Motley Fool Money - Diesel’s All-Time High

Starting point is 00:00:01 The pain at the pump is getting worse. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host today, John Quast. I'm joined by my friends and contributors, Tyler Crow and Matt Frankel. And we have a couple things on the show today. We're going to talk some Berkshire. We're going to talk a question from the mailbag.

Starting point is 00:00:22 But first, we want to hit diesel prices. So as of this morning, diesel prices are at a record high of $6.51 per gallon. That's according to AAA. and that is up 76% from this exact time last year. And I think that it's possible that maybe some of our listeners out there are saying, I don't see how this applies to me because I drive a gas car. But let me assure you, this does indeed apply to you. This is a story that everyone in the country, I believe, is going to feel very soon.

Starting point is 00:00:58 Matt, what are some of the ways and why are we going to see this for everyday consumers? Yeah, I mean, diesel prices have pretty widespread economic implications, not just, you know, if you drive a diesel powered vehicle or have a diesel powered boat or something like that. Trucking companies, the companies that move everything around the country, everything that you buy, everything I buy, they generally include fuel surcharges when they deliver items to their customers, and they're directly tied to the price of diesel fuels. So when diesel prices rise, and it's been a long time, I think, since Katrina, before we saw a six on a fuel price sign in South Carolina.

Starting point is 00:01:37 I don't know about where you are. But it's been a while, and it's going to cause some pain. I mean, that's a lot of, you said, a 78% increase. That's a lot to be passing on to your customers. When we talk about diesel, and we could actually expand this out, too, to like jet fuel as well, because, you know, gas, anything that is a refined product is way up. Obviously, diesel is much higher than gasoline in part because of what. what you said is where diesel is much more of a must-have for shipping for agriculture and things

Starting point is 00:02:09 like that. It is kind of the lifeblood of the supply chain industry and moving stuff from one place to another. Like I said, jet fuel is also another one. We don't talk about as much because jet cargo is a thing. And while we're probably not moving commodities and things like that on a jet, But it's still, right now, jet fuel prices are about $200 a barrel, and that's two times the price it was pre the Iran conflict. So, and that's increasing relatively fast as well. So you're seeing those similar fuel surcharges on airline tickets as well. And I would not be shocked if we start to see things pop up in like airline traffic coming in

Starting point is 00:02:46 during the holiday season if we see these airline fuel surcharges really start to climb. Is there anything that we can do about this to bring prices back down? Because, you know, Senator Chuck Grassley coming out and suggesting that we ban the export of diesel fuel. And to me, that idea kind of makes sense because the price is set with global supply and demand economics. And so it stands to reason that if you ban the global demand that your domestic supply is going to start outweighing your domestic demand and bring prices down. But is that how it works? You could probably get a short-term sort of swing here, but there's so many unintended consequences that would likely happen as a result. Let's just give an example. So we export in total about

Starting point is 00:03:33 5 million barrels per day of refined products, whether that's gasoline, whether that's diesel, whether it's jet fuel, name it, whatever it is. We also import about 2 million barrels per day of crude oil. So on a net basis, we are a net exporter. But the challenge is, we actually, export a lot more diesel, and we actually are a net importer of gasoline. And so if we were to start banning diesel exports, then all, you know, the countries that would suffer, mostly Europe, is where we do a lot of our gasoline diesel trade with. Maybe they start banning gasoline or exports, and then all of a sudden we're in some tit for tat of who bans what, where. And yeah, it could probably have some short-term impact, but I would be more worried that it would cause more

Starting point is 00:04:20 problems down the road than it would having some sort of short-term solve. One thing to keep in mind, too, is it's not just on the ban or whatever of exports. One thing that's really going to be challenging, no matter how we shake it, is the fact that refinery capacity, like the utilization of refining is at the highest it's been since like the early 2000s, the Atlantic Basin. So that's like basically all of our East Coast refineries, in addition to European refineries, are like 97% utilizations. It's not just, you know, because of the Iran war, but also we've seen a lot of refineries knocked out in Russia, which is impacting European fuels demand as well. So a lot of things are going on here. And a funny thing we were talking about, you know, if you want to say

Starting point is 00:05:05 like a hidden investment, for the longest time, oil refineries in the United States, Valero, Marathon Petroleum, incredible value creators for a lot of people, even in lousy oil environments. I think they were pretty hidden investments, but I think today when people are seeing the crack spreads or the difference between refined products and crude oil today, it's really changing the thing. I don't think anyone thinks those are hidden investments anymore. All right. So, Matt, I want to give you the final word here. It sounds from Tyler that it's going to be complicated to get prices down, at least in the near term, or even in the medium term, if we can't get these diesel prices down, where are we going to see that ripple through

Starting point is 00:05:47 the macroeconomic picture? Yeah, so here's one interesting point that it's really important. If gasoline prices rise, you see that show up in inflation immediately, you know, energy costs rise. If jet fuel prices rise, it's a somewhat immediate effect. It affects travel inflation very quickly, for example. With diesel, it can be somewhat more of a delayed fuse as it reaches consumers. prices a little bit later due to higher freight costs. Companies resist passing on a price

Starting point is 00:06:16 increases. We've seen this from the tariffs. Companies try to resist passing on price increases until they can't anymore. So it tends to be a little bit more of a delayed fuse. And that's exactly what I'm expecting here. We're already seeing the more immediate effects in the most recent inflation data, transportation and warehousing services and truck freight transportation were two of the worst parts of the data. But looking forward, I'm really keeping an eye on a couple of, or three categories in particular. So food, diesel not only impacts food transportation costs, like, you know, the cost of getting food to the grocery stores, but it affects farm equipment. I mean, farm equipment runs on diesel. The processing equipment that processes food, a lot of it runs on diesel.

Starting point is 00:06:57 So it affects food prices in a few different ways. Airlines, I mean, Tyler already mentioned that jet fuel is up. It's not a diesel thing, but, you know, airline fares are already up. 23% year over year. That's not the percentage increase of diesel. So I wouldn't be surprised if we saw a little bit more increase in airfares going forward, especially as we headed to the holiday season when there's a lot of demand. And then construction, I mean, heavy equipment runs on diesel for the most part. And I mean, it goes without saying that the delivery companies are, you know, like UPS and FedEx. I mean, their planes use jet fuel, their trucks use diesel. We could see that kind of pass through to the consumer a lot. So there are a few categories.

Starting point is 00:07:36 where inflation could get worse before it gets better. Well, and of course, if inflation continues to be a persistent problem, that's going to make it really hard for the Federal Reserve to lower rates. So that would be an interesting thing to watch as well. When we come back, we're going to talk some Berkshire Hathaway changes. You're listening to Motley Fool, Hidden Gems, investing. You just found out that your sales team is at risk of missing quota. Don't panic.

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Starting point is 00:09:34 Welcome back to Motley Fool Hidden Gems Investing. So the Buffett era is officially over at Berkshire Hathaway, or maybe I should say the Warren Buffett era is over because his son Howard is stepping into the chairman role of the company as Uncle Warren is stepping down according to a letter that released on Friday. And this is kind of an interesting thing here. It does bring up an interesting topic because the change at CEO had already. changed. Of course, Greg Abel running the company, but now his son Howard stepping into the chairman role, many companies on the stock market, the chairman CEO is combined. And I think this is an

Starting point is 00:10:17 interesting case where maybe we can start to examine what is the difference between the chairman and CEO roles, generally speaking, and how is it going to play out specifically at Berkshire? As far as the separation, it really depends on the flavor of the company. Obviously, companies where you have like founder leaders tends to be a combination of chairman and CEO. But there is a fair share where it's actually separated. And honestly, I think it's a better sign of good governance to have those roles separated to a certain degree. There are some separate things when it comes to like compensation, when it comes to audits that you kind of want them separated. Now, look, Berkshire has sort of gotten away with some,

Starting point is 00:11:02 murky governance stuff over the years. I mean, they already had a dual-class shares. But I think we all kind of look the other way with some of the things that Berger-Hathaway did with its governance because it was Buffett. And he seemed to always do right by investors. Now, his son automatically getting the executive chair, I think is another example of slightly murky governance. Is he the most qualified?

Starting point is 00:11:26 Maybe. I don't think he is, actually. and even there was an article in the Financial Times over the weekend being like, this was a bad move. So I'm not the only one saying this. The other thing to consider, though, and perhaps the reason why this is the case is more than anything, all of the shares that Warren Buffett owned are going to be transferred to either foundations or family trusts or whatever, and most of those are owned or operated or run by his children, Howard being one of them, and they're all foundations run by them.

Starting point is 00:11:58 And obviously, foundations want to, like, own stock and, you know, probably want to maintain as much family control as possible. So that as, like, the, not the majority, but I guess you could say the plurality shareholder, that's the best case you could make for Howard. Here's the fascinating thing I want to follow is that Berkshire Hathaway's always had a halo effect. Like, you know, Warren Buffett, Elon Musk, Jeff Bezos, valuation, everyone kind of gives them benefit of the doubt. how long does that last when Warren Buffett really isn't in the picture anymore? Matt, what do you think about the Berkshire specific way that this is going to play out? Because Tyler is mentioning here, part of the perhaps motivation behind Warren naming his son Howard is the fact that he is transferring a lot of his wealth to his children and where the company

Starting point is 00:12:46 goes over the long term is important to him. Well, I mean, my biggest pushback is why didn't the Financial Times published this article 15 years ago? And the reason I say that is this move has been known. I mean, Warren Buffett said, you know, on TV in 2011, that this was his plan, that his son Howard would move into the chairman role for the specific role, not to play any role in the company, but just to kind of preserve the culture if a future CEO went rogue, for example, and started, you know, micromanaging the operations, which Berkshire prides itself on being a decentralized culture, just as one example, Howard could step in and do something about it. That's his sole goal for being there. And Tyler's right, maybe he's not the most experienced. He's been on several boards. He's been a director at Coca-Cola.

Starting point is 00:13:32 He's been a director at ConAgra Foods. He's been chairman of a few boards throughout his career. To be fair, it's probably because of his name and his connection to Berkshire that he got those roles. But he had them for quite some time. He's been on Berkshire's board since 93. So he's been on Berkshire's board since I was 11 years old. He's got some experience.

Starting point is 00:13:53 experience there. He's been in the boardrooms. But yeah, it's, I don't know why this is an issue now when it was kind of a known, known succession plan for a long time. Well, I think there's a fair point of like it's a problem now because Howard's already 71. Greg Abel's already 64 years old. And yeah, you know, maybe 15 years ago when it was kind of the executive chairman in waiting, he was 55 and seemed like a relatively reasonable thing here. part of my kind of contention with the idea, too, is we hit for the longest time, Warren Buffetto was always like, you know, we got Ajie Jane in charge of insurance, Greg Abel's going to take over. Howard's there to do the executive chairman. But these guys are all now already approaching retirement age. And there's this assumption that they're going to be, you know, on the top of their game into their 70s and 80s. And that was a rarity for Warren Buffett. that he, you know, to use one of his quibs, he kind of won the birth lottery, if you will, with, you know, genetics and being able to stay as sharp as he did for as long.

Starting point is 00:15:00 There's no guarantee that the people that he has already hired are going to be as good into their 70s and 80s as he was. And if not, where's the bench in the lieutenants after that? Because if I was, I am a Berkshire Hathaway investor, Parkmey starts to wonder, like, what happens post-ABLE post-Haward Buffett? that could really change things pretty quick. Yeah, and to be fair, that's the best criticism. I mean, Howard isn't young.

Starting point is 00:15:28 Him and Greg Abel are both at what I would consider to be retirement age in any world other than Berkshers. So it's, you know, that's my biggest question mark is I want to see the next steps in the succession plan. I wouldn't be surprised if it, you know, the next Berkshire shareholder, meaning that's an ongoing, you know, question topic that people are asking Greg Abel is what happens next because he's not, like you said, not exactly young. who's going to preserve the culture after Howard? He could retire. He's 71. I know there is a bench of Buffett nephews and sons and grandsons who work in the financial industry. But stating the plan would definitely help at this point. Yeah, it's certainly suboptimal when your succession plan already needs a succession plan. But basically what I'm hearing from you guys with this plan that is in place. The idea is for Berkshire to not change, at least in the ways that have made it

Starting point is 00:16:28 great. That's what Warren is thinking about. But let's talk about a change that might be for the better, or at least that some shareholders seem to want, and maybe this is the time to do it. Warren Buffett has historically been very averse to paying a dividend, and there is a growing little murmur out there that maybe this is the time. I think over the next 18 months, they will declare a dividend. And for the most benign reason possible, Again, the Buffett ownership stake is going to foundations and trusts. Foundations and trusts need money, and they'd probably prefer to use dividends instead of having to sell their shares to do so.

Starting point is 00:17:04 I think with that much invested interests from foundations and things like that, we could see a push from the board to go towards a dividend, to fund those operations at those foundations. Very similar to what we see at Hershey. They're majority owned by the Hershey Trust, which is basically, all they really care about is the dividend. Yeah, I mean, I'll gladly take the other side of that argument. I don't think Berkshire will pay a dividend within the next five years. And when I say that, that assumes that both Greg Abel and Howard Buffett

Starting point is 00:17:34 are going to be in their current roles in five years. So that's a big assumption. You know, Abel has already showed that making investments and buying back shares are his priority. He's making statements about that in his first couple of quarters as Berkshire CEO. I mean, I'm not saying it's not possible. I'd probably give it about a 20% chance that Berkshire pays a dividend, and only if the stock traded well above its intrinsic value for a length of time.

Starting point is 00:18:04 Because after all, both Abel and Howard Buffett are there to preserve the culture. It's clearly stated in Berkshire's capital preferences that it will pay a dividend if it exhausts all other options, including buybacks. Well, we'll have to keep an eye on that as Howard steps into that role. and time moves forward. When we come back, we're going to hit a question from our mailbag. You are listening

Starting point is 00:18:27 to Motley Fool Hidden Gems Investing. Where some see heroes and others see egos. Bloomberg sees the era of billionaire athletes. A fad to some, the future of money to others.

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Starting point is 00:19:09 and that email address is podcast at fool dot com send in your questions to anyone on this show especially if you can keep it concise if it stays foolish and if you remember that we don't give out personalized investing advice that email address again is podcast podcast at fool.com. And this question today starts off by saying greetings from Chile. When looking to open a position, whether dollar cost averaging or not, on a stock you absolutely need to own. Do you look at technicals before determining the entry point?

Starting point is 00:19:42 Put another way, if a stock is trading at all-time highs, do you blindly buy, example, Intel during the height of the dot-com era, or conversely if the stock has been a dog for the past five years, think Nike. Do you want to wait for signs of life before buying thanks, Vicente? Vicente, we appreciate the question, but we are going to reframe a couple things here to make it a little bit more foolish. So I'll let you guys go ahead and jump in here with a couple of premises in the question that you want to reject. One of the things that I can't say that I agree with is the idea of something being a need to own stock. I feel like when we get that itch where we have to own something immediately. It's like we've studied it and, you know, I've made all the decisions.

Starting point is 00:20:29 It's a little bit more like of a sunk research fallacy where like, well, I've put so much time into it. It must mean I have to buy it, right? Well, it's not necessarily the case. Now, I just kind of took some shots at Warren Buffett for corporate governance and whatnot. But he had some real bangers of lines in terms of like investing advice. And one of my favorite ones is actually there's no called strikes in investing. You don't have to go out and buy something. You don't have to own it. There's always opportunities elsewhere. Sometimes you need to look further a field than others. And, you know, one could argue now is arguably a further afield time. So it's just one of those things where I don't necessarily think that's the best way to look at investing in general.

Starting point is 00:21:11 Yeah, I mean, I agree with Tyler completely that there's no such thing as a need to own stock. I mean, having a sense of urgency in investing in general is one of the top reasons that people overpay for investments. But, I mean, the question's not what the chart is doing. It's what you're paying for a business's future earnings, because at the end of the day, that's the goal is you want to pay less than the present value of a business's future earnings. I mean, that's investing 101. I mean, saying things like it used to trade for $100, but now it trades for $80 is not a reason to buy. And on the other side, it's at an all-time high is not necessarily a reason not to buy. But to my like investment strategy, if I really want to own a stock, not need to own, but if I really want to own a stock,

Starting point is 00:21:56 because I think it's trading at a fair price relative to its future earnings, but I might be a little concerned about the current valuation, as the question is implying. That's when I really like to build positions incrementally, not necessarily completely textbook dollar cost averaging, maybe buy a little now, buy a little in a month, buy a little in another couple months. and I prefer that to using technicals to determine an entry point in the stock. So basically there, Vicente, just kind of reframing a little bit, they're saying not necessarily any stock is a half to own. You can just stand there and wait for a better pitch at some point. And then also the technicals, Matt, they're highlighting the future earnings is really more what we're concerned with. But dollar cost averaging is certainly a approach that we'd like to use.

Starting point is 00:22:43 but I thought guys that we can now actually turn to this question a little bit here. He talks about dogs, stocks that have been dogs that are starting to show signs of life. And I thought I'd throw this out there to you guys just to kind of leave with something a little bit more positive. Are there dogs out there right now that you're seeing, hey, these are actually showing some signs of life and this looks like a decent buy to me? I kind of cut my teeth on cyclical commodities, which I don't know, just maybe means that I have a, I don't know, some, masochistic streak in me where I just love pain. But one of the things I did discover in that sort of vein is that the dog days sometimes can be those windows of accumulation. It may take several years for them to pay off. I've been looking in a couple different places. If you're

Starting point is 00:23:29 looking for dogs where signs of life, I really want to start looking at small and regional banks. Lots of these businesses are trading for less than their tangible book value right now. That's actually one of the more common traits. And they do tend to be uncorrelated. I know that we see rising interest rates, but for a lot of them, they don't have to pay much on their deposits and they can charge more for what they're lending.

Starting point is 00:23:53 It could be a pretty interesting time for some of those businesses. Matt, how about you? Yeah, one that I think actually fits the question really well as Target, TGT. Their comp sales were up by almost 4% in the second quarter. That's among the best numbers at a tough retail environment. I know we've talked a bunch of other retailers

Starting point is 00:24:10 that weren't doing so well with comp sales. strong digital sales. The stock is up by 67% on a turnaround so far. But I would actually argue that it's lower risk now than buying before the turnaround signs were really clear. It's still well below its all-time high. They're executing well on a turnaround. It's a really good example of, you know, it's up 67%. Maybe I'm going to tiptoe into a position and build it over time, but you're clearly seeing signs that the turnaround's working. So it's one that is on my radar right now. Well, thank you, Vicente, for writing in. As always, people on the program may have interest in the stocks they talk about,

Starting point is 00:24:47 and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for our producer, Dan Boyd, and the rest of the Motley Fool team for Matt, Tyler, and myself. Thank you so much for listening to our show today, and we will see you again next time.

Motley Fool Money - Diesel’s All-Time High

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