The Rational Cloning: Weekly Ideas #15
Twebs on the Double Dog Index (Pabrai's "PE of 1") | LT3000 on Contrarianism, ESG Investing, and Coal
Welcome to the 15th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Twebs on The Double Dog Index
Essentially an interesting list of cyclicals trading 1-3x NTM EV/EBITDA. An eclectic mix of coal, steel, shipping, fertilizer, lumber and copper. Reminds me of Mohnish Pabrai’s “P/E Of 1 Stocks”:
1) ARCH - This is my favorite Double Dog because I view downside risk as incredibly contained (low on cost curve, you are VERY likely to get capital return) yet the upside convexity is very much there. I am linking my last article but there are two others in my Substack archives.
2) AMR - Could earn nearly 1/3 of its market cap in the first quarter! Come on. Some who are smarter than me prefer AMR as they view it as higher upside convexity capture.
3) X - Dirt cheap and they don’t even have a pension overhang!
4) STLC - Could this be the unicorn? The aggressive repurchase is already very much in motion, and this management team seems to be very aligned with shareholders. How can you not love buying back 13% of the company in one transaction at a 26% discount?
5) ZIM - My favorite part of Shipping Twitter right now is the many posts about the amount of free cash flow ZIM makes PER WEEK :). Once again, shipping is not without its flaws, but the market is absolutely daring you to bet that rates don’t implode tomorrow.
6) UAN - Plum expects $38 of distribution on an $82 stock in the next three quarters and this is a company that can forward sell up to 6 months of production.
7) LXU - Similar to $UAN, with a good primer thread below
8) RFP - $1000 Lumber Prices would lead to a sub-1.5x EBITDA multiple and the company has already started small buybacks and paid a $1 special dividend during the Lumber run in May. I wrestled with including Lumber companies as they do have very little ability to lock in the curve, but who knows, maybe the fact that this commodity has spiked back to $1100 means we might see a yearly average in the $800-$1000 range. There is a confluence of supply and demand issues causing these price spikes, and it’s not just Covid-related supply disruption.
9) GFP.V- I wrote this one up a few months back and my key conclusion was that if you just build a two-step model with 1 year of strong prices and then revert back to either $500 or $600 Lumber long-term, the risk/reward looks quite favorable. Interestingly, you really get paid much more on the normalized assumption (as opposed to the 1-year super-spike) and I am becoming increasingly confident that something like $550 could be a new floor.
10) CEIX - Consol has optionality to hit a lot of different markets with its Thermal coal production, so there are many ways to win here. @KNLCBD did a great episode of Single Stock Spaces and posted this thread in advance
11) WHC - A bit controversial as there are some who really don’t like management here, but stronger for longer Newcastle and this stock is severely under-valued.
12) ARG.TO - Sure it’s nichey and there is some idiosyncratic risk but it’s also levered to copper prices and makes zero sense if Copper over $4 has duration…. and we aren’t having an energy transition without a boatload of copper demand.
(2) The LT3000 Blog: Contrarianism; ESG investing; coal; and climate change
Great piece on contrarianism and anti-ESG investing.
Generally acknowledged that one needs to act in a contrarian manner to achieve outsized returns
Yet in practice, it is very hard to go against the crowd
Many instead practice faux contrarianism: buying expensive stocks that have recently become less expensive (e.g. Peloton comes to mind or any of the ARKK names. Kuppy calls these the the “Ponzi Sector”, which is the whole grouping of companies that has no ability or desire to ever become profitable. Highly recommend his piece: The Problem With Ponzis)
The root of genuine contrarianism lies in the idea that the world is not binary (white/black, good/bad), but is instead extremely complex and contains many shades of gray.
ESG embodies binary generalizations: coal/oil/gas is bad, fracking is bad, solar panels/wind is good
Some favorite bits below:
It is widely acknowledged in the investment world that one need think and act in a contrarian manner in order to achieve outsized returns and differentiated results. However, despite many claims to contrarianism and ‘going against the crowd’, its actual practice is vanishingly rare, and the core ingredients that drive effective contrarianism are also often misunderstood. It is not simply a matter of having a disagreeable personality, and disagreeing for the sake of it, or buying a stock simply because it has gone down.
Much of what passes for contrarianism these days is actually what I describe as ‘faux contrarianism’ - buying expensive stocks that have recently become slightly less expensive, but where the fundamental view on the company remains very much in accordance with recent mainstream opinion (and often fails to comprehend new, emergent negative developments which have driven the recent share price decline, but are not yet apparent to all).
In my opinion, the essence of genuine and effective contrarianism lies in a deeply-rooted belief/understanding that the world is not black and white, but instead shades of grey, and is filled with infinite nuance and complexity, and as a result, future outcomes will routinely surprise mainstream popular opinion informed by overly-simplistic generalisations and thinking in absolutes.
We see the same sort of simplistic, binary thinking manifesting in the investment world all the time, and it is generally characterised by the excessive use of generalisations and absolutes. Examples include ‘bricks and mortar retail is dead’; ‘EVs are displacing ICEs’; ‘ride hailing will put an end to private vehicle ownership’; ‘Millennials don’t buy stuff anymore, they buy experiences’; ‘coal is dead’; ‘Europe’s banks are all insolvent’; ‘banks are all black boxes and are hence uninvestable’; ‘Greece is bankrupt’; ‘China is nothing more than a giant leveraged bubble that will explode’; ‘Russia is bad’; ‘Africa is the hopeless continent’; ‘Trump is stupid and everything he says is by definition wrong’; ‘free trade is always best in all circumstances’; ‘you’re either for immigration or against immigration’; ‘China is evil’; ‘shopping mall REITs are all going broke’, or ‘malls in tier 1 cities will be immune from online threats; malls in tier 2 cities will go bankrupt’, etc.
What all of these types of claims have in common is that they are all absolute, black and white assertions… they are also all generalisations that lack any sort of nuance, or leave any room for complexity or uncertainty.
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The latest in the long and continuous string of fallacious black and white thinking to envelop the investment world has been the emergent wave of so-called ESG investing (environmental, social & governance).* The flaw is not in the principle or idea of ESG investing (after all, what is usually good for employees, customers, and broader society, is generally good for business in the long term as well), but instead the manner of its typical execution, which precedes on the assumption that the world is simple and clear cut, rather than complex and contradictory, and that businesses/industries can therefore be easily put into ethical and unethical categories.
Armed with this belief, the ESG crowd has proceeded to categorizes stocks and industries as either ‘good’ or ‘bad’ in an extraordinarily blunt way entirely lacking in nuance. ‘Coal is bad’; ‘fracking is bad’; ‘solar panels and wind farms are good’; etc, are obvious examples. The ‘coal is bad’ view is perhaps the most widely held, black and white position in the ESG community; it is the archetypal climate villain. No ESG investor would be caught dead owning a coal stock.
I recently came across an interesting tidbit by Murray Stahl on coal as well from FRMO’s Q1 2022 quarterly call:
Okay. So I think – the question is, are there investment opportunities in the world of coal?
Well, coal is so ostracized that there’s almost nothing left that’s publicly traded in coal. So there’s really not a lot to choose from in coal. My own personal view coal is – I don’t think it’s going away. What went away, what went bankrupt are coal companies that had legacy liabilities, black lung disease, pension liabilities, post-retirement health care liabilities, that sort of thing, those companies went away.
But demand for coal globally, as you can probably tell, is exceedingly robust. And there’s a lot of profitable coal companies. Unfortunately, they’re not publicly traded. And it’s not easy to find ways to invest in coal, but we are looking.
Luckily for you, there are a few interesting coal names in the The Double Dog Index ($ARCH, $AMR, $CEIX, $WHC).
Insider Observations
Tweets That Make You Go… Hmm 🤔