Weekend thoughts: "easy" opportunities and what am I missing?
At the beginning of the year, I was asking “what am I missing” a lot. In particular, I thought cyclicals and sporting goods stores looked way too cheap. The high level thesis was these companies were producing record results and buying back shares pretty aggressively, yet the market refused to give them credit for the results and they traded for insanely low multiples.
I’ve been thinking about those posts recently. I’m hearing from lots of friends about companies and set ups that seem no brainers. A few hypothetical examples (that are very similar to current pitches I’ve heard):
Across the board, commodity companies still look cheap. Six months ago, oil and gas stock prices probably implied a curve ~$10 below where the market was pricing (I.e. if the futures curve was ~$70/barrel, most energy stock prices implied ~$60/barrel). Today, many of those oil companies have seen nice appreciation, but the appreciation far undershoots the current oil curve (I.e. the stock now implies ~$65 oil, but the oil curve’s moved to $80).
I used energy stocks above, but you could use the same logic for just about anything touching the current commodity boom. Fertilizers, refiners, etc. All of them are minting money right now, and they’ll print a huge piece of their market cap at the current curve. At current prices, the stock market is basically implying no terminal value for these businesses.
Another way to frame the commodity / energy opportunity: There’s a big divergence between the futures curve and the price implied by the stock market; there should be opportunities there.
I’ve mentioned the “rumored deal” set previously, but it seems there remains huge opportunity there. Stocks with insider buying and offers from financial buyers continue to trade at huge discounts to the offer price until a deal is officially locked down.
Honestly, it’s got me a little nervous. In investing, deep insights that make alpha are rare. A lot of times, you get paid for assuming risks that you don’t realize you’re taking. Investors in Lehman Brothers made huge returns for years…. until it all got taken away because it turned out they were taking on huge illiquidity and accounting risks. Often, you can make a fortune in commodity plays because you’re implicitly making a bet on the commodity curve, and if the curve goes up you make money but if it moves against you you get demolished.
I keep looking at these situations and wondering what I’m missing. On the commodity plays, you’re buying with built in “if the curve moves down 20%, the stock is still undervalued” protection. Many of these “rumored deal” stocks look incredibly cheap even if their deals fall through (or never get finalized), and they often have insanely strong balance sheets that would allow them to aggressively return capital if they decide to remain public.
The market is a very competitive place. There’s generally not easy alpha laying around, and if there is “easy alpha” it’s generally because there’s lots of risks you’re missing….. but there’s lots of situations I see at that look “easy”, and that’s got me worried.
What am I missing?