Trimming The VSL Of Oil, Commies, Laggards & Zombies

Summary

  • The “Very Short List” was originally my top 100 stocks. It’s over 200 now. Time to refocus and reduce the VSL to around 150 great and potentially great companies.
  • Growth stocks have a benchmark 20% annualized target return and dividend stocks a 15% annualized target return of 15% with greater stability both over 3-5 year timeframes.
  • Exxon and Chevron which were “suspended” are now outright removed as I will never own those again with their current business alignment. We’re down to 3 fossil fuel stocks.
  • I have removed all stocks that the “commies” can disrupt, destroy or take control of. There’s no point taking single stock risk on China or Russia.
  • I am also getting rid of most “turnaround” stocks, companies in highly disrupted industries, high debt companies with no growth and other assorted potential zombies.

The Coronavirus Pandemic has disrupted an already disrupted world. Our “normal” was already changing, but now has changed faster and more severely. A year later, I am doing a deep think on what we need to focus on.

To that end, I am refocusing our “Very Short List” of stocks. The first step is removing companies that have been disrupted to the extent they no longer qualify as great or likely to be great companies.

The second step you will see in a couple weeks when I add about a dozen new companies to the VSL. I am focusing on companies that generally are midcaps in size. This allows us to avoid the speculative, potential failure phase, and find stocks that can replace S&P 500 zombies in coming years. 

I am also paring down the ETF Favorites to best reflect asset allocation opportunities. Keep an eye out for that update by month-end and as noted in the ETF Trends piece I am now doing weekly. 

Removing Exxon And Chevron

Identifying secular trends is the first step in our 4-step investment process. It is clear that the secular trend is against fossil fuels.

While we will no doubt be using some fossil fuels for decades, without growth, very few fossil fuel companies, if any, will ever be great investments again. 

Make no mistake, I am not saying fossil fuels disappear tomorrow, but other than some trading opportunities, the fossil fuel companies have massive, expensive, complicated transitions to make. Most will fail those transitions. 

The only three companies remaining on the VSL are: 

  • Kinder Morgan (KMI) because there is virtually no competition for them from new pipelines, we will use natural gas for at least 3 more decades and the right aways are a backdoor play on hydrogen becoming important in energy storage and heavy transportation. 
  • Pioneer Resources (PXD) because of all the oil & gas producers, they have the best combination of “good rock” (exclusively Permian land), low debt and smart management. 
  • Total (TOT) because they are far ahead of all the other oil majors in transitioning their business to clean energy and utilities. Their cautious approach to fossil fuel development the past two decades has served their balance sheet well and they have support from the French government. 

I removed: 

  • Exxon (XOM) because the secular trend is against them, I don’t trust management, they have refused to begin an orderly transition to cleaner energy, their finances are deteriorating and they have large potential legal liabilities. 
  • Chevron (CVX) because the secular trend is against them, management is only slightly better than Exxon’s, they have barely begun an orderly transition to cleaner energy, their finances are no longer improving and they have large potential legal liabilities.

Earlier this year I removed Occidental (OXY), Conoco (COP), EOG (EOG), Devon Energy (DVN), Diamondback (FANG), Ovintiv (OVV), Marathon (MRO), Continental (CLR), Antero (AR), Helmerich & Payne (HP), Enbridge (ENB), Marathon Petroleum (MPC) and Phillips (PSX). Chesapeake Energy, as I forecast a couple years ago, went under. Several others merged themselves off the list, for example, Parsley and Concho. 

To be sure, some of the companies I removed are going to hang in there a long time. None have much hope of beating the index long-term though.

If you insist on fossil fuel exposure, and I say this as a guy who was in oil and gas stocks for 20 years, stick to the three I have kept on the list. I gave the core reasons they stuck. For those willing to buy fossil fuel stocks, I can see buying Pioneer and Total the next time oil stock prices crater with oil price declines (maybe by year-end). 

Removing “Commie” Stocks

Obviously I say “commie” slightly in jest. I have no problem with groups of people, of any nationality or race. But, I do have a problem with extreme ideology, politics, religion or any other kind of extremism.

Communists are extremists and the Chinese Communists are the extremist of the extremists. We can’t completely trust them at any level and can’t trust them at all at certain levels. We certainly can not trust them to provide safeguards on our investments. 

I had a dissident professor from China in 1990. He could not go back to China for fear of being persecuted. Many of his friends, colleagues and family suffered under the yolk of Chinese oppression. He said this to a small group of us students who were in the group being considered for a graduate track: 

(Paraphrased after all these years) “The Chinese government will string America along at every juncture. Make a big promises, get what they can, fail to deliver. Make new big promises, get more, fail to deliver. They’ll do it as long as they can.”

I have been watching that play out for 3 decades now. I have read about and listened to people talk about the decades since World War II. The Chinese communist party has become more extreme, especially under Xi.

With what we are seeing happen to Alibaba (BABA) – maybe the best company in China – and other companies, why would I ever invest in a Chinese company directly again? 

The Chinese government can disrupt, destroy or take control of any Chinese, and now, or Hong Kong company. If we invest in stocks individually, we are reduced to stupidly speculating on the goodwill of the Chinese government.

There is certainly an argument to be made for Chinese growth as more people move up the middle class ladder. And it’s probably good for peace to not isolate them financially. But, the single stock risk is too much.

So, where we can make adjustments to our asset allocation to try to take part in Chinese growth, we can use ETFs. This will expose us to aggregate Chinese growth without the single stock risk.

The ETF I am most focused on is the Emerging Markets Internet & ECommerce ETF (EMQQ) which has a healthy slug of Chinese stocks (26%), including Alibaba. 

Removed stocks from VSL are as follows: 

EMQQ holdings.

I removed Russian stocks a few years ago 

Removed Growth Laggards And Potential Zombies

Companies that were severely impacted by the pandemic and business shutdowns were removed. While many of these companies will remain in business, and could even be called good companies, in cases where the scar resulted in higher debt and lower future revenues, which is obviously not a good combination, I took them off of our focus list. Some might be added back in the future if they overcome their business challenges.

One thing I try to keep in mind is a Buffett quote:

Turnarounds seldom turn.

So, to the extent I do include “turnaround stocks” I have some good reasons based on identifiable catalysts. The sorts of things I’ve talked about with Ford’s (F) 4th Industrial Revolution technology, or Lumen Technologies (LUMN) eventual M&A separating at least the consumer division, or AT&T’s (T) ability to cut debt and monetize Warner somehow, or Travelcenters Of America (TA) new C-corp structure and role in future trends in EV transportation and logistics with supply chains moving back to America, need to be apparent to me for inclusion on the VSL.

Here are the companies I removed with the short reason: 

Company (Symbol)Short reason…
Discovery (DISCA)valuation
Interpublic Group (IPG)valuation/growth
National CineMedia (NCMI)debt
Omnicon (OMC)valuation/growth
Kohl’s (KSSvaluation/growth
Nike (NKE)growth
Ulta (ULTAvaluation/growth
Clorox (CLX)growth/debt
Procter & Gamble (PG)valuation/growth
Sysco (SYY)valuation/growth/debt
American Express (AXP)tracks SPY w/o big divi
Invesco (IVZ)valuation/growth
Alexion Pharma (ALXN)acquired (AZN)
CareDX (CDNA)growth
Zynex (ZYXI)growth
Boeing (BAvaluation/debt
General Electric (GE)growth/debt
Insperity (NSP)growth/debt
Ichan Enterprises (IEP)growth/debt
Northrup Grunman (NOC)growth
Blackstone Mortgage Trust (BXMT)credit risk/growth
Chimera Investment (CIM)credit risk/growth
Camden Property Trust (CPT)growth
Dynex Capital (DX)credit risk/growth
Hersha Hospitality (HT)growth/debt
Ladder Capital (LADR)credit risk/growth
Annaly Capital (NLY)credit risk/growth
Sotherly Hotels (SOHO)growth/debt
Simon Property Group (SPG)valuation/growth/debt

I am sure there are several more to be removed, I will continue this work the next few weeks.

I was generous at keeping some SMID cap healthcare companies, despite uncertainty. Some can be very big winners, but some can be very big losers. Only include stocks you understand the risks on, otherwise, use an ETF such as the ARK Genomic Revolution (ARKG) to buy the basket. I will continue to analyze ongoing.

Sentieo is helping me track down amazing insights across the board, including biotech. I am sure I will have a few company additions over time. Biotech is a place for homeruns if we can properly manage the risk. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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