved of investors.

That sounds like opportunity.

One major UK bank has been trading on a P/E of around 12 since the March lows, and until the last seven or eight days hadn’t bounced back like other sectors of the market.

Think that’s low? One of its main competitors trades on a P/E less than half that, even after a 20% rally since mid-May.

Mere survival represents an improvement on many people’s expectations. But if my inflation theory comes true in the next five or ten years, interest rates will have to come off the floor, away from the lower bound, back toward 2%, 3%, or even higher.

That’s so that real interest rates – the annual rate minus inflation – remains steady. If inflation is rising and interest rates stay low, real rates go more deeply negative and savers lose out disproportionately.

In such a situation, banks would look a lot more attractive.

European banks are even more despised than UK banks.

Source: Stoxx

I have done no in-depth study of European banks, and so this is in no way a recommendation or an endorsement, but I intend to take a closer look and so should you.

Every great investment starts with discomfort, after all.

If you want to do better than the market, you have to be different to the market. But you have to also be correct. Contrarian and wrong is no good to anyone.

But, in the three sectors above, I feel there must be opportunity. There will also be opportunities elsewhere, of course, but if we are to see a return of value, we must look in places where others avert their gaze.

The energy transition, a theme I love, would probably fit more in the growth category in fact, though it is exceptional because it is very young, small, and new.

On Monday, we looked at why the “growth” idea cannot outperform “value” stocks forever. These beliefs move in cycles, and the value of value is at all-time lows.

The proclaimed death of value from certain corners simply confirms this. But you won’t make any money betting on what everyone already knows.

You can only make money by being first in line to the new idea.

A few coronavirus thoughts – skip if you’re sick of hearing about it

Coronavirus has added a lot of complexity to our lives.

The easing of lockdown has made decision making much harder too. At least lockdown was simple – do nothing except shop for food.

As the world opens up, and social and family circles start blending again, I imagine many of you have found themselves conflicted and uncertain.

I find myself judging people constantly when I’m out and about, for being in big groups, or a little too close. I want to know whether it actually makes a difference to keep 2 metres apart, or to wear a face mask.

What the government says is pretty meaningless to me. I’ve never been good with authority. I need backup, justification, before doing what it tells me. If I agree with its reasoning and evidence, then it’s all good.

But I have always hated being told what to do if what I’m being told to do doesn’t make sense.

As we emerge from lockdown, a lot of people are scared of a second wave. I am too.

I have a lot of questions.

  • If we had taken no action at all, how bad would the damage have been?
  • If we had adopted face masks and social distancing and left restaurants, pubs and shops open, how much worse would it have been?
  • Is it better to have multiple waves or a big one, after which we can behave normally?
  • Is everyone susceptible to this virus, or only some people? Some more than others?
  • Why are people talking and acting as if we can go back to normal without a cure or a vaccine? Do they know something I don’t?

It seems to me that normal behaviour = a return of growth of infections.

Until we have a medical solution for the virus, it will spread only depending on how inter-connected we are, and how hygienic.

For example, social distancing and face masks. But how effective are they really?

According to the latest study that I have seen, by Lancet, here are the stats on coronavirus safety and transmission:

  • The risk of infection when individuals stand at least one metre away from the infected individual was 3%, compared with 13% if they are within a metre.
  • Face shields, goggles and glasses reduced the risk of infection from 16% to 6%, the findings suggested.
  • The use of face masks reduces the rate of infection from 17% to 3%.

That means keeping to 2 metres rather than 1 metre and wearing facial protection does reduce your risk of contracting the virus.

On a national level, could that be enough to tip the reproductive rate of the virus below 1 (ie, it’s not growing, but dormant)?

I have also seen that the virus is far more infectious in hospitals and care homes than the rest of society. So, with significant improvements in protective gear and hygiene in those two crucial sectors, plus face masks and social distancing outside of them – perhaps that’s a balance that could be struck so that normal life could resume until a vaccine is found.

But I don’t see widespread use of face masks being proposed anywhere, despite this correlation with the virus’ growth rate, spotted months ago:

Source: Nassim Taleb on Twitter

Now though, that’s quite enough on coronavirus from me, as I really am no expert. I just wanted to share a couple of thoughts and a few helpful stats.

The Financial Times’s Alphaville has done a great piece, going through Sage’s copious meeting minutes, and trying to see what motivated the UK government to take the steps it did, when it did, and answering a lot of questions about various mis-steps. It’s called “Making sense of nonsensical Covid-19 strategy”, and FT subscribers can find it here.

Hoping you’re all safe, well, and as untouched by this ongoing tragedy as possible.

Best wishes,

Kit Winder
Editor, UK Uncensored

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