Oil Flies

Mar 22, 2022

Good morning investors,

Lots of stuff in the news over the past few days. The Federal Reserve announced they will begin to tighten rates above neutral if needed. Cathie Wood’s Fintech Innovation ETF (ARKF) plunged over 5% as Shopify, a key holding, crated 16%. Oil jumped to $113/bbl as conflict in Ukraine continued combined with Saudi Arabia saying it won’t bear any responsibility for the shortage of oil supplies. Occidental Petroleum (OXY) reached new highs as investors expect Warren Buffett to continue to accumulate.

On the personal side, I’ve started to build a position in a new stock that has gotten absolutely hammered. The stock is down 60% year-to-date and has a short interest of 40%. In addition, the management team recently announced they plan to sell two of their distribution facilities for $80 million. With net cash of $50 million, this puts the implied enterprise value at only $180 million.

The new management team has aggressively repurchased over $182 million worth of stock since 2019 and the team increased the repurchase plan to $60 million after quarter-end. Q1 will be weak, but full year guidance suggest they will generate $65 million plus in EBITDA. I will be doing a full write-up on this stock over the next few days. Alpha Letter Pro subscribers will get first look.

Want to chat with a tight group of investors? Consider joining our free chat room on the Odyssey app. After downloading the app (IOS only) you can use this link to join the discussion. I post there a few times per day on companies I am researching and also my general thoughts on everyday market moves.

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Sectors I am watching

The oil and gas sector: This is a given. Oil is over $113/bbl and anyone producing oil is making a killing. I’m invested in a low cost producer that plan to rapidly expand production over the next few years. I am also invested in another oil and gas company that recently emerged from bankruptcy. Both of these names are unlevered and low cost which help me sleep at night investing in an extremely volatile sector.
Private Prisons: There are only two private prison operators out there and I am taking a hard look at both. Both are trading near multi-decade lows and have over-levered balance sheets. The industry is not ESG friendly and it may be hard to refinance some of this term debt that is coming due along with a change in regulations that could impact the sustainability of the private prison model. Despite these headwinds, private prisons are backed by high quality real estate that is irreplaceable. The liquidation value of this real estate is likely worth more than the current public market valuations. See note below on key holder of private prison stocks.
Thoughts on land banking: I have continued to look to invest in plots of land in the United States. I like the idea of parking some money in a large contiguous plot of land that will hold its value through an inflationary period. In addition, I am interested in buying a single or multifamily house in Hawaii over the next few years. I believe that the work from home trend will continue allowing individuals to work from wherever they want. Hawaii has perfect temperatures 99% of the year and there is a limited amount of inventory on the islands. Buying and holding a property in Hawaii seems like a no brainer if you have a long-time horizon.

Geopolitics

Ukraine rejects Kremlin demand to surrender Mariupol; Russia says U.S. relations ‘on the verge of rupture’ (CNBC)
US Sending Soviet Anti-Air Defense Systems To Ukraine That Were “Secretly Acquired” (ZeroHedge)
ESG funds piled into Russian oil over Canadian energy (BNN)
Yield curve business cycle indicator says no recession imminent (BNN)
Moscow stock market reopens for some bond trading (BBC)
Russia to open stock market this week: Impact will be 'internal,' not global (Fox)
Russia-Ukraine: How the top stock and bond funds exposed to Russia are performing (Yahoo Finance)

Commodities

Fertilizer makers Nutrien, Mosaic, CF Industries continue to shatter records (Seeking Alpha)
If You Think Fertilizer Prices are Bad Now, Here's Why China Could Make the Situation Even Worse (AgWeb)
Sanctions on Russian energy and commodities explained (S&P Global)
Saudi Aramco to bring on significant incremental capacity from 2024 (S&P Global)
Replacing Russian uranium in case of ban might cost over $1 billion (S&P Global)
Uranium outlook improves - UK plans to increase nuclear to 25% of energy mix (Reuters)
Senators move forward with bill to ban Russian uranium imports, Cameco takes off (Seeking Alpha)
US coal producers cannot ramp up to feed Russia's European customers (S&P Global)
US gas-fired generation gains as Russia-Ukraine war hikes coal prices globally (S&P Global)
Global coking coal market reacts positively to 'transparent' ArcelorMittal sell tender (S&P Global)

Michael Burry’s Top Stocks

Michael Burry recently dropped his stock holdings for the month of February. According to the SEC filing, Burry now only holds six stocks. Two of these stocks are private prison companies.

AEA-Bridges Impact Corp. (IMPX)
Bristol-Myers Squibb Company (BMY)
CoreCivic Inc. (CXW)
Fidelity National Financial Inc. (FNF)
General Dynamics Corporation (GD
The Geo Group Inc. (GEO)

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7 Comments

Joe Brown

Mar 26, 2022

Interesting article, I'm not knowledgeable on private prison REIT's but what is it about private prisons that their real estate is "irreplaceable" as you say? Could you expand on that one?

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