HFI Research 6-24-2024: "This is the next Great Rotation"
Posted: Mon Jun 24, 2024 6:49 pm
Notes below are from HFI Research:
At the end of 2020, the birth of the great rotation (from tech to energy) took place. Over the ensuing 2 years (what felt like an eternity away), energy investors experienced gains that could be best described as life-changing. < During the three years ending December 31, 2023 our Sweet 16 Growth Portfolio gained 219%.
Since then, however, it's been an emotional and psychological beatdown of epic proportions. For those of you who have not lived through the turmoil of 2018/2019, the latest episode of torment was miserable but nowhere near the misery your earlier predecessors had to endure.
And perhaps with today's price action, there's a change in the tide. The wind is changing, and perhaps, it's finally time for the great rotation (from tech to energy) to begin.
I can't count the number of times I have been preaching the "great rotation." I'm willing to bet that if you had done the exact opposite of what I've been saying since 2018/2019, you probably made so much money that you are laughing your way to the bank.
So it's with this precautionary warning that I must say, I'm likely to be wrong again this time as well. Perhaps I'm just too biased to see the light, and maybe I don't understand the concept of buying 75x P/E stocks only to see them double again, and again, just because people think it's the future. Or maybe I am right... Maybe.
The Great Rotation?
In every market cycle, there's a bubble child. The 2020-2021 saga was ARKK, the infamous Cathie Wood. She has now cemented her fame as the 3rd highest "wealth destroyer" losing $7.1 billion of shareholder value over 10 years.
But for anyone who followed Cathie closely, her rise to fame was nothing but a fluke, and her demise was just as easy to predict. In early 2021, we wrote a hit piece on ARKK calling it the greatest short vehicle for the incoming tech bubble. Open Insights made the article public on May 6, 2021.
A year after we published our piece, ARKK dropped from ~$136 to ~$60. By late 2022, it dropped to a low of ~$30.
Similarly this time around, the tech bubble is fueled by the AI frenzy. And unlike Cathie Wood and her ridiculous fame to success, this AI bubble holds merit in the long term, which is what makes shorting Nvidia and other AI bubble stocks particularly difficult.
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MY TAKE: On Friday, June 21 our Sweet 16 Growth Portfolio (all rock solid upstream companies) close at 3.37 X my 2024 operating cash flow forecast. That is a ridiculously low valuation multiple for companies of this quality. It really only makes sense if you believe that WTI will dip below $60/bbl and stay there for at least a year. On Friday BTE, CRGY, SBOW and VTLE all closed below book value. How can profitable companies with free cash flow trade below book value? FANG is trading at the highest multiple of operating CFPS (6X) and that is ridiculous. FANG is a "World Class" upstream company. A valuation of 10X CFPS would be justified.
At the end of 2020, the birth of the great rotation (from tech to energy) took place. Over the ensuing 2 years (what felt like an eternity away), energy investors experienced gains that could be best described as life-changing. < During the three years ending December 31, 2023 our Sweet 16 Growth Portfolio gained 219%.
Since then, however, it's been an emotional and psychological beatdown of epic proportions. For those of you who have not lived through the turmoil of 2018/2019, the latest episode of torment was miserable but nowhere near the misery your earlier predecessors had to endure.
And perhaps with today's price action, there's a change in the tide. The wind is changing, and perhaps, it's finally time for the great rotation (from tech to energy) to begin.
I can't count the number of times I have been preaching the "great rotation." I'm willing to bet that if you had done the exact opposite of what I've been saying since 2018/2019, you probably made so much money that you are laughing your way to the bank.
So it's with this precautionary warning that I must say, I'm likely to be wrong again this time as well. Perhaps I'm just too biased to see the light, and maybe I don't understand the concept of buying 75x P/E stocks only to see them double again, and again, just because people think it's the future. Or maybe I am right... Maybe.
The Great Rotation?
In every market cycle, there's a bubble child. The 2020-2021 saga was ARKK, the infamous Cathie Wood. She has now cemented her fame as the 3rd highest "wealth destroyer" losing $7.1 billion of shareholder value over 10 years.
But for anyone who followed Cathie closely, her rise to fame was nothing but a fluke, and her demise was just as easy to predict. In early 2021, we wrote a hit piece on ARKK calling it the greatest short vehicle for the incoming tech bubble. Open Insights made the article public on May 6, 2021.
A year after we published our piece, ARKK dropped from ~$136 to ~$60. By late 2022, it dropped to a low of ~$30.
Similarly this time around, the tech bubble is fueled by the AI frenzy. And unlike Cathie Wood and her ridiculous fame to success, this AI bubble holds merit in the long term, which is what makes shorting Nvidia and other AI bubble stocks particularly difficult.
------------------------------
MY TAKE: On Friday, June 21 our Sweet 16 Growth Portfolio (all rock solid upstream companies) close at 3.37 X my 2024 operating cash flow forecast. That is a ridiculously low valuation multiple for companies of this quality. It really only makes sense if you believe that WTI will dip below $60/bbl and stay there for at least a year. On Friday BTE, CRGY, SBOW and VTLE all closed below book value. How can profitable companies with free cash flow trade below book value? FANG is trading at the highest multiple of operating CFPS (6X) and that is ridiculous. FANG is a "World Class" upstream company. A valuation of 10X CFPS would be justified.