Motley Fool Hidden Gems Investing - Allocation Strategies for a Down Market

Episode Date: March 2, 2022

Between President Biden's State of the Union address and Fed Chair Jay Powell testifying before the U.S. House Committee on Financial Services, there are multiple investing-related stories coming out of Washington, DC. (0:25) Bill Mann discusses: - The current state of play for the oil & gas industry - Why investors should be looking at exploration and production companies - How the stock market has already priced in the first interest rate hike of 2022 - The increasing lure of businesses with great free cash flow and the ability to raise prices. (13:00) Jason Moser and Matt Frankel share allocation advice for a down market. Stocks discussed: OXY, GOOG, GOOGL, AAPL, BRK, RHP, PYPL, SQ Host: Chris Hill Guest: Bill Mann, Jason Moser, Matt Frankel Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Check your politics at the door and put on your investing hat, because it's not about red or blue, it's about green. Motley Fool Money starts now. I'm Chris Hill, joined once again by Motley Fool Senior Analyst, Bill Mann. Thanks for being back here by popular demand. Bill Mann. I think it was just you and one other guy though, right? That's popular demand. There are a couple of things I want to get to. As you and I are talking at the moment, the Federal Reserve Chair Jay Powell is across the river on Capitol Hill spending some time with the nice people at the U.S. House Committee on Financial Services. We will get to that. But I want to start with,

look, long-time listeners know this is not a political show. So, this is not the show for those who are looking to mix a lot of business and politics. However, I would be remiss if I didn't notice that the President of the United States gave the State of the Union address last night, and one of the ripple effects of that speech is continued conversation of the oil and gas industry as the conflict continues with Russia's invasion of Ukraine. All of that laid out in front of you. Where are we now with the oil and gas industry? What do you think as you watch the last 48 hours play out the way it has? It is interesting. And yeah, we try not to be political, but sometimes politics shows up

on businesses' door. And this is absolutely one of those occasions. You know, Chris, I think that we're in some ways seeing the result of a rather unserious energy policy here in the U.S. and in Europe as well. And, you know, it's the kind of thing where a lot of the energy people who really track the energy industry have said was coming for a long time, have said that Europe, for example, was leaving itself way too vulnerable to Russia, for example, just, you know, for their energy needs. And there's a cliche that energy is life. And one of the things I was hoping for was to see a little bit more of a recognition of the fact, even if we don't like it, even if we say, well, you know, the good person in me says that, you know, in time, I want us to be a country that's

run primarily on renewables, that we need to recognize now that our energy policy, as it pertains to the oil and gas industry, it doesn't help us at all, and it definitely helps our adversaries at this point, in particular, Russia. This is not specific to the oil and gas industry. this is the case with pretty much every industry, that when there are overarching conversations in the media about a given industry, the attention goes to the biggest companies and the biggest names. The usual suspects in the oil and gas industry are companies like ExxonMobil and Chevron. Where else should we be looking as investors? Because this is an enormous industry. You know, I sort of chuckle every time someone refers to the healthcare industry, and I want to say, which part?

Because it's an enormous industry. It's like asking about business. Right. Tell me what you like about it. What's your favorite business in the business sector? In terms of oil and gas, where else should we be looking beyond the usual suspects? I would look specifically in the exploration and production patch. One of the big issues that has happened is, we've had about 10-15 years of deep, deep under-investment in exploration and

production. In the U.S., there's a really neat measurement, it's called drilled but uncompleted wells. It's a measure of how many wells are not producing right now, but they're ready. When we talk about turning on the taps, this is what you would talk about in terms of turning on the taps. In 2020, there were almost 9,000, now there's about 4,500. There really, really is not that much available, ready to turn on taps in this country. If you're looking at places where there is going to be an obvious demand, I would look at the exploration companies. Anadarko is one, by the the way, not a small company at all, you know, $13 billion in annual revenue. Occidental Petroleum is another. And, you know, these are companies that are out doing the exploration for really

the fuel that's going to be running our economy for, you know, for a long while, whether we like it to do or not. I want to go back to that metric because I'd never heard of that before. Drilled but uncompleted wells? That's the metric? Yeah. D-U-C. Let's go acronym on everything, Chris. C-H, it's D-U-C. Yeah, they're called drilled but uncompleted wells. It's something if you have a Bloomberg connection or you have access to the EIA, the Energy Intelligence Agency, excuse me, those sorts of metrics are listed there. And it's simply, these are wells that you've got, that these are 95% complete. You could turn them on. And the number that we have right now, both through energy policy and then also through the reality that following the drop in

oil prices in 2020, there was a lot, a lot of losses in the oil and gas industry in terms of capital. Let's go to our friend Jay Powell. I was saying to you earlier today, I feel like the conversation that is taking place on Wall Street, primarily on Wall Street, about the Federal Reserve and will it raise interest If so, when? If so, in 2022, how many? To me, it is like the financial version of a bad rom-com storyline where it's, will they or won't they get together? It's like, just get together. Has Daphne noticed yet that Niles has a thing for her? Right. Just start dating or don't start dating. That's where I am as an investor with interest

rates. Like, hey, look, raise them, don't raise them. Can we just move on? That's when I'm being petty and childish. When I become more serious, I think, okay, let's assume, just for the sake of this conversation, that the way the tea leaves are reading right now come to fruition. And in mid-March, the Federal Reserve raises interest rates a quarter percent. In your opinion, then what happens? If you're talking about from the markets, as we record right now, it's already happened. The markets in the U.S. are up strongly today. The S&P 500 is up about 2%. Just to interrupt, up strongly today because Powell's testimony came out, it was either his written testimony or in answer to a question, he basically said,

yeah, this is where we're headed. You can draw a straight line from when he made that comment to when the market started heading north. Thank you for not presuming along with me that everyone has paid very close attention to this today. I guess it's really important to note that the market really is a discounting device. By discounting, it is really good at valuing in right now things that are known that will happen in the future. The fact that Chairman Powell came out and said that this was something that he believed was going to happen, it narrows the potential that there might be no interest rate increase, Fed fund rate increase, or that there might be a larger one. And in a time in which there is an awful lot of uncertainty given the

geopolitical conditions that we find ourselves in. The fact that he went out and has put some boundaries around what it is that they're planning on doing, the market, I don't think, will react then because it has already reacted today. Are there industries that become more or less attractive as a result of this? Not so much. Because just on the surface, Bill, a quarter percent ain't that much. No, especially from where we are. We are still at a multi-century low in interest rates. The reason that interest rates ultimately go up and down is to guarantee an orderly operation of the economy. I would remain interested in the higher-quality companies that are generating

lots and lots of free cash flow, the ones that have the ability to raise prices and be the ones that are financially in better shape and don't really need the debt. Companies like Google, I mean, let's go back to some of the old standbys, the largest, most important companies in the world. Apple is another. These companies just really don't have much need for debt, they're cash-rich, and this gives them some more options. Just thinking about cash, you're not surprised that when Berkshire Hathaway came out with their latest quarterly report. I like the fact that they release it on a Friday afternoon, but given that this is what I do for a living, I don't actually appreciate it. I would

prefer they do it at a time when it's easier for me to talk about it. But I'm assuming you're not surprised that Buffett and Munger and their team just continue to stay as disciplined as possible, because when you think about businesses that have billions and billions of dollars on the balance sheet. Berkshire Hathaway is right there. They're not doing anything really other than buying back their own stock. Yeah. They came out in the letter. Warren Buffett essentially said that they didn't find too many things outside of the ones that they already owned to be that attractive. I think Warren Buffett and any company that has a lot of cash is just really actually excited to see a point in time in which they are competing

with less alternatives for acquisitions. I know that Buffett had mentioned in the letter this time that they are poised and ready to go, but they're not doing it yet. The fact that they have plenty of cash, so much more than they need for the operations of Berkshire Hathaway, the business and all of its subsidiaries, that speaks volumes for what it is, the type of environment that they they may really thrive and it's not one in which money is as easy as possible for anybody and everybody. Man, great talking to you as always. Thanks for being here. Thank you, Chris. While the S&P 500 is up today, it is still down for the year. We've talked before

about the natural temptation to try and time the bottom. But since doing that is basically possible, we wanted to share some allocation advice, not for the bottom of the market, but for a down market. Here's Matt Frankel and Jason Moser. It's been quite a wild ride for investors lately. Plenty of things going on around the world to keep the markets guessing. And we're getting plenty of questions regarding how to think about allocation, portfolio allocation in a down market. As we speak, right now, the S&P 500 is down almost 9% year-to-date. The NASDAQ is down about 12%. But there are some clear do's and don'ts that come with this territory. We wanted to take a few minutes today to talk about that. I guess,

first thing, really, what goes through your mind when we see market corrections like we've seen this year? Well, I like to use it as an opportunity to, everyone always says I want to find cheap stocks to buy. That's what everyone wants to do. But I like to use it as an opportunity to get in on stocks that I may have missed out on, which there have been quite a few of those over the past couple of years. I mean, I've complained to you for how long that I missed out on PayPal. Ah, yes, I remember that. So now I look at it as kind of a second chance to add stocks like that to my watch list that maybe I missed the boat on the first time around, and now I'm being given a second chance, if that makes sense. It makes perfect sense. I like that.

I think we probably all have that list of stocks we feel like we missed the first time around. Honestly, we do try to combat that. You can feel like maybe you missed it, but by the same token, a good business is a good business. I feel like I'd rather ultimately own that good business as opposed to just letting it go, even if I feel like the price ran away from me. But to your point, PayPal is a great example. We've seen PayPal, along with Block and other payments companies, really come back to earth here lately. It's nice to see that you've got that company back on your list. It sounds to me like, while it's easy to get a little bit worked up during volatile times, it can be easy to want to sell and run for the hills. Generally speaking, it feels like you

should be more excited about this. I think you just keyed in on that. You're getting a chance not only to perhaps revisit some companies that you feel like might have gotten away, but also probably add to some businesses that you already own, that you've maybe developed some more conviction along the way. Yeah. And one mistake I see people making is trying to time things. They'll say, I don't want to buy PayPal now because it might go down more, which is definitely a valid point. I don't want to add to block because it might go back down to the 80s like it was a couple weeks ago. Don't try to time things. It's always a good time to buy good businesses. And you have to be

willing to look like an idiot in the short run if it makes you look like a genius in the long run. And I'll give you a perfect example of that. Back in March 2020, when the COVID pandemic first started and there was tons of uncertainty in the market, you probably remember me saying I was buying Ryman Hospitality because it tanked so badly. I ended up getting shares at about $14 a share, I think was my cost basis. It proceeded to go down another 20%, finally bottoming at like $11. I looked like an idiot at that point. I timed it poorly. But today, it's trading for about $90 a share. So, you have to be willing to get the timing issue out of your head, because it's always possible that stocks could go down more. If the situation in Ukraine gets worse,

I would expect pretty much every stock in the market to go down more, with the exception of maybe oil stocks. You don't want to try to time it. They can always go down further, But it's always a good time to add good businesses for long-term investing. Yeah, I like that. And it really takes me back to something my father taught me when I was a teenager, when he was first teaching me about investing and just the entire concept of it. And he told me, first things first, he's like, listen, when you buy a stock, you need to prepare for it to go down. It's going to be lower than what you pay for it. He said, you're never going to buy the bottom and you're never going to sell the top. So,

just get used to that and don't worry about it. And he's right. I mean, it takes some going through the motions, right? It takes going through that to really become a believer, I think. It's one thing for us to sit here and say it. But the benefit of going through times like these as an investor is it makes it easier the next time we go through them, because the next time is inevitable. It's not a matter of if, it's a matter of when. I want to go to that market timing point that you were making, because I think that's a really good one. We obviously talk about that a lot here at The Motley Fool. It's not, I think, necessarily just our philosophy. I think a lot of folks out there believe in that as well. It takes me to

a study that I found recently, a Bank of America study on the S&P 500 returns. It broke down returns by a decade, going back to 1930. It looked at the returns over the course of the decade, but then it also took a closer look at if you excluded the worst 10 days per decade, if you excluded the 10 best days per decade, and then if you excluded the best and the worst 10 days per decade. It was just interesting to me to see how profound an impact this can have on returns. If you look at the decade from 2010 to 2020, the S&P returns were 190%. percent. Now, if you exclude the worst 10 days in that decade, your returns go to 351 percent. I mean, that sounds like a great deal. Maybe we should start focusing on trying to time the

market if the returns are going to be that significantly better. The flip side of that coin is if you exclude the best 10 days per decade, your returns all of a sudden sink down to 95 percent, right? So, you can see a profound impact on both sides of the coin there. And Ultimately, this gets back to that point, we're talking about a decade. What do you think the chances are of actually picking those 10 days over the course of a decade? Try to pick those 10 days over the course of a month, I think would be challenging enough. To do it over the course of a decade, I think we all would agree, it's impossible. You're not going to be able to do it. There are additional costs that come with that. There are taxes that you would have to consider.

there's opportunity cost of getting out of potentially good ideas and into ideas that aren't necessarily as good. But I think the ultimate point here is that while the numbers can make people perhaps want to time the market, I think it's better to look at the bigger picture, try to take this into context and try to assess, what do you think the chances actually are of executing that timing perfectly? Because I think you would agree too, chances are pretty much zero. Oh, yes. Swim to none. I mean, I've incorrectly called the bottom of February about 10 times. I mean, it's it's impossible to do. And I mean, I've said this feels like a bottom probably about 10 times in February. So it's it's not possible to do. And it's it's you're more likely to lose out by being hesitant to pull the trigger that you are of gaining by trying to time the bottom. Now, how do you view, because I know that we've seen the Nasdaq, I think growth stocks in particular have felt a little bit more pain here than others. I know a lot of folks

out there own a lot of these stocks and are probably feeling that pain along with us. How do you view allocation when it comes to stable companies versus those high-flyer growth stocks? Maybe they're not profitable yet, maybe you have to look a little bit further the road to really understand the potential there. But how do you view asset allocation when you're looking at those stable companies versus the unprofitable, riskier ideas? Well, one of the good parts about having a portfolio of boring banks and real estate stocks in normal times is it gives me a lot of wiggle room to pursue the growth opportunities when times get rough. But that aside, I definitely think there needs to be some sort of balance in

your portfolio. If you've generally been a growth stock investor and you're getting clobbered and stuff like that, maybe it's time to look at some high-quality real estate stocks that have been beaten down, or high-quality bank stocks, because those are starting to look very attractive right now, because a lot of them have some Russia exposure. So it could be a great time to try to find some long-term investments in an area you're not focused on, in addition to picking up shares in some of your favorite companies that you have been focused on. But there definitely needs to be some kind of balance. There's opportunities on both sides. Yeah, I tend to agree. I've said it before. I feel like if you can own

one of those nice, stable companies for every high flyer that you own, I know in the near term, it may not seem as sexy. Maybe you're not really benefiting from the tailwinds of those growth stocks that you may be hoping for. But honestly, if you can own some of those stable companies, it really does make the investing journey much easier. It makes it really easy to sleep at night and it makes it a lot easier to stomach the volatility that we see during times like these. I think there really is a lot of merit in trying to make sure that you're well diversified and focusing on stability to go with that growth. It really does make investing, I think, a lot easier. One of the great parts about being willing to attack investing from all different sides

is, I mean, I have not had a day where my entire portfolio is down. It just hasn't happened. And that's because I diversify and I look for the best opportunities regardless of growth, value, what sector, things like that. And there's always going to be winners somewhere. And diversifying lets you find them. Well, I like that, Matt. I appreciate your insight today. I'm sure our listeners do as well. Thanks so much for taking the time. It's good talking to you again. Always good to be with you. That's all for today, but coming up tomorrow, we'll have three stocks to put on your watch list for inflationary times. As always, people on the program may have interest in the stocks

they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow. Thank you. Thank you.