(Bloomberg) — The stock market rebounded sharply last week after falling into almost a bear market. Don’t get too excited about it, says Victoria Greene, co-founder and chief investment officer of G Squared Private Wealth.
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Greene joined this week’s “What Goes Up” podcast to explain why he doesn’t think the sale is over and to give his perspective on the outlook for oil and energy stocks. Below are the highlights of the talk, lightly edited and summarized. Click here to listen to the full podcast and subscribe to Apple Podcasts or wherever you listen.
Q: Do you think we’ve bottomed out yet?
A: I don’t think we’ve found a bottom yet. I just think we’re not done yet. I think this is just the first leg because I always ask, what is our catalyst, how will we achieve growth? You really haven’t seen too many earnings revisions. And so, we’re talking about falling valuations. Yes, the P portion of the P/E is down. What happens when E starts to go backwards? This has two parts.
That being said, it’s held – I don’t think we’re done yet. I think it’s more of a charity rally. If you look for signs of capitulation — 90% down days, the rise of the VIX — we’re not there yet. Yes, cash balances have definitely increased, and yes, we’ve seen some stock sales, but well and not a real panic. I don’t want to sound like a snob, but I need a solid panic. We did not see that strict, absolute surrender, everything sold. We are not there yet. And then my concern is, where is your growth. Margins are definitely being tightened and we’ll have to wait for the Fed to send the economy into recession to stop some of that.
Q: Your company is located in Texas. Is the energy sector affecting your customers?
A: It probably makes them a little more optimistic in the energy industry. But some of our clients, actually we are using old energy because it depends on their exposure. So if you own a private company or are on the board of a public company, you already have this risk. So we’re actually trying to diversify and reduce concentration because everyone in Texas is well aware that the oil market is cyclical. So you’re riding in the good times, but at some point you know there’s a flip side to it. And these last ten years have been very difficult for the energy industry. We had five accidents in 10 years. And so there’s just this fatigue, okay, yes, we’re ascension energy and energy transition, it’s going to take a little longer to absorb as the ESG comes in and the electricity comes in. And we see this game here in 2022.
So I would say most likely not to generalize, but the attitude of most of our clients is that the death of energy is excessively exaggerated. So it goes without saying that there aren’t any concerns about ESG or climate change or anything like that, but it does make them a little more willing to gain a foothold in this segment. So I think a little bit of what you know affects how comfortable you feel when investing. The same thing happens in California — if you’re in the San Francisco area, you’re probably very, very comfortable with your job. a little more comfortable with early-stage and small-scale technology and innovators.
Q: Which energy companies do you like?
A: This gets into the larger theme of what is going on in the world right now and the elimination of globalisation. And as you can see, Russia has pulled out of the market, you’re seeing all this rebalancing of supply and demand and it’s hitting commodities harder. It’s not just energy he hits. Fertilizer, all exports and some precious metals, palladium. They’re a huge supplier of palladium. And you see this rebalancing and change, and it takes a lot of time to redistribute all that and build supply chains. Our base case is for oil to stay high for the next 18 months. I don’t see it falling back. I don’t see a demand squeeze happening. Yes, China, you live and die somewhat according to China, but if you look at travel and consumption in the United States and Europe and where the trends are, most developed countries no longer have a zero Covid policy.
I know Covid is like a dirty word these days because we’re so tired of talking about it. But it’s still there. This is what affects China and Chinese demand. Chinese demand may also be somewhat dispersed because China and India have demonstrated their willingness to buy cheap Russian crude. Some are geographically easy for them and can buy for $30 and are worried about their economic growth. Therefore, we can see some decrease in demand in China. But generally speaking, I think $90 to $100 per barrel for the next 18 months is certainly possible. You haven’t seen this wild hunter mentality come back.
And then obviously we had the OPEC change. And so you saw this huge investment in the oil and gas industry cut. And even now we’re fine, well below the peak. We are still far below the pandemic-era oil and gas platforms. You’ve seen the oil companies — and you’ll see this theme in the oil and gas stocks I love, Devon, EOG, FANG (Diamondback Energy) and Pioneer — they are US-based. Big footprint in Permian. Breakevens are low and they are definitely pushing cash on shareholders. They don’t put it back on the ground. They say, ‘Thank you to our shareholders for trusting us.’ Here’s your money back.’ ‘I’m really sorry we didn’t make you any money for ten years, but here you go. Let’s make some money now.’
But you don’t see that wild animal mentality that happens with other oil price hikes because it’s going to happen and you’re going to have a big input like ‘Let’s get more towers out of there’ and only supply and demand will eventually reverse that. . If you look at the slope of how the rig count increases, it’s a much lower trajectory. Nobody really puts tons of money into capital investment. That’s why we love stocks that currently deliver better returns for our shareholders — like Devon Energy’s 16% free cash flow return at $100 a barrel. They distribute 50% of their free cash flow as a variable dividend every three months. You talk a lot of money to sit and wait, and you can still get price appreciation as they keep making more money. And if you look at where earnings revisions are occurring, the only place we think earnings will increase is energy. And so even with this tremendous price movement on most of these stocks, the P/Ks there are actually still there, the P/Ks are actually still very nominal and very value driven.
(This was just the highlights. Click here to listen to the full podcast.)
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