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Valuentum Weekly: Outsized Energy Exposure Continues to Buoy Newsletter Portfolios

publication date: Mar 7, 2022
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author/source: Callum Turcan

Image: Light crude oil futures once traded for roughly -$40 (negative $40) during the COVID-19 crisis, but have now rocketed to more than $120 in recent trading. Image Source: TradingView.

This note was emailed to members Sunday, March 6, 2022.

Markets
 
  • The S&P 500, as measured by the SPY, is down 9% year-to-date, a modest pullback, in our view, particularly in light of the fantastic performance the past few years. Though not necessarily welcome, a down year every now and then for the broader market indexes and a modest bear market can only be expected, at times. The Dow Jones Industrial Average, as measured by the DIA, is down more than 7% year-to-date (not too bad), while the Nasdaq--as measured by the QQQ--and 'disruptive innovation' stocks--as measured by the Ark Innovation ETF (ARKK)--have fallen more than 15% and 36%, respectively, so far this year (data from Seeking Alpha). We like how the simulated newsletter portfolios are positioned.
  • Energy resource prices continue to surge (with WTI crude oil prices skyrocketing north of $120 per barrel at last check), and they are bringing energy equities higher along with them. The simulated Best Ideas Newsletter portfolio, simulated Dividend Growth Newsletter portfolio, and simulated High Yield Dividend Newsletter portfolio are all materially overweight energy equities relative to the energy sector’s weighting in the S&P 500, and we expect to maintain such high tactical "exposure." Both the Energy Select Sector SPDR ETF (XLE) and the Vanguard Energy ETF (VDE) soared to 13-year highs last week. Our favorite energy ideas are the largest two energy majors, Exxon Mobil (XOM) and Chevron (CVX), and both have hefty 'weightings' in each of the three aforementioned simulated newsletter portfolios, “Evaluating the Exposure of Chevron and Exxon Mobil to Russia’s Energy Industry.”
  • Russian equities, as measured by the RSX, are down nearly 80% so far this year, and we're pleased to say that we've largely avoided the fall out. We continue to like the broader areas of U.S.-heavy, large cap growth and big cap tech when it comes to long-term secular exposure, and we continue to like energy as a tactical overweight for the foreseeable future across the simulated newsletter portfolios, as much as we did even prior to the huge advance in energy resource prices and the invasion of Ukraine by Russia.
  • As reported by BNN Bloomberg, “fertilizer is getting harder to find just as farmers are getting ready for planting,” and as noted by CF Industries, fertilizer “inventories will be ‘as low as we’ve ever seen’ heading into the Northern Hemisphere’s summer.” We think this bodes well for Nutrien Ltd (NTR), a company we recently wrote up as a dividend/income idea. For those interested, our latest work on NTR can be accessed at the following link, “Nutrien Benefiting from the Strong Global Farm Economy (Feb 8).” 
  • Gold prices, as measured by the GLD, are up more than 7% so far in 2022, according to data from Seeking Alpha, and our favorite gold miner remains Newmont Corp. (NEM), which is looking very attractive from a technical standpoint, in our view. Defense stocks have also been catching a bid thanks to expectations for increased defense spending in Europe led in part by Germany, which materially increased its defense spending budget for 2022. Our favorite defense contractor is Lockheed Martin (LMT), whose stock price has soared in recent months! Please note that both NEM and LMT are included as ideas in the simulated Dividend Growth Newsletter portfolio.
  • We recently closed out four "winners" in the Exclusive publication, which continues to boast impressive idea "win rates." If you're managing a hedge fund or looking for ideas each month across the areas of income, capital appreciation, and short idea considerations, the Exclusive may be right up your alley. Here is more information >>
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Top News
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  • Russia continues its invasion of Ukraine, and the war has only grown in intensity and scale since our last update. Fighting at nuclear power plants has the world on edge, while shelling of major cities and the killing of innocent civilians may amount to war crimes committed by Russian President Vladimir Putin. The world continues to watch the fighting in Ukraine with worried fascination as NATO guards its borders and the Ukrainian President Volodymyr Zelenskyy pleads for a no-fly zone above Ukraine and continued support from the West. Congress has already been warned about an estimated timeline that cities in Ukraine will fall into Russian hands, and many are alarmed. We do not expect the U.S. or other NATO countries to get directly involved in this fight, as it may mean nothing more than nuclear war. We hope for peace soon.
  • Dividend Growth Newsletter portfolio idea Honeywell (HON) was upbeat during an investor conference last week, noting the following in a press release: “We are raising our long-term financial framework, including our organic growth, margin expansion, and long-term segment margin targets, to reflect our confidence in Honeywell's ability to accelerate growth and deliver value for shareholders. This is an exciting time to be part of Honeywell, whether you are an employee, a customer, or a shareowner.” The press release >>
  • Hut 8 Mining (HUT) provided an update on its February daily average bitcoin production, which came in at 289 during the month, or an average of 10.3 bitcoin per day. The company holds 6,115 bitcoin in reserve, as of February 28, 2022. Cryptocurrencies are extremely speculative instruments, but for those that may be interested in this area, we recently wrote up Hut 8 Mining last November, “Hut 8 Mining Is an Interesting Play on Cryptocurrencies (Nov 15).”
  • We remain bullish on ideas in the simulated Best Ideas Newsletter portfolio, and Meta Platforms (FB) may be one of the most undervalued stocks on the market today. FB's share price volatility has given us a lot of heartburn, however.
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Economy
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  • The 10-year Treasury yield now sits under 1.7% as many now believe that Russian's invasion of Ukraine will move the Fed to a more dovish stance in light of sanctions and more uncertain global economic conditions. We maintain our view that the 10-year Treasury yield is at healthy levels, supporting our bullish stance on equities. Our expectations that the Fed will raise rates at a modest and very accommodative pace are unchanged.
  • According to the February 2022 Services ISM Report on Business, released last week, “Economic activity in the services sector grew in February for the 21st month in a row — with the Services PMI registering 56.5 percent.” The Chair of the ISM Services Business Survey Committee had the following to add: “According to the Services PMI, 14 industries reported growth. The composite index indicated growth for the 21st consecutive month after a two-month contraction in April and May 2020. Although there was a pullback for most of the indexes comprising the Services PMI, in February, growth continues for the services sector, which has expanded for all but two of the last 145 months. Respondents continue to be impacted by supply chain disruptions, capacity constraints, inflation, logistical challenges and labor shortages. These conditions have affected the ability of panelists’ businesses to meet demand, leading to a cooling in business activity and economic growth.” To read the report >>
  • We believe the U.S. economy remains very healthy, and we have tremendous confidence in the Fed to guide the markets through any sustained turmoil. We don't think the war in Ukraine and a 10-year Treasury rate still near all-time lows will derail the global economic machine that has endured multiple world wars and global pandemics. We're huge fans of stocks for the long haul.
  • Warren Buffett's Annual Letter to Berkshire Hathaway Shareholders is now available. It can be accessed here >>
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Valuations
 
  • Our best ideas continue to be in the simulated Best Ideas Newsletter portfolio, simulated Dividend Growth Newsletter portfolio, simulated High Yield Dividend Newsletter portfolio, simulated ESG Newsletter portfolio, within our additional options commentary, and in the Exclusive publication. Our team sorts through our vast coverage universe to identify the very best of ideas for consideration, in our view, and we include such ideas in the monthly publications that target unique strategies.
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Fed and Treasury
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  • The Fed’s Beige Book was released March 2. Here’s the National Summary for ‘Overall Economic Activity,’ ‘Labor Markets,’ and ‘Prices:’ “Economic activity has expanded at a modest to moderate pace since mid-January. Many Districts reported that the surge in COVID-19 cases temporarily disrupted business activity as firms faced heighted absenteeism. Some Districts attributed a temporary weakening in demand in the hospitality sector to the rise in cases. Severe winter weather was also cited as disrupting activity. As a result, consumer spending was generally weaker than in the prior report. Reports on auto sales were mixed. Manufacturing activity continued to grow at a modest pace. All Districts noted that supply chain issues and low inventories continued to restrain growth, particularly in the construction sector. Reports from banking contacts indicated some weakening of financial conditions, although loan demand was generally unchanged. Demand for residential real estate was generally strong, although many Districts reported no change in home sales due to seasonal trends and low inventories. Agriculture reports were somewhat mixed, as some Districts experienced difficult growing conditions while others benefited from higher crop prices. Reports on the energy sector indicated modest growth. Among reporting Districts, the overall economic outlook over the next six months remained stable and generally optimistic, although reports highlighted an elevated degree of uncertainty. Employment increased at a modest to moderate pace. Widespread strong demand for workers remained hampered by equally widespread reports of worker scarcity, though some Districts reported scattered signs of improving labor supply. Many firms had difficulty maintaining their staffing levels due to high turnover; this challenge was exacerbated by COVID-19 disruptions in January, though workers and firms recovered more quickly than during previous waves. Firms continued to increase compensation and introduce workplace flexibility to attract workers—especially in historically low-wage positions—with mixed success. Contacts reported they expect the tight labor market and consequent strong wage growth to continue, though a few Districts reported signs of wage growth moderating. Prices charged to customers increased at a robust pace across the nation. A few Districts reported an acceleration in prices. Rising input costs were cited as a primary contributing factor across a broad swath of industries, with elevated transport costs particularly significant. Labor cost increases and ongoing materials shortages also contributed to higher input prices. Firms reported an increased ability to pass on prices to consumers; in most cases, demand has remained strong despite price increases. Firms reported they expect additional price increases over the next several months as they continue to pass on input cost increases.” To dig in more >>
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ETF News
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  • Many initial public offerings (IPOs) continue to struggle in a market that has become more discriminating with respect to risk tolerance. Snowflake (SNOW) is the latest to feel the pain, sliding considerably last week. The Renaissance IPO ETF (IPO), which is based on an index “of the most liquid U.S. listed newly public companies,” is down more than 20% so far in 2022 and more than 33% the past year, according to data from Seeking Alpha.
  • As we wrote in our book Value Trap, increased volatility may be the way of the future. The trend toward more and more leverage continues, and GraniteShares is following Direxion Funds into the leveraged stock ETF game that will allow traders to double up their exposure on nearly 20 stocks. The SEC opened Pandora’s box when it allowed the proliferation of quant and indexing, and new ETFs are only increasing the risk to long-term market structure. Here is GraniteShares’ prospectus >>
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On Deck
 
  • Up next is the Best Ideas Newsletter and ESG Newsletter, both to be released on March 15. We hope you continue to enjoy your membership to Valuentum!
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Thank you for reading!
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Kind regards,
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The Valuentum Team
www.valuentum.com
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Tickerized for SPY, DIA, QQQ, ARKK, XLE, VDE, XOM, CVX, RSX, RUSL, ERUS, FLRU, RSXJ, NTR, NEM, GLD, LMT, HON, HUT, FB, AGG, BND, TLT, IEI, IEF, MARA, MSTR, COIN, RIOT, BTBT, CORZ, SI, BKKT, LQD, IAU, NUGT, PHYS, GDX, SLV, SIL, SIVR, PSLV, PALL, SPPP, GOLD, AUY, KGC, AU, AEM, HMY, GFI, BTG, AGI, NILSY, BASFY, CF, MOS, UAN, IPI, SNOW, IPO, DFEN, ITA, XAR, FITE, PAA, HACK, WEAT, CORN, SOYB, USO, UCO, BNO, SCO, USOI, USL, DBO, NRGU, UGA, OILK, NRGD, OLEM, USAI, NRGO, NRGZ, YGRN, UGA 
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Disclosure: Callum Turcan owns shares in FB and XLE and is long call options on FB and XLE. Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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