In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Big Decade For Commodities Ahead. Here’s an excerpt from the episode:
Tobias: If you look back the historical– So, late 1990s was tech and then first decade of the 2000s was value, which was probably mostly commodity type because of the Chinese commodity super cycle.
Jake: Lot of financials too.
Tobias: And financials. And then, everything blew up. So, it was a tech decade. Do you really want to bet on a big commodity decade here? Are you making that bet?
Jake: Mm, implicitly.
Tobias: You’re just trying to buy value, but really what you’re doing is you’re having a big commodity bet. Maybe that’s why value fell apart so much for the last ten years. It was just all commodity bets when there were cheaper businesses, cheaper compounders around.
Bill: This is a big-time commodities bet, it looks to me. Valero, Cheniere, CF Energy, Marathon Petroleum, ExxonMobil, Pfizer, Mueller, I don’t know, what they do. Suncor, [unintelligible 00:20:26], Chevron, Bungie or Bun-gee, ConocoPhillips, Imperial Oil, AIG, you get some insurance in there, Phillips 66, Canadian Natural Resources, Pilgrim’s Pride, [crosstalk]. Yeah, you got a lot of commodities in this thing.
Jake: I guess the question is like reversion to which mean are you betting on? Is this a reversion to the mean of these valuations have been beat up for ten years? Is it a reversion to the mean of, “This has worked for two years and now, we’re reverting back to quality businesses carrying the next decade”? I guess it’s not so easy to answer that question. I think it depends on, probably, however you have your position portfolio is an expression of which reversion you’re expecting.
Tobias: Yeah. I think when I read that story about Icahn buying– I can’t remember it. Whether it was U.S. Steel or it was one of the oil companies at one time’s earnings, and just thinking, “That’s crazy.” You never see an opportunity like that again. Clearly, you see them these days, everybody else thinks it’s over earning. I think it is such an overstatement of the true earning power that you should be trading at one time earnings. One time is– [crosstalk]
Bill: Yeah, these things aren’t at one time. That’s the problem.
Jake: Well, what was Valero? Five times?
Bill: Yeah, five current cash flow. Yeah, for sure. Maybe that continues.
Jake: That’s pretty cheap. I don’t know, if maybe my recency bias of the last bubble years, but that feels kind of cheap.
Bill: Well, yeah, if you think $3 billion is the normalized cash flow, it’s 16 times that, 17 times that– Well, you do have a $9 billion year, you’ve also got a negative $840 million a year within the last three years.
Tobias: Oh, that was– Yeah.
Bill: [crosstalk] You got to own it when the outlook doesn’t look good again. At that time, you’re probably looking at a 30% drawdown and wondering whether or not your underwriting thesis was accurate.
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