I agree with that... note that in the mad rush this morning... the SPY made another lower high.
But, also... the counter trades are undervalued in the whipsaws... that being the point of them, in part... to deflate the short term perception of rising (or falling) value... as value rises (or falls)... by imposing the perception that the market says ones perception was in error... when it was not. Perhaps all that says... is that pots with frogs in them slowly warming... must be stirred in order to sustain uniformity as necessary to avoid enabling proper perception with stratification...
So, in oil and gold and silver... palladium particularly with a fuze alternately crackling and fizzling... the effort attracts eyes to the short term moves... while distracting them from the larger (and the bigger changes in) underlying trends... obviating perception or risks... and the change in the potential they may be realized... which remain on trend... higher. "A bad day in oil"... that takes it down from a sudden deviation from the trend up to $126 as a "sudden recognition of risk"... then back to $106, without the risks having lessened at all ? Still means an oil company whose last financial reports were based on $60 to $75 oil... will have its next quarterly reports based on $90 to $120 oil... or more... again, with nonlinear impacts from that linear change.
All before still applies... that people, even those who should not be, are really bad at proper perception of exponential functions... and including time functions as unconstrained in the ability to be exponential...
Why should a sudden spike to $126... that then drops oil back to where it was before on the uptrend in place... distract you from the uptrend in place ? The exogenous event... the non-linearity... disrupts cognition... so, it is exploited for that... vertical moves almost always fail... as normalcy bias... not reason... conditions people to expect change should not be discontinuous that way... but incremental... as avoids perception of discontinuity existing... and awareness of associated risk. Change is risk... is the perception... but not the reality. Risk more often comes wearing a cloak... growing in incremental fashion... normalcy bias helping to ensure you do not notice it amassing its potential.
In oil, particularly ( even without the added benefit of amplifying the effect by manipulating the perception of oil investment as "evil")... people overlook the exponential functions in the leverage in shares versus the commodity price... which leads to "corrections" as we saw in OXY, XOM and CVX over the last week or two.
An excessively short term view facilitates the error in valuation... but, look at a monthly chart, showing "last time oil was here, and rapidly heading lower, this was priced at X"... and that should be obvious enough... allowing you to proceed with DD to find out If that lower priced entity, today, still has all that same value, or maybe even more ?
OXY was a no brainer... and shocking, as its story was well known...It choked on absorbing and rationalizing a series of massive acquisitions (for which they paid too much), and then struggled with the related debt as the bidding wars in the prior boom rolled into a market dominated by price declines. That it survived intact... and thus was undervalued as prices rose, again... should have been obvious ? Yet, it was not... ?
Normalcy bias ensures short term focus, more as investors also obsess over the short term moves in the commodity price... and revalue shares in the short term... while ignoring the long term and accumulated impacts of trends... that actually matter far more ? Oxy's struggle with debt... as oil prices declined... should mean "not struggling with the debt" as much as prices rise above the point where the debt was an issue ?
So, with the failure to perceive the non-linear functions in things like the share price leverage that applies versus the commodity price... on both the upside and the downside... there is a parallel failure in lagging perception of the value of "actual" leverage through the boom and bust cycles of the economy. It is very apparent, when oil is cratering... that companies that are overly indebted are suddenly put in extremis... with rapidly shrinking revenues and fixed obligations to meet. Every cycle it happens... and mid-streamers in particular... as pipelines are debt intensive infrastructure... suffer enormous price declines as the debt suddenly becomes perceived as a risk. And, it doesn't matter if the debt is not a real threat... with revenues more than covering it ? They go on sale... the yields spike to 20% or 50%... and, the good ones keep on making the payout... This last cycle... I bought OMP under $5 with a >30% yield... it never missed a distribution... and when it made it back up over $25... it still had a yield of >10% ? The distribution had it pay for itself in ~ two years.
But, the point of that story... is the perception and mis-perception of exponential functions, including the impacts of directional change amplified by leverage... the same story as at OXY ? The error occurs both n relation to the leverage of share prices versus the commodity price... AND in relation to the share price versus debt... risk / benefit... under changing market conditions. Debt you can't service absorbs and destroys value in a share... a low cost debt you can easily service in rising markets... leverages returns generated ?
Lagging perception... has investors remembering how bad the debt was in the recent decline... and continuing to discount the price because of the risk it carries... even after the leverage carried has returned to being a net positive... ?
And, of course, that's also the story at GTE, and one of the reasons I've always liked it... as the management know that drill... and know how to exploit it... and have done so brilliantly over the last three primary cycles. So, should I care.. and think less of its future potential (which, knowing it well, I cannot) only because... oil spiked up to $125 one day... and fell back the next ? LOL. GTE is a mini-OXY story... only... serially... ?
In any case... the spike did its work... in disrupting the market perception that maybe oil is going higher... which has given me a chance in the interlude to scour the market for similarly positioned undervaluation stories... during a bit of "gap" in a breather that... awareness of real risks says... may not last all that long ?
The point is not to find issues where future price rises will likely drive prices higher... for that... throw a dart at a list of oil stocks...
The point is to find issues... like OXY and GTE... where the market is overlooking large value already accumulated in result of prior change in value that is not being properly or fully recognized... Or, otherwise, finding others like OAS / OMP that are obviously acquisition candidates... only under-priced more...
Used multiple scanners and multiple criteria... generating a list... and, did enough DD to discard the throw-aways...
And, WOW !!! Found CEI... widely touted as having 100 million + barrels in reserves on the cheap... plus tech projects !!! But, its has all the hallmarks of an NYSE tolerated PnD operation... allowed because "green tech" focus... and a Reddit baby stock, too boot. The oil "was sold" according to the CEO... and good riddance because of shedding all the debt tied to it... but, when I went looking for the oil... all I found was that the subsidiary it was in was foreclosed on by Texas for failure to pay taxes. So, where-ever the oil went... it went in a tax sale... and, probably the company managers and "Class C shareholders" now own it without having to worry about you ?
FWIW... total trash. It's in the dock with the SEC for trying to pawn off convertible notes as "Preferred Class C" shares... hasn't filed required annual or quarterlies or held an annual meeting since 2020... the auditors "won't let them file" until the SEC gives a green light on their accounting treatment of the "Class C Preferred Shares"... and, all the SEC has to do to make it go away... is not reply... and the stock will be de-listed on May 20. As NYSE it has options. Buy the cheapest puts... wait two months... make 100% when it delists... unless a miracle happens.
Not exactly what I was looking for...
Only two survived the basic screening, the iniitial sort, and the (very) basic DD...
The first is SJT at $7.08, down 3% today..... a royalty payer... paying 12.71%... and, perhaps, not more to see there other than its already back to where it was in 2017... but is undervalued, still, and has a higher yield, compared to peers like PBT, SBR, CRT, BPT, or, probably its closest proxy, MTR... at $8.87, up 12% today... and yielding 7.28%. But, I wasn't really looking for royalty plays... which, in the gold market, are highly valued, perhaps because actively and well managed as companies... seeking to grow their portfolio of future production... and in the oil patch... are more like where old oilfields are sent off to pump out and die when the owners tire of them... and are considered trash... often being badly abused (even stolen) by "well heeled" big bank contract "management" hired to "look after your interest" for you... and I have no idea why that difference in focus exists... except that it does ? If you want the royalty flow... oil will give that... where gold royalty plays... have tiny yields and high share prices, instead...
The only other survivor of this now 5 day long effort begun on March 9th...
CPG... at $7.30 has a $4 billion market cap... $2 billion in debt... and TTM gives it a P/E around 2... yields only 1.84% by distributing $0.14 on TTM earnings of $3.23... next earnings due May 12.
As often the case... when I find such things... others among the usual suspects do too... as March 7: Simply Wall Street and March 9: Zacks... The debt is a big weight, of course... but, that's why its both cheap and valuable... as with TTM revenue of $2.83 billion and 103.3% YOY quarterly growth... that doubling of oil prices and revenues could mean paying off the debt in a year... or, more likely, needing to do something else to prevent them from choking on all that cash piling up... |
