I recently wrote an article that startled me with its reaction. Over 330,000 people read it in two days on Reddit alone. It was We Have Had 2 Recessions And 2 Bear Markets in 3 Years, Will It Be 3 In Just 4 Years? That is a clickable link to it. I suggest reading it first. It starts with "I have watched the stock market since the 1970s. Never in my life have I seen so many people think a recession was coming before. Yet this has gone on for about 9 months, and still no recession. "
This Friday, 6-2-2023, was a breakout day for both the SP500 and the Russell 2000 (small caps). The SP500 did a Cup and Handle breakout and the Russell a flat bottom base breakout. The NASDAQ 100 has already broken out, for a while. Yes, there are all sorts of bad things and stock valuations are poor. But does that mean the stock market will not go up? Look at 2020 and 2021 as recent examples of bad problems and extremely high valuations, and the stock market still went up big anyway. We have had two bear markets in the last 3 years, a rare event. One other factor. Oil stocks are at arguably the best valuations ever and maybe the best sector valuation ever. The Russell small caps recently made new lows in its ongoing bear market, which after Friday, is maybe over. The Russell blew away the NASDAQ on Friday, in terms of gains.
What happened on Friday? Well, the debt ceiling was kicked down the road as it always is and the Jobs report fooled everyone again This has been going on for about 9 months now, with almost everyone bearish and expecting a recession. The jobs market is actually hot. This was not predicted at all.
I totally agree with people like Danny Moses, Guy Adami, Carter Worth and Dan Nathan that point out all the bad things as they do in this video, but does that mean we will crash, as they have been expecting for months? They do a good job of making the bear case, but then what happened? The next day the Russell broke out of that range they talked about containing it, on their chart.
https://youtu.be/ZEwCAp-Zb9o?t=280
So, will the economy fool everyone and not go into recession? Maybe, and sure has so far.
To the last question Where Do Oil Stocks Go from Here? This one I am much surer of; in my opinion they will go into a historic bull market. I have already experienced one, having bought them heavily in 2020 COVID crash. Received several 10 and 20 baggers and just about any oil stock 5 bagged in that rally.
Here is a happy story of what is possible in such bull markets in oil stocks. I bought Cardinal, a Canadian oil stock (CJ.to or CLRFF on USA mkt). Got a 20 bagger and now it has a 1% a month roughly dividend. Yes, that means I am roughly getting 200% yearly dividends now and have been getting them for a while. And in the last month have bought more Cardinal. At 1% dividend a month on a 4 PE stock with a CROIC of 30%, it is still a great deal. The valuations are better now than in 2020 for oil stocks. Back then they were in danger of going under, but dirt cheap. Now dirt cheap at higher prices, yet much higher safety with wonderful balance sheets and cash flows.
These two charts show that oil stocks are dirt cheap and spending less on CapEx than ever before, as a percent of Cash Flow. This time is different, they are not overinvesting as they did every time before when oil went over $100.
Eric Nuttal, who runs Canada's biggest oil stock fund, talked about the coming oil stock bull market in a recent video. About how buybacks can drive a $20 oil stocks to over $1 million a share, unless they go up greatly before the buyouts complete. Do not scoff, he is right. He makes the case for oil stocks and high cashflow oil stock buybacks so well in this video, I will not comment myself. The whole thing is worth viewing, but this link starts where he talks buybacks.
https://youtu.be/fv35J8Qr7AE?t=442
On buybacks will do some math here. In this case if a stock started at $20 a share, $1 billion FCF and mkt cap of $3 billion = 150 million shares you will get to $1 billion a share in 3 years if 100% of FCF goes to buybacks and stock does not go up before then. If it rerates to 9x FCF after 1 year then was 3x FCF, 33% of stock removed = 100,000,000 shares and $9 billion market cap = $90 a share a 4.5 bagger in one year.
Reality today June 2023 is the best, we have had big buybacks and prices have stayed about the same in last 12 months on oil stocks. Debt is way down, so they have more money for buybacks.
So, let's go 1 more year at current prices. $1 billion FCF is spent buying back stock. That is 50% of stock left, so now just 50,000,000 shares left. Then it goes to 9 FCF (still cheaper than avg stock out there) so $9 billion mkt cap / 50,000,000 shares left = $180 a share, so a 9 Bagger. Pretty good.
Let's go 1 more year. Let's say the market was as stupid as it was in 6-2022 to 6-2023 and price stays the same. That means the remaining 50,000,000 shares are bot back, except for just 1 share. Then it goes to 9 X FCF = $9 billion mkt cap and 1 share = $9 Billion a share. A 450 million Bagger. This will not happen because eventually the market wakes up to how stupid it has been after 10?, 20?, 50? times increase in earnings per share, and it rerates the stock way higher, until it no longer is worth buying back. In fact, the company might sell some back for 20 times more than they bought it for, if it makes sense to. Also, if a company gets 2/3s of its stock back, then its EPS going forward, for every Q, will be 3 times higher.
As an example of what can happen with buybacks with far inferior cashflows, and valuations is Teledyne. George Roberts, who worked alongside Singleton, described the experience like this:
Henry was quoted as saying, with a laugh, “In October, 1972, we tendered for one million shares and 8.9 million came in. We took them all at $20 and figured it was a fluke, and that we couldn’t do it again. But instead of going up, our stock went down. So we kept tendering, first at $14 and then doing two bonds-for-stock swaps. Every time one tender was over the stock would go down and we’d tender again, and we’d get a new deluge. Then two more tenders at $18 and $40.”
The first six buybacks were all in the period from 1972 to 1976. The market reacted adversely to this at first, not understanding what Henry was accomplishing. But as the number of shares went down and the company’s operating income continued to grow, the earnings per share increased rapidly and dramatically. In 1970, net income per share was $1.64. By 1975 it was $6.09 per share; in 1976, $10.79; and in 1977, $16.23 per share.
With the first six stock buybacks, a total of some 22 million Teledyne share were repurchased, reducing the number of outstanding common shares to less than 12 million. A seventh stock buyback offer was made in 1980 and the final one in 1984, at the extraordinarily high price of $200 per share. This was about $30 above the current market price and eight million shares were bought back. By September of that year the stock had climbed to $302 per share and was the highest priced stock on the New York Stock Exchange.
The total value of these buybacks was over $2.5 billion, and more than 85 percent of common shares were retired. Shares outstanding had dropped from 88,827,372 in 1971 to 22,564,756 in 1980. Henry also purchased another 5 percent of Teledyne shares on the open market at various times, bringing the buyback total in the years 1972-1984 to over 90 percent of the company’s shares.
Singleton eventually paid off the debt used to buy back shares. By 1985, net income per share was $46.66. The buybacks created a compounding effect on earnings per share.
Remember oil stocks that are doing, or about to do, buybacks are at about 3-7 times better valuations than Teledyne, so they can compound better. Teledyne was never in a position to buy back at a fast enough rate, so that all of their stock could be bought back in 3-4 years, just with free cash flow. So, Teledyne was not even close to being able to do what oil stocks can do today.
An example is Cenovus CVE on USA and CVE.to. As Nuttal pointed out CVE has committed to 100% of FCF to go to buybacks soon, after debt drops. They can buy back all their stock in less than 4 years, unless the stock rerates higher. Teledyne was never even close to being capable to do that.
Just going through my stocks, some oils I have are:
AOIFF AOI.to BNEFF BNE.to BTE BTE.to
CPG CPG.to CRLFF CJ.to CVE CVE.to FECCF FEC.to
GENGF GXE.to GXRFF PEI.to IPOFF IPO.to
KGEIF KEI.to OBE OBE.to PTRUF PQR.to
ROKRF ROK.to SPGYF WCF.to VET VET.to
