Fish where the fish are

[Cod Liver Oil]

Where are the fish now?

Defense contractors: Major weapons budgets doubling over the next 4 years (19% pa).

Gaming: Estimated demand growth 13% pa until 2030.

If you own quality names in these sectors (NTDOY, LHX, HEI), you may catch some fish.

Please add productive fishing areas with rising tides.

 

 

 

Edited September 27, 2023 by Cod Liver Oil

[Dinar]

Where did you see that major weapons budgets are doubling over the next four years?  Thank you.

 

 

[Cod Liver Oil]

@Dinar

"The war in Ukraine has created an urgent need for the Pentagon to replenish its munitions, likely creating an upcycle for these rocket engines. Cowen forecasts that Department of Defense spending on major weapons programs will more than double between fiscal 2022 and 2027. L3Harris said the deal would increase its backlog of future business by about 30% to $30 billion"

 

from here:

https://www.fool.com/investing/2022/12/19/heres-why-l3harris-latest-merger-gambit-will-pay-o/

Edited September 27, 2023 by Cod Liver Oil

[Luke]

Countries: China

 

Pretty much anything is cheap there right now, mega caps, small caps. 

 

 

[Cod Liver Oil]

China is cheap but the tide is going out for the moment and Xi is the moon.

[WayWardCloud]

Defenses contractors do seem like today's no-brainer and I've been toying with the idea of a defense/aero ETF. Revenues should go up meaningfully because of Ukraine as well as the escalation of tensions in the Pacific and it would also add an anti-fragile element to the portfolio. However I came to the conclusion I couldn't look at myself in the mirror if I got rich from people being killed. Same reason I have never owned tobacco companies. To each their own, though. I actually support the necessary evil of us building those weapons I just don't want to profit.

 

The cable industry is historically cheap (Charter, Comcast, Altice) due to increase competition with telcos and fear of a europeanisation.

 

The traditional auto industry is super cheap too (GM, Ford, Stellantis) due to EV transition, Chinese competition fear, Tesla fear, and a long history of no returns.

 

Japan and Korea have been cheap forever.

Edited September 27, 2023 by WayWardCloud

[Luke]

EDIT

Edited September 27, 2023 by Luca

[Luke]

25 minutes ago, Cod Liver Oil said:

China is cheap but the tide is going out for the moment and Xi is the moon.

[no_free_lunch]

1 hour ago, Cod Liver Oil said:

Where are the fish now?

Defense contractors: Major weapons budgets doubling over the next 4 years (19% pa).

Gaming: Estimated demand growth 13% pa until 2030.

If you own quality names in these sectors (NTDOY, LHX, HEI), you may catch some fish.

Please add productive fishing areas with rising tides.

 

 

 

Insurance, the effects of rising rates are positive and still trickling through. 

[Cod Liver Oil]

46 minutes ago, WayWardCloud said:

However I came to the conclusion I couldn't look at myself in the mirror if I got rich from people being killed.

As @Spekulatius implied, defense is politically unpalatable and keeps a lot of investors away. A PM I know at First Manhattan said he can't even mention defense or tobacco to his clients because he will lose them. I was inspired by someone's comment here that the least intelligent investor he knows had a great results because he kept things simple and obvious so, inverting, we can learn stuff from The Unintelligent Investor.

@no_free_lunch everyone is seeing rising insurance rates, what companies are the obvious beneficiaries?

All of my good outcomes have come from growth, not reversion to the mean. I see obvious top line growth in the panhandle of Florida, defense budgets, insurance pricing, gaming, cloud services and cybersecurity.

Edited September 27, 2023 by Cod Liver Oil

[John Hjorth]

36 minutes ago, WayWardCloud said:

Defenses contractors do seem like today's no-brainer and I've been toying with the idea of a defense/aero ETF. Revenues should go up meaningfully because of Ukraine as well as the escalation of tensions in the Pacific and it would also add an anti-fragile element to the portfolio. However I came to the conclusion I couldn't look at myself in the mirror if I got rich from people being killed. Same reason I have never owned tobacco companies. To each their own, though. I actually support the necessary evil of us building those weapons I just don't want to profit. ...

 

@WayWardCloud, @Cod Liver Oil & @Dinar,

 

To that part already mentioned about the ramp-up in munitions you have to add the judged effects of a lot of military ramping-up in European countries that are NATO members spending less than 2 percent of state budget on defence by now. Just look up a list of worlds largest defense contractors, and think about who has the stuff in their product catalog that is in demand.

 

None of these countries want MIGs [for obvious reasons ], they all want something called F-##. In general, I think it's a in general a fairly correct statement that the US defense contractors are the preferred suppliers in many cases.

 

I'm personally under similar investment restrictions as @WayWardCloud, set by the Lady of the House, btw. It's OK with me, I don't miss this to mess around with, also.

[Saluki]

1 hour ago, WayWardCloud said:

Defenses contractors do seem like today's no-brainer and I've been toying with the idea of a defense/aero ETF. Revenues should go up meaningfully because of Ukraine as well as the escalation of tensions in the Pacific and it would also add an anti-fragile element to the portfolio. However I came to the conclusion I couldn't look at myself in the mirror if I got rich from people being killed.

 

The Koch family had no problem making their fortune building refineries for Stalin.  Although Oil and Gas isn't as morally objectionable to most as munitions, what they did is more morally reprehensible than selling bullets to people fighting a Russian invasion.  If you were talking about selling guns to North Korea or to rebel warlords in Somalia, then I would say that you are correct. But I don't think the line is as clear as it seems. 

 

I don't have any defense companies, but I do own Smith and Wesson. Guns are used by criminals, but they are also used by law-abiding homeowners to protect their loved ones, and Police Departments are very large purchases of S&W. I'm okay with it, but I can see why others would be uncomfortable with it.  But in terms of "fishing where the fish are", Bruce Greenwald said that "unpopular and unloved" industries tend to be good places to find value. 

 

 

[no_free_lunch]

2 hours ago, Cod Liver Oil said:

As @Spekulatius implied, defense is politically unpalatable and keeps a lot of investors away. A PM I know at First Manhattan said he can't even mention defense or tobacco to his clients because he will lose them. I was inspired by someone's comment here that the least intelligent investor he knows had a great results because he kept things simple and obvious so, inverting, we can learn stuff from The Unintelligent Investor.

@no_free_lunch everyone is seeing rising insurance rates, what companies are the obvious beneficiaries?

All of my good outcomes have come from growth, not reversion to the mean. I see obvious top line growth in the panhandle of Florida, defense budgets, insurance pricing, gaming, cloud services and cybersecurity.

 

 

I like globe life.  Trading at just over 10x projected earnings for the year.   They are a cannibal buying back 3-4% of shares each year.  Berkshire has a stake in them.  Long term results are outstanding.  Obviously I am a bit late, the market is pricing some of this in.  However, I think relative to the market some of these insurance companies can offer reasonable returns of ~10%+ with fairly low risk.

 

Edited September 27, 2023 by no_free_lunch

[gfp]

2 minutes ago, no_free_lunch said:

Berkshire has a stake in them.

 

After many many years of owning Torchmark (now Globe Life), Berkshire has just started selling down their position, selling more than half of their longtime position in the last reported quarter.  Knowing Warren, he isn't going to just trim a small holding like this - so expect Globe Life to quietly dissapear entirely from Berkshire's holdings in the next 13-F.  

[Cod Liver Oil]

@Saluki Unfortunately, war is a feature of the human condition. As long as there have been men, there have been wars. It would be ridiculous to say we should not have a military. Armies need weapons. I could not tell you if owning stock in General Dynamics is an act of patriotism or shameless profiteering but our government has a strong point of view that they have a moral, economic and political obligation to protect our interests globally.  LMT and LHX have authorized buybacks of 15% of shares o/s and their cash flows should increase meaningfully over the next 3 years.  The unintelligent investor sees growing profitability combined with a shrinking share count.

https://www.wsj.com/articles/global-military-spending-hits-record-amid-ukraine-china-tensions-e8224262?mod=article_inline

 

Edited September 27, 2023 by Cod Liver Oil

[Saluki]

In terms of fishing where the fish are, the small/micro caps are full of tons of  junk with the occasional gem.  It's like going to flea markets and estate sales. The volatility on these microcaps takes some getting used to, though. I have a tiny position in one that I am trying to keep track of until I decide if it deserves a bigger weighting.  There was some minor good news this morning, but nothing that would make me want to buy more:

 

https://finance.yahoo.com/news/taylor-devices-announces-first-quarter-114500081.html

 

Within an hour of the open it was up almost 10%, then after lunch it gave up all its gains and was down 3.5% from the open. 

[sholland]

Oil producers, especially ones located in Canada.  Consensus seems to be that OPEC will defend $90 oil until it is no longer defensible. 

[schin]

On 9/27/2023 at 12:27 PM, Saluki said:

 

But in terms of "fishing where the fish are", Bruce Greenwald said that "unpopular and unloved" industries tend to be good places to find value. 

 

 

 

@Saluki Where are most unloved industries for you?

[Vish_ram]

Medical devices industry is a bit unloved

[Saluki]

9 hours ago, schin said:

 

@Saluki Where are most unloved industries for you?

I have some stuff in firearms (SWBI and a little VSTO), and a little tobacco (BTI).  Shipping has been dead money for 10 years, but I have a mid position is STNG and a smaller one in NETI and a few shares in two other ones I'm still researching (KNOP and SFL).   People hate oil, but VTS and OXY are mid sized positions for me, but I'm holding not buying more. People hate Chinese stocks and BABA is cheap now, but I'm down 50% on my position, so who knows.  I think commercial real estate is being killed for good reasons, but a lot of it is oversold.  HHH did a capital raise at $50 during the start of Covid and it's at $75 now.  The pandemic is no longer an existential threat for them and they have some great assets, albeit with mediocre management that keeps changing at the top. So it probably doesn't deserve a premium, but this discount is a bit much. My Mexican cable stock, TV, is getting killed but on a SOTP basis it looks good, and the bonds were selling close to par last time I checked, so who knows about that one too. Fairfax India looks cheap enough that they are buying back shares.  The Canada/India row is a nothing burger in the longterm. 

[Spekulatius]

How do you define unloved? What metrics would one use to quantify "unloved"? Discount to historical valuation metrics like EV/ EBIT?

[Saluki]

1 hour ago, Spekulatius said:

How do you define unloved? What metrics would one use to quantify "unloved"? Discount to historical valuation metrics like EV/ EBIT?

 

That's a great question because if you really like something then you can find some historical valuation metric to justify your decision to buy.  So for example, someone on this board has been heavily talking up a certain women's underwear maker. And you can look and pick out things like price to sales where it looks cheap. But other companies like Gildan (or even Hanes) are not getting beaten down as badly, so it's not that people hate the garment business, they just hate that stock. 

 

But if you look at something where the industry seems cheap by some valuation measure (or hopefully several), then you are not just buying a cheap company, you are trying to find the best value in the flea market. I think book value is not a great valuation metric for shipping, but if you see that they are all selling for much less than book, then you can find out if any corners of the market look promising, or companies that are making the right moves for shareholders by paying dividends, buying back stock, or paying down debt.  The same goes for things in the energy industry where they have a history of buying more capacity or doing more exploration instead of returning money to shareholders. For each industry, identifying the turning point is different, so it's important to stick with what you know.  In shipping, you look at the replacement order book vs the existing fleet.  For things like banks, I don't know what to look at, so it's an easy "no" for me.

 

I think most of these decisions will involve some qualitative aspect.  Maybe gun stocks or tobacco (or autos besides Tesla) will always trade at a low P/E because people hate the industries, and in those cases you will hopefully find some that have hidden growth potential, like the vaping or oral tobacco, to grow into a good outcome since the expanded P/E multiple will probably not show itself. 

 

Buffett made a great deal on buying a Railroad, which he jokingly said is one those industries that has a bad century now and then.  But if you look at WHEN he bought it, it's fascinating.  RRs had been consolidating after a few went bankrupt and the government eased the rules that made it hard for them to increase rates, so that they could make money again and not rely on government subsidies. So it looks like one of those places where "theory blinds observation."  If you are a person who has known that Railroads are a bad investment because it has always been for as long as you and your father, or possibly your grandfather, have been alive then you won't see it.  If too many people put it in the unloved pile and it deserves to be there, then no problem.  But if they are wrong about it, then it's running towards the goal with no one on the field. 

[james22]

Utilities are pretty unloved.

[Spekulatius]

27 minutes ago, james22 said:

Utilities are pretty unloved.

They went back to 2019 valuations. Big deal since interest rates are much higher. Utility stocks have served as bond substitutes and have become fairly unattractive, imo.

 

Health care got a huge bump during COVID in terms of valuation multiples that are now receding. i do like some plays especially health insurers but I think valuation wise, we are just looking at mean reversion here and I am not even sure we have overshot in this correction yet.

[james22]

39 minutes ago, Spekulatius said:

They went back to 2019 valuations. Big deal since interest rates are much higher. Utility stocks have served as bond substitutes and have become fairly unattractive, imo.

 

Yeah, unloved for good reason. Probably not undervalued (yet).