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Editor’s Note: This is the transcript version of the show we recorded on Wednesday. This transcript is only a part of the entire episode. Due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts. Bring your questions and join us live every Wednesday at 12 pm ET. Grab your free 14-day trial of Austin’s service Cash Flow Freaks now. Check out Raul Shah’s articles on Seeking Alpha |
Transcript
Daniel Snyder: So, without further ado, I would like to introduce to the show for this episode, Raul Shah. Raul, why don’t you join us on screen here? I’ve got so many questions for you. I want to dive into these two recent articles that you published on Seeking Alpha as well.
And, well, let’s just start off this way. Give us a little quick background of your investing journey. How’d you get started? Obviously, tell the people about – I mean, you play baseball professionally. You invest on the side. You do it off-season. Give us the full rundown, man?
Raul Shah: Yeah. Well, first, I’d like to extend a thank you to everybody, Seeking Alpha, yourself, Josh, Austin, just for having me on. I’m really happy to be here and I’m excited.
Yeah, going back to what you said about my background. So, I started playing baseball at a pretty young age. And I do play professionally. I play for a minor league team called the Maryland Blue Crabs. And I live a little bit in between Baltimore and Washington, D. C.
I started investing – I bought my first stock when I was 19. And I didn’t know what I was doing at the time, but I knew that I learned very well doing things sort of hands on. And so I had a lot of guidance for my parents, and they basically gave me some money to just invest for them. And I wasn’t really making my own decisions. I was more or less talking with my dad. He would give me ideas. And then I would go and sort of buy the stocks that we talked about.
And then as I got more comfortable, I started learning a little bit more. I started taking more unilateral control of the portfolios. And making my own decisions as sort of allocating the funds as I saw best fit.
I would say 2018 is when I took over full control of the portfolios. And that’s when I started writing on Seeking Alpha for the first stock I ever wrote about was Dick’s Sporting Goods (DKS). And since that time in five years, I earned 25% a year, and I earned 19% in 2022, which beat the NASDAQ by 50%. So, that was a good test year.
My father and a lot of people would always say, “Hey, look, you know what? You made money in a bull market, but that’s not really that difficult necessarily. Can you do it in a bear market?” And so last year was a very good example of that and I expect that to continue into the future.
Austin Hankwitz: That is incredible. We all know how Dick’s Sporting Goods has. I think we even did a whole episode on that, Daniel, right? Or I mean, even Academy Sports (ASO) and Dick’s?
Daniel Snyder: I mean, the Academy Sports and Dick’s.
Austin Hankwitz: Yeah, yeah, yeah. I mean, we definitely know that Dick’s Sporting Goods, I mean, up into the right, right? So, that is good, good eye there. This is exciting. I’ll let Daniel kick things off with questions, and I’m sure I’ll chime in with some interesting perspectives.
Daniel Snyder: Yeah. I’m going to go ahead and get things started. So, I’ve got a few things I pulled specifically for this episode that we just got to – we got to dive into. Hold on one second. Let me make sure that I start on the right page here because this is your returns, right? So, this is something that you just published on Seeking Alpha yesterday. And it’s worth showing the actual graph that kind of shares what your rate of return has been, right?
So, when we talk about you’re the 1% on TipRanks. I mean, this is it right here. Obviously, Dow Jones, NASDAQ, S&P 500 had a horrible year last year. And, I mean, you definitely are producing some alpha, so I’m kind of curious.
I mean, how did – you talk about the journey of your dad in selecting stocks and getting into it, but like, you’ve been doing it for so long now, right? How are you still finding the stocks today that are interesting to you to the point where you’re like, oh, these are the stocks for the next 10 years?
Raul Shah: Yeah, that’s such a great question. I think and I heard this first from Chuck Carlo [ph]who does runs FastGram. And he always talks about it’s not a stock market. It’s a market of stocks. And when you shift your thinking in that regard, you really start to look at things a lot more appropriately. And you start to realize that in a market of stocks, there are good stocks, bad stocks, average stocks at any given point in time whenever you look at it.
And so you just keep your eyes open for maybe things that you use in real life or what people are talking about in comments or what they send in messages or social media or whatever, and you can discover companies that way. And you’re going to have a lot more misses than hits in the sense that I probably might take one out of every 100 companies that I think actually looks good. There are certain things that I look for, and we can talk about that later.
But you’re not going to find a 100 good companies immediately. You find certain areas or certain companies that you think will do really well and you evaluate them further and you don’t need a lot of companies to really go big. I mean, I own three stocks in my portfolio. I typically own three to five at any given point in time, and I don’t really go above that.
Daniel Snyder: Do you like specific sectors, though? Do you have a screener? Like, what is – you talk about social media? Is it just kind of like you mentally think about what comes up in conversation? Do you personally use products? Like, what – what’s the method behind the madness?
Raul Shah: Yeah, that’s a good question, too. I think the first thing is you have to know what the company does. And so I’ll give you an example that I think went into the question. Hims & Hers, right, a stock that we are planning to talk about and that Austin has written on very well. I found Hims & Hers Health (NYSE:HIMS). This is a true story. There is a gentleman who left a comment on one of my articles. And it was a very nice comment. I just thought it was kind of really made my day.
And so I clicked his profile and I was looking at some of his other comments. And in the one basically right underneath, he had commented something about this company called HIMS, and he was very bullish on this company. And I had never heard of it. And so I had looked up the stock. And I thought, wow, this actually looks very compelling. Let me do further research. And so that’s sort of an example how I found a stock that is currently my biggest position off of somebody who I’ve never met on the Internet who just happened to mention it in the comment.
Daniel Snyder: Gotcha. And so, I mean, you so backtrack a little bit. You mentioned Hims & Hers Health, and this is one of the stocks that we wanted to talk to you today about based off of your recent article, but you’ve written four articles on this company in 2022 alone. Like, you’ve been on this company for a while.
So, why don’t we just go ahead and dive in? I wanted to share as well that I mean, let me see. I’m a little bit backwards here. So, you go in and you’re saying that you own what nearly you shared 50,000 shares is what you currently own of Hims & Hers just for over a full disclosure for everybody that’s listening. So, obviously, you are a shareholder. You’ve been in this one for a while. What’s the bull case here? What’s the bear case? What’s the base case?
Raul Shah: Yeah. So, the – let’s start with the base case. HIMS is a telehealth company. They basically provide a really convenient service for a lot of patients. Where certain stigmatized disorders, people don’t feel comfortable going to a doctor, maybe they feel embarrassed, maybe they don’t have a doctor nearby, maybe the waitlist is really long, all kinds of reasons. And so it’s very convenient to be able to log into your phone, get a consultation with the physician, and do it right on your screen. And then if it’s appropriate, you get a prescription, and then you can fill it very conveniently and discreetly. And that’s a very big value proposition.
And from the reviews of people who use the app, which are phenomenal, the app has a 4.8 star rating in the App Store. Clearly, they’re actually making a big difference in people’s lives. And that’s a really important thing. I think Jeff Bezos, one time in an interview talked about how do you take – somebody asked him how do you pick the right stocks? And his response was to think about the companies that will make the biggest impact. And clearly, HIMS is making a big impact.
So, as of right now, they’re not profitable, but they had inch closer towards profitability every single quarter, and they’re right on the brink. In fact, they’re supposed to be EBIT positive next quarter. That’s the start. Once you’re EBIT positive, now you can work on that bottom half of the income statement and you can become net income positive or free cash flow positive. And that’s when the ball really starts to get rolling. And I think once they prove that, that’s when the stock will really take off.
Bear case, of course, is as with any stock, the sales won’t materialize. They burn too much cash or they have too much debt. But you don’t see that with this company. They have zero debt. They have $200 million in cash. They have 200 million shares. And so essentially, you’re getting $1 of cash and return to you with every share that you buy.
So, almost every share right now is trading at a 15% discount. That’s a quality of a really good company. It’s – I kind of laugh because people say, well, this company is bankrupt. I say, well, look, you can’t go bankrupt if you don’t owe anybody any money. If you don’t have debt, the only way that they would go bankrupt is they burn through all the cash that they have. But their cash burn rate is smaller than the free cash flow that they’re actually generating.
And so you have a lot of positives here. Their sales are going ballistic. They’re doubling their sales every single year. Sales are 20 times – expected to be 20 times higher in Q4 than they were four years ago. That’s a massive improvement. So, you got all these factors that really have a strong case that the stock is going to go much, much higher in the future.
Daniel Snyder: Awesome. I love you to jump in here, too, because you obviously are in the bull case both for this company as well. I mean, we’ve talked about this one before. I guess my question for both of you as well is why would there be 12% short interest on the stock if it seems like everything or if the stars are aligning?
Austin Hankwitz: So, and I’d be happy to for the people listening now to reintroduce. I got – I pulled up the script from a couple of weeks ago, so I could certainly do that. But as it relates to the short interest, in my opinion, I think there’s like this spell cast it upon investors of, like, oh, it’s a stack? It’s worthless, right? Because we’ve seen that time and time and time again with several SPACs that have gone from $10, $20, $30, $40, $50 down to $1. Or, I mean, we’ve talked about this several times.
And so I think as being categorized as a SPAC, they have something to prove, right? People are just lump them in odds and a SPAC. They don’t want it. So, short, short, short. But I mean, for – I can’t really think of any other big blaring red flag coming from this company. I mean, think about it like this, right? And I have this near the bottom of my – the post that I had shared.
This is everything an aggressive investor is looking for, right, disruptive technology. They’re flipping healthcare on its head. Massive total addressable market. Predictable subscription revenue, right? 90% of quarterly revenue is predictable subscription revenue. Those juicy gross profit margins nearly 80%. They’re exceeding expectations during a potential recession a.k.a. 2022. They’re flipping free cash flow positive in 2023.
Everything about this company seems strong and awesome. So, I don’t really see a reason for short interest besides, I guess, trading algorithms, and maybe you can kind of predict the here and there. But from a, call it, two, three, five, six, seven-year time horizon, there are stocks to short certainly over those times and this isn’t one of them in my humble opinion.
Daniel Snyder: Raul, what is your thought on that?
Raul Shah: Yeah. I thought that was – I thought you hit the nail on the head there, Austin, with a lot of just the stuff about the stock qualities in general, like, margins, recurring revenue and all that kind of stuff. I don’t know the specific reason of why so many people will be short in such a sock like this.
I mean, I think there is definitely truth for the SPAC. I actually read an article about that for the first time I ever realized it. Maybe that could be part of it, a perception of it to hit the SPAC. And we don’t want to own this on for whatever reason.
I think quite honestly, you have a lot of day traders who maybe see the price action has gone down from 25 to 72 is the low. Maybe they think, oh, what? Every time we get a balance and goes down, maybe they’re looking at chart patterns and they’re seeing we can make some money riding this thing down. It could be something like that. They’re going to get slaughtered in the long run. They’re not going to make money in this.
You might make money on this for a week, for a month, but in 10 years, there’s no shock with this company. If it keeps executing the way that it does, it’s going to be lower than the price it is now. It’s a steal. So, you can have fun in the short-term, but hopefully, that short interest is going to vanish.
Daniel Snyder: Yeah, that’ll be interesting to see. I did say that the days to cover is, like, nine days, though. So, I wouldn’t expect a short squeeze, right?
So, Austin, you had mentioned the reoccurring subscription revenue, and Raul, you wrote about this as well, and this is actually something I pulled directly from your article that you put out. I want to play devil’s advocate here because you guys are leaning into the subscriptions, but it looks like in Q3 of 2022, obviously, we’ve seen 8% year-over-year growth in the subscriptions and they’re growing subscriptions.
But if that’s only $991,000 and their overall quarterly revenue was a $145 million, I mean, doesn’t – that’s such a small percentage of their overall revenue for the quarter. Is there an actual playbook where you guys see this growing substantially. Like, how do…
Austin Hankwitz: Wait, wait, wait, can you say that again? Why don’t you say that again?
Raul Shah: I think, that’s subscription.
Austin Hankwitz: Yeah. Those are people. Yeah. Those are 991,000 people who [Cross Talk]
Daniel Snyder: Okay. Yeah, Oh, it’s quarterly revenue. Okay.
Austin Hankwitz: So, I’m one of those 991,000, right? I have my Finasteride subscription or prescription rather through Hims & Hers. I don’t want to lose my hair. It used to be through Keeps and now it’s on HIMS. And so, yeah, 991,000 people, you can compare that now to 157,000 or 190,000, right? Like, it has grown exponentially. When they made their public debut in 2020, it was around 250,000, I believe. Yeah, right there about that 218, 250 range, and now it’s nearly quadrupled, right?
Daniel Snyder: That makes so much more sense. Because I was like thinking [Cross Talk] about that.
Raul Shah: Yeah. Interesting too is that just anecdotally speaking, in the clubhouse, I’ve seen guys actually bring out various HIMS’ products. And so it’s sort of interesting because I know the company I’ve seen the subscriptions and how much they’re going up. And then I’m seeing in real life people actually using those products. And again, it’s anecdotal, but it’s some merit there that there’s proof that this is really growing.
Daniel Snyder: Yeah. So, let’s get in over here to the chat for a little bit because we’re getting some interaction for Denise. Obviously, Denise is here. She says Zero Debt. That’s a company that will probably get acquired.
I mean, we talked about Amazon (AMZN) and CVS. You’re talking about all these other companies that are in this space. And obviously you make the argument that this company needs to grow rapidly. They’re trying to get to profitability. I mean, they have 190 something million dollars of cash, not a lot of debt, right? So, it’s like, do you see this eventually being a company that gets acquired within the next few years? Let me just ask you that.
Raul Shah: Yeah. It’s hard to say, right? I mean, it seems like the company that’s as founder led and as passionate as they clearly are when you listen to their earnings calls and you follow their social media accounts, it would seem unlikely that they would spend their whole lives doing this just to up and give it away to somebody, especially when they see the potential of it.
Now of course, anything is possible. I mean, you look at Instagram as an example. I mean, that was a company that was privately owned and then ultimately Facebook (META) bought it. And Instagram is such a huge thing now. So, it’s hard to say. Either way, if it does happen or if it doesn’t, I think investors will probably get a big payout.
Daniel Snyder: Gotcha. And then Balu is over here going through the metrics. Price of sales is the highest in the healthcare industry for HIMS, and then also earnings beat the consensus only in the last two – two of the last eight quarters. I haven’t fact checked that. Do you guys have any commentary on that?
Austin Hankwitz: Yeah. So…
Raul Shah: Yeah. The earnings beat every – oh, sorry, Austin, go ahead.
Austin Hankwitz: I was going to say if it’s, like, price to sales being the highest in the healthcare industry, I don’t know the median gross profit margin for the health industry, right, but Hims & Hers is like software company. Margins, right, 80% or so. So, I’d imagine that probably has something to do with why they’re trading at a premium. For the rest of the industry, I’ll take a look and see if I can find more about that. But if I were to guess, that’s probably the reason why it’s trading so high.
Raul Shah: Yeah. Their price to sales is 2.5. And you got to put it in perspective for – and that’s relatively not very high. 2.5, you’re getting a company that’s doubling revenue every single year, that’s got $200 million in cash in the balance sheet that has no debt, that’s hiring people, that’s got insiders buying shares for all that you’re getting, 2.5 times sales is not that high of a price to pay.
Now I don’t typically like that ratio because it’s not the top line. It manages the bottom. But when it’s that extreme, it does sort of highlight a potential value play. And what was – there was another question before something else about that. Oh, yeah, the earnings.
The company has been earning every single quarter. Wall Street has extremely underestimated every single quarter how much income that they’re going to produce. In fact, I actually, in an article, compiled a table of all the Wall Street expectations, the company’s own expectations and then what my forecasts were. And even the company and Wall Street both underestimated every single quarter.
So, their sales are going through the roof and they’re doing really well. And I don’t think that’s going to stop because they achieved all of this primarily without their mobile app. Their people were just going on the Internet and logging in and it’s kind enough for stuff. Now that they have an app, it’s so much more accessible. So, I think the sales are only just getting started. I think it’s going to carry on for a long time.
Daniel Snyder: Austin, can I ask you? You mentioned you’re one of the reoccurring subscribers to their products. I mean, did you start doing that via the app or were you doing that before they launched the app this last year?
Austin Hankwitz: So, I did it starting with the app. So, I started with Keeps, right, another one of these, like, healthcare companies back in 2018, 2019. I hated the experience. It didn’t have an app, so I’d use a website on my phone, and it just, like, never worked well, right? It wasn’t mobile optimized.
And then once I saw that Hims & Hers launched an app, I merely downloaded it, and the prices were very similar, ended up just moving on over. And it’s been sort of fairytale ever since. I mean, it’s been really simple, really awesome, and it’s just super incredibly easy. I’ve never used the approximately. I haven’t used it for anything beyond that, right, just like my subscription. So, like, I’m not over here getting my flu consultations or if I’m out like using it beyond just the subscriptions, I’m sure people do that, but it’s just not in my experience yet.
Daniel Snyder: Gotcha. Just had it. I was a little curious. All right. So, let’s dive back into it. Raul, I got to go back to you because I was going to ask you this as well. So, obviously, we’re talking about HIMS. We’re talking about telehealth. When people hear that, they usually think it’s Teladoc.
And in your article, you said, due to HIMS’ competitive advantages, I believe its revenue will surpass Teladoc’s (TDOC) within the next decade. So, maybe touch on that. And then also Stephanie’s question – sorry, Steven’s question – Stephane’s question, sorry, is what is HIMS’ moat because you also wrote on that?
Raul Shah: Yeah. So, I think Teladoc, I’ve got off the top of my head. I think their earnings were like about $2 billion and I think HIMS is maybe about half of that or it’s or I’m sorry, a quarter of that. I think it’s interesting because when you compare two companies, particularly HIMS, and let’s say, Teladoc, for example, you see HIMS on one hand has 80% margins that’s growing at an extremely fast pace, that has a very good mobile app, that has very good branding.
If I were to ask you is Teladoc sort of presence the same? I think it would be clear to somebody that has looked at both that it’s not. And that makes a big impact for consumers because it’s very easy to go to HIMS now instead of Teladoc. Just from a branding perspective, ease of use perspective, and the company itself is doing a lot better if you look at things like gross margin, asset turnover ratio, things like that. No and nobody wants to use an outdated software.
Austin talked about using Keeps for example, and going on the website and sort of a hassle, you’re not going to win over customers on a regular basis doing that. And I don’t think any company has an app that even comes close to HIMS. So, that’s one thing.
And when we talk about moat, I see a lot of comments that would say, well HIMS has no moat. Any company can come along and do the same thing. And that’s true. And the example that I give is with Netflix (NFLX), right? When Netflix first started, they were to ship in movies. Anybody could ship movies. People claim this all the time when Nike (NKE) first started. You got – you had Adidas (OTCQX:ADDYY) out there for decades before, right? It’s easy to claim that, hey, this company has gotten no moat.
But you have to understand, the moat is an after result of the value proposition. When you provide value to customers and differentiate away from other competitors, that is what’s ultimately going to give you a moat. So, for HIMS, you look at the value proposition first, not the moat.
The value proposition is that it’s convenient to use. It’s easy. They have a much better app. It’s – they have a much more, what’s it called, I think, what is called, widespread categories versus some of the other ones. And you look at these things and you say, “Okay, well, that provides HIMS a competitive advantage that will ultimately continue to increases or infrastructure increases and the moat is going to increase too with that.
Daniel Snyder: So, you’re fairly saying, so the – go back on the categories. You’re referring to the hair loss, sexual wellness, mental health, dermatology, kind of…
Raul Shah: Yeah. So, those are the four main ones now.
Daniel Snyder: Yeah.
Raul Shah: And they have actually, somebody asked the CEO who’s on a call. They have plans to expand to more categories, but they have so much room to grow in these four that is not on the menu yet, but that will come as soon as they sort of really take advantage of these four.
Austin Hankwitz: Gotcha. And I just want to jump in here for a second. I’m going to share my screen and show you guys here, I actually did a whole stock pitch on HIMS to my Cash Flow Freaks I thought they were just great because they’re flipping free cash flow positive next year.
But I think this part – this graph right here is really important, right, showing you new revenue for the year and then repeat customer revenue. Rules [ph] over you’re talking about, like, providing so much value that these customers keep coming back and they want to know they’re sticky.
I mean, you just see here. Like, that is a whole lot of stickiness. It’s sticky, right? And I just I think that’s a really powerful graph and I definitely want people to check that out and see that. Because HIMS is a company that once in – I’m – that data point. Once I’m in, it’s like, I don’t want to leave. I have no reason to leave, the experience is great. And if I can just put on autopilot, I’m in.
Daniel Snyder: All right. One last question over here from Christian about more of the technical aspects and Raul, maybe this one is for you because I noticed you pointed out the $4 price target and how that’s been support for a while. But Christian says big gap fill between $4.60 and $5.30. Do you have any comments on that?
Raul Shah: I haven’t seen that. And I don’t really pay a lot of attention to technicals. I sort of included that in my last article on HIMS just because I did see something interesting things from the technical side. But, usually, I don’t pay attention too much for that. That sort of thing is more important if you’re looking at short-term. When you’re looking at the long-term opportunity, I mean, whatever the gap is, is irrelevant. We look at it over many years, for example.
Daniel Snyder: Yeah. That’s facts. And obviously, just a reminder, I mean, you’re talking about years out, right? We’re talking about this company potentially going free cash flow positive or sorry, earnings positive and everything else within the next year or two. Wasn’t that what you were saying to ’24, ’25 year timeframe?
Raul Shah: Right. So, they’re – yeah, so they’re expecting – their own company expectations are to be EBIT positive in this quarter. And I think from my own forecast that they will likely be operating profit positive in 2024 and then maybe free cash flow positive in 2025, somewhere in that timeline.
And I think once that happens, that’s really going to get the ball rolling and they can kind of go from there, that’s the big milestones to get to that point where it’s positive. And this is a 10-year-plus investment. It’s not one-year. It’s not two years. But you give it 10 years and then you can you – I think you’ll really start to see the difference. Probably much sooner than that, but you got to give it a 10-year timeline.
Daniel Snyder: Love it. Austin, any last questions from you before we switch on to this next stock?
Austin Hankwitz: Yeah. I’m just looking at real quick here. Maybe I’m wrong. I thought they were going to flip free cash flow positive much quicker than 2025 and pull up Wall Street’s estimates right now. Yeah, Wall Street’s got them making 5 million in free cash flow in 2023. So, who knows? Maybe they flip quicker than we think.
Daniel Snyder: That’d be incredible for us for that stock. We’ll definitely keep an eye on it.
So, let’s go ahead and go on to this next stock I wanted to talk to you about that you also recently wrote an article on within the oil and energy space. Because I think I mean, just the other week, I was telling Austin, I think the oil and energy space still has room to run personally. And I feel like you’re there in that interaction, you were a little bit surprised by that, but you recently wrote this article about Devon Energy (DVN). And I believe you still have a personal buy rating on the stock. So, just kind of curious, you want to give us an over – a general overview as to why a buy rating and why that stock?
Raul Shah: Yeah. Devon is a great company. I bought it in, I think, January of 2021, and it was probably my biggest position that whole year. And the energy sector in general is very underweighted. I don’t know what the number is this year. I think last year, it was until 2021, I think it was, like, around 6% a year or 6% waiting in the S&P. And that’s historically quite small. And so I think there’s a lot of room to rise.
I think you have a lot of fund managers that sort of they got burnt in 2008, 2009 on the energy stocks when crude oil went up really high and it crashed and maybe they’re a little reluctant to sort of open these positions up again. So – but I think as the price of oil keeps going up, they’re going to get more and more money is going to start to flow into these energy stocks that’s going to probably push them back up.
But Devon is a great company. They’ve got tremendous cash flow. They’re paying a great dividend. They don’t only have any debt maturing for – I forget the exact year, but I don’t think it’s for a while. And they just – they have the makings of a very good company, shareholder-friendly. And, really, the price of oil is going to be the key. And we can talk about some catalyst that I think are really going to push the price of oil higher later. But that’s sort of my general bull case for Devon. It’s a great company. Got a lot of good things going forward.
Daniel Snyder: We see quant system over here as a buy rating on it. Wall Street analysts have a buy rating and the Seeking Alpha authors overall have a buy rating on it as well. Kind of curious though, because I was looking into the financials. I was just going to dive in here. I just had it up a site like that, but it seems like this company over the recent years has been in increasing its share count. Obviously, as an investor, I’m not always in favor of that. Is that something that worries you at all?
Raul Shah: Yeah. Actually, I think and I don’t remember the exact percentage, but they retired. I think maybe 4% of shares last year or something. It’s in the article, but you’ve got stock-based compensation sometimes that improves the shares. Maybe sometimes they needed to fund capital investments. I don’t know the exact number that it’s increased over the years, maybe it’s dramatic, maybe it’s not. But I think as it currently stands, it’s in an okay state. Also, they have a share purchase – repurchase program in place that’s going to probably lower those shares as well, too.
Daniel Snyder: And is this one of those companies that you see kind of, I think you mentioned they’re spending, is it $0.5 billion or a $1 billion or they just spent it on CapEx? I mean, because this is a very weird moment in time, right, for oil and energy companies where do we invest in new infrastructure? It’s not going to pay off for five to 10 years. We see this green transitioning happening. I mean, why the conviction if they still have to invest in refining and production and discovery?
Raul Shah: Right. Yeah. That’s – and I think perfectly leads into sort of like the price of oil. They did spend some money on CapEx. I mean, it’s hard to say the exact reason why, I mean, they have all these basins, particularly the Delaware Basin. Maybe they got to drill out or they got to do something in the meantime, whether it’s maybe just to maintain what they’re producing and not even necessarily to expand their production.
But there’s a lot of catalyst for the price of oil to go up, particularly when COVID happened, you had this sudden demand shock where nobody was driving, utilizing oil, and the price of oil collapsed. The thing is, is that as soon as that happened, I realized it was a great opportunity to buy oil stocks because demand is sort of like a spigot. You can turn it off and on at will, but you can’t do that with supply.
So, once all of a sudden people start driving again, and all this demand for oil comes back, well, the supply was already reduced because people weren’t using oil and demand comes back like this, but you can’t just bring supply back online at the same pace. So, there’s a bit of a lag. And so you have all this demand for oil, but there’s no oil. So, the price is going to get pushed up extremely fast. And you saw that during 2021 when the price is going up to $120, $130 a barrel. And so that was expected.
Now, which I think really going to keep the price elevated, maybe to around $100 a barrel, is number one, you have a lot of oil companies not invest in future CapEx projects, why? Because like you said, you don’t know what the price is going to be intended. You get all of this. You got political pressure to move to green energy, consumer pressure to move to green energy. You’re not going to make these million-dollar, billion-dollar investments if you have no clue what the price of oil is going to be in 10 years. So, the supply is not going to go up very much, but the demand is still going to be there. And so you’re going to have a constant upward pressure on price for that one reason.
Number two, once we run out of oil in this strategic oil petroleum reserve, the price is going to get pushed back up again. It’s pretty irresponsible to use that reserve for this sort of a situation. Really, the SPR is for actual dire times where there’s a genuine shortage and we need to supply the country oil. It’s not supposed to be, hey, we printed a lot of money. The price of oil went up. Now we got to use the SPR. That’s very irresponsible. But ultimately, when that goes out, that’s the second thing that’s going to start pushing the price back up.
And just in general, the third really big thing is inflation. The dollar index is strong right now. I think it’s like a 103 spot something at the moment. Once the dollar starts to collapse a little bit, not collapse, but once it starts to decrease a little bit, that’s when you’re really going to see prices start getting pushed up. And so I think those three things are going to push the price of oil a lot higher and it’s going to take every oil stock with it.
And then the fourth thing is once the price of oil goes up and these stocks start to go up, now you’re going to get more fund managers buying these oil stocks and that’s going to even further push the price up.
Austin Hankwitz: So, here’s my question. And this is coming from a guy who doesn’t know Jack about oil or oil companies or any of that stuff. Why Devon and not like OXY or Chevron (CVX) or insert name of oil gas company here, right?
Raul Shah: Yeah, there’s so many good oil plays in the market. Devon stuck out to me because they had such a big dividend and I knew they didn’t have a lot of debt maturing. Until I think it’s 2030, don’t quote me, but I think I wrote in the article. So, you look at that. You’re like, okay. They’re producing these massive free cash flows. They don’t have any debt. They’re buying back their shares. They’ve got – the price of oil is elevated.
So, that really stuck out to me. And also, it was a value player right? Like, Devon, at time that I bought, it was $16. A lot of these other oil stocks were still trading at much higher Pes, you know. So, that was – it was a combination of the price that I was getting the stock at versus what I was actually in, what I was getting for that price. But there are a lot of good oil companies, you know.
Austin Hankwitz: Got it. Got it. I like that. Very cool.
Daniel Snyder: Just pulling up the dividend grade scorecard here on Seeking Alpha, obviously. So, we got safety as an A, dividend growth as an A+, the dividend yield is a D+, and the dividend consistency is a B+. It’s looking like payout ratio, 57%; dividend yield is 1.24, last announced dividend, $0.18. Is this the company that does the variable dividend? Is that what…
Raul Shah: Yeah. So, they’re – yeah. Exactly. Yeah. So, I think the variable dividend is about 9%. They’re basically paying out probably about $5 a share.
Daniel Snyder: Gotcha. And you think that’s very sustainable going forward?
Raul Shah: I think it will be reduced to a certain degree, maybe in the following few quarters because the price of oil has gone down. So, their free cash flow is going to go down with it. If the price of oil were to go back to around a 100, I think that’s sustainable. I mean, I don’t – it’s hard to predict the price of oil. And I think that’s what a lot of the free cash flow is dependent on.
I mean, I think general trajectory, I think we’re headed out probably somewhere around $100 a barrel, but you never know with commodities. You don’t know the timeframe. I have a good feeling of the trajectory. So, that dividend will depend on that price of oil because ultimately their free cash flow depends on that price of oil.
Daniel Snyder: Right. 8.9% on that yield though, I mean, how low and low yield on cost, that’s favorable, man. So, you’re saying we’re talking about the SPR, right, Strategic Petroleum Reserve. They already said they’re going to – the government’s going to come out and buy, what was it, around $70 a barrel. So, it doesn’t that in essence, put the floor of the market in? I mean, right now, as we’re recording this, I just pulled it up crude oils at $73 a barrel roughly, $74.
Raul Shah: Yeah. I think there are so many factors too that go into play with oil. You have this. It’s not just the supply side, but you have the demand side, too. You have countries that are maybe, like, China and I know I think recently started to end some of those lockdowns. But for a long time, you had a lot of Chinese people still locked up not using oil. So, there was a huge lack of demand there that also kind of contributed to the price falling.
So, there’s so many different factors at play. It’s hard. It’s – I’m very reluctant to try to predict the price of any commodity because your guess is as good as mine no matter how much I may have read up because you just never know. But I do think sort of bottom line that once we start reducing the supply from the SDR, and we start getting some of those other inflationary pressures start to pick back up, I think that the price is ultimately going to circle somewhere around a $100 a barrel.
Daniel Snyder: Do you have any worries about, I mean, if you read the news about the oil industry in OPEC and what’s going on with China buying oil outside of using U.S. dollars the depth of that, they’re getting more oil from Russia. That’s probably not being transacted in U.S. dollars. I mean, do you have any worries about that affecting the price? I mean, obviously, it would have to affect the price, right?
Raul Shah: Yeah. I think it’s again, it’s so challenging when you think of all the different factors at play and then particularly trying to assign, like, a monetary effect of each transaction, right, where it’s like, okay. Hey, let’s say that this country X decides that they’re going to buy oil in a different currency. They’re going to buy from a different country. And then trying to take that information and say, “Okay, what’s the impact going to be on the oil price?” Because it’s so challenging to do that, I try to look at it from just a very big perspective. What’s the supply of oil going to be? What’s the demand of oil going to be?
If we need oil and we’re not drilling for oil because we don’t know what the price in the future is going to be, you’ve got sort of a cap on supply, but you don’t have that same cap on demand. And so those two forces, no matter what happens in between, whether you’ve got countries buying from different countries, you’ve got different currencies going on whatever, Ultimately, it’s the supply and demand that really matters.
And if you look at it from that perspective, I think we’re going to have a lot of demand for oil. We’re not going to have a lot of supply of oil, and that’s going to keep the floor on the price. And really, it’s the biggest thing aside from supply and demand is the inflationary pressure. As it stands today, anything is possible, but oil is priced in dollars.
Once the dollar index starts to fall even a little bit, you’re going to see, I think, that’s really going to be the catalyst for seeing, not just oil prices go, but really commodity prices like gold, silver. I think that’s going to be the fuel that’s really going to start those prices to start to bump up a little bit more. So, I don’t think it’s the granular aspect of who’s buying from who. I think it’s more of a supply and demand inflation, and just a big picture thing.
Austin Hankwitz: So, I want to jump in here for a moment. Again, come from a guy who doesn’t know Jack about oil. I don’t invest in three industries because I don’t invest in what I don’t know. Bank stocks, airplane companies, think about your airlines, right, and then oil. I don’t know anything about oil.
So, as someone who’s listening right now, kind of a fly on the wall and might now be in aspired to learn more about oil, if I want to begin investing into oil companies, what are a couple of things I should be looking at that might be obviously bottom lines and things like that.
But, like, specific to the oil industry, in your opinion, what are some things that I should be looking at as I want to begin researching more about oil companies? Is it debt maturity? Because they’re all doing. Is it CapEx? Because of refining. Like, what are the maybe, call it, two or three things that, like, you’re just like, oh, I always look for these three things when I’m evaluating oil stocks?
Raul Shah: Yeah, that’s a really good question. I would say – so I’ll give you one bonus point two that’s sort of outside of what you had mentioned. But I think learning about it for YouTube as funny as it sounds is a really good way to do about it. I literally went on YouTube, and I would look up a lot of the things like terminology, what people were saying, and it gives you a very good, like, overview of any sector. And that’s a really good base to have because you want to be familiar with certain terminologies. So, that’s, I think, a really good thing in general. I do that with almost every single stop.
Austin Hankwitz: So, it’d be resourceful, number one. I love it.
Raul Shah: Yeah, yeah. Be resourceful. And then the second thing is, too, I think a lot of things that apply for other companies and other sectors also still apply for oil companies. So, one of the big things that I look for is I don’t want to buy an oil company that has a lot of debt. Because the problem here is that, hey, you’ve got interest rates going up, but also that you don’t want to buy a company that has to spend a lot to, let’s say, build new equipment, refine a lot of new equipment in an inflationary environment.
Not oil companies have to do that either way. But again, you look at that relative to their free cash flow. And so I think that you want to buy companies, oil companies that don’t have a lot of debt and that are producing those free cash flows. So, that’s a big thing right there. At least then you have some stake because, again, like I said, if you don’t have a lot of debt, it’s very difficult to go bankrupt and that acts as a very good floor on the price.
You want to look at shareholder, managements like how they look at, how they view returning capital to their shareholders. Do they sound like they actually enjoyed doing it? So, Devon, for example, listen to their earnings call. One of the things that they take pride in is how much they return in dividends and buyback. And that’s really important because a lot of people buy these stocks for those reasons, more so than other sectors.
So, that’s another good thing to look for. So, you look at debt, you look at cash flow, you look at the management policy towards shareholders, and that gives you sort of at least some safety that you’re collecting a dividend yield and you don’t have to worry about the company going bankrupt.
Daniel Snyder: I would love to have you.
Austin Hankwitz: Got it. That was great. Thank you.
Daniel Snyder: Raul, I would love to just have you. I just pulled this from your article as well. I mean, this is price correlated with adjusted operating earnings. What are the big takeaways from this graph for investors?
Raul Shah: Yeah. So, number one, first and foremost, you’ll see that as with any cyclical stock, these earnings go up and down. And so if you catch it at the wrong time, you could lose a fortune. And if you catch it at the right time, you could make a fortune. You’ll notice here too. I’m going to kind of get closer to the screen, so I can see it.
But let’s go back to sort of that ’08, ’09 timeframe when I was talking about earlier when you had a lot of funds buying oil stocks. You’ll see we kind of peaked here at ’09, and then we had this big crash in the price of oil and like other oil companies, Devon also fell a lot. And then a lot of people got out of oil stocks at this point in time. And the price kind of fluctuated, kind of stayed the same for a long period of time. And then we had a couple of the big crashes, of course, 2020 was the biggest one.
But from here on out, I think these earnings are going to be accurately reflected. So, if you look here at the current day, we’ve got probably about $9 a share. And in this sort of a graph, the more in the green the stock price is, the more A, margin of safety you have; and B, the more opportunity you have to make a lot of money. And so I think these earnings are going to stay in this area.
So, to give you some perspective, in ’08, I don’t remember what the price of crude oil got up to maybe 140, maybe I don’t know if you do guys remember 150, something like that. But it makes sense that if that was the earnings in ’08, when the price of oil was 150, that in current day, we should be somewhere close to there if we get to about a 100 where the current stock price is.
So, I think the graph checks out. It makes logical sense everything where it’s in place. And if the company does well, if the oil price goes up to a 100, I think that price is going to stay, where it is and a little bit higher. I don’t think it’s going to go down much more.
Daniel Snyder: Gotcha. I got one more question from my side, maybe Austin has one as well. But through talking all of this, I think the one thing that we haven’t specifically addressed is what’s going on with ESG, right? Which is obviously, I think what is, I mean, we talked about management and maybe having new CapEx and how long that, that plays out and how long it takes them to the return on the investment.
But what is your perception of, say, the next five years? Because ESG kind of is, like, falling from the wayside. It feels like a little bit or maybe that’s just me, but, like, is ESG over the next few years going to be something that makes oil companies, in your mind, more reluctant going forward?
Raul Shah: To be quite honest, I’m not that familiar with that, but I could be able to give any sort of helpful advice to viewers, and I don’t want to mislead anybody in that regard.
Daniel Snyder: I love the truth. All right. No problem with me. Austin, do you have anything from your side?
Austin Hankwitz: No, I’m just thinking about this ESG question. I don’t remember, I had a TikTok video about three or four months ago about the YALL [ph] ETF, right? And it’s like anti ESG. And so – and even my dad, my dad’s a boomer though, but he’s over here talking to me about these gosh, what’s the recent anti ESG pump the oil drill? I think it may be used what the ETF was called. I don’t know, right?
But I think it’s interesting, right? I think on one side, you’ve got these companies, these oil companies saying, we welcome ESG. We are over here doing all we can to offset that maybe this catastrophe that we caused or this thing with the environment or this or that. And I think they do a really good job of hiring these awesome PR marketing firms to make them just seem like these awesome companies from the ESG perspective.
But I also think that and this is like a recent phenomenon. But that more and more people are, like, I don’t care about ESG, care about prophets, right? I don’t care about this ESG stuff. And I don’t know if this was catalyzed by Trump in, like, in 2016 or 2020, right? But that’s kind of when ESG kind of made banner headlines, and I think it really caused people to say yes or no to that. So, maybe it was just a coincidence.
But I think there’s like a weird kind of phenomenon happening right now where people are either completely for ESG or they’re like, what? I don’t care about ESG. I’m going to invest in companies that I think are going to turn a profit or push those free cash flows higher or things of that nature, and that might not be a big thing for them. But then from the management side of things, right, that’s where it really comes down is how much they have to reinvest into, make sure that they’re aligned with these initiatives that are passed by Congress or things of that nature. That’s – it’s a really fun thought experiment, right?
Daniel Snyder: Yeah. I love the different opinions, right? And that’s why I brought it up. It’s like I mean, even Devon Energy, I know, kind of works within the natural gas side of the industry as well, and we really didn’t dive into that. So, we may – we stay more oil, but then you see companies like ExxonMobil, for instance, which anybody listening in the show knows, I’m a shareholder blah blah blah. They’re like they’re going into hydrogen as well.
And so you started thinking about how all these different factors might come and affect that sector and industry. Just always try to get every opinion I can, which is why I got to ask the question. But Raul, I got to say, I’m going to give you the opportunity. Is there anything else that you think we miss? I mean, how you elaborate on companies and your research or how you find them? I mean, anything else because if not, I’m just going to push people back to your Seeking Alpha author profile because I love reading your articles. I mean, anybody that’s looking for metrics evaluations, you cover it all, but the floor is yours.
Raul Shah: Well, I mean, I think the only thing maybe I would have is to sort of a general overview of how to evaluate a stock, and I’ll give it a quick 30 second rundown. I think the first thing is really important when you look at what price you’re paying. So, the PE ratio is so important.
If I see something that’s 20 or 25 or 30, I’m already not really that interested. I try to find something that’s 10 or less. And then you can look at the earnings per share, and you want to see that going up every single year. And you have these graphs that when you plot the earnings, they’re like this going straight up. And that’s very powerful.
So, you see consistency, reliability. And then if you’re getting it for a cheap price, that’s something that’s really worth then looking into a lot more. So, I think those are the two big things that investors could take away that will immediately screen out a lot of bad stocks and bring it to their attention, a lot of really good stocks.
And from there, you just sort of try to value the company. You can do that different ways. You can do that with the discount cash flow. Or the easiest way is just looking at the EPS and attaching a market price multiple to it. But that’s 12, 15, 20, whatever you think. And I’m going to give you an idea of the price, and then you can kind of dig a little bit deeper, look at the debt, look at the cash, and that gives you a very good comprehensive overview of stock.
And I tell people all the time you don’t have to be a genius to be a good stock market investor. If you did, a lot of people wouldn’t have as much money as they do. You just have to have a little bit of common sense buying good stocks at good or better prices. Don’t chase stocks or buy things out of emotion, and you can make a lot of money.
Daniel Snyder: Man, giving me Peter Lynch vibes right now. You feel that?
Raul Shah: Actually, for years, he’s my – that’s probably the best comp I’ve ever gotten. He is probably my favorite investor. I like Peter Lynch a lot more than Warren Buffett. When I listened to Warren Buffett talk, I honestly don’t know what he’s talking about half the time. But Peter Lynch does a really good job of making it very easy to understand for people. And that’s why I really admire him, and plus his run at Fidelity was unbelievable.
Daniel Snyder: Totally. I got to ask you guys, I mean, so maybe just you, Raul, since you’re the oil guy. We got the chat blowing up over here about XLE, the XLE ETF, right? And then we got the two different size. I mean, obviously, you’re paying the expenses for the ETF versus Devon Energy and stuff. What’s your – do you have an opinion on XLE?
Raul Shah: I actually owned XLE. At some point, I don’t know if it was 2020 or 2021. And it did very well, and I wound up so near because I was selling it because I could actually use that money to buy more shares of Devon. But I think your opinion on XLE, it would depend on your opinion of the price of oil.
I hate to sound like a broken record, but it’s so much dependent on that anytime you buy a commodity stock. And I think XLE provides a lot of safety because, like you said it’s ETF, you’re going to get a lot of exposure to different companies that you wouldn’t if you just bought one. I haven’t looked at what the price is now. I have to go back and look at that if you have it. No. But…
Daniel Snyder: Yeah, $84.
Raul Shah: That’s a great – what is it? 84?
Daniel Snyder: 84.5 right now. Yeah.
Raul Shah: Okay. Yeah, I think I bought it at, like, probably 40 or something, and I sold it very shortly after, but it’s interesting that it’s done that well.
Austin Hankwitz: Man, am I the only person who can, like, take advantage of the oil trade. I feel like everyone saw oil coming from a mile away, and I’m over here just like twirling my thumbs. I feel so silly for not jumping in on oil back in, like, 2020. Like, when things went negative, like, what you did? I just golly, what was I thinking?
Raul Shah: Yeah. It’s so funny because it’s like human nature, right? You don’t – it’s like you – it’s counterintuitive. When you see the price bottoming out, it’s like you try to decipher the reason is it justified? Is it not justified? But it’s hard to pull the trigger because it’s going down. It’s just counterintuitive to human nature.
Daniel Snyder: Yeah. Crazy. Guys, excellent conversation today. Appreciate you joining us, Raul. Obviously, we’re going to put a link and the show notes and everywhere for you to get everyone to go follow you on Seeking Alpha. I mean, your articles really are amazing. I got to say that. Like, I’m not just saying that. And I know you don’t write as much during the baseball season makes total sense, but I wish you did personally just a little – I need those articles, but we’ll take it when we can get it.
Raul, thank you for coming today on the show, sharing your insights, and just recap Hims Health and Devon Energy is what we covered today. Anything else you’d like to say before we let you out?
Raul Shah: No. I just say I’m so stoked to be here. Thank you for the cameras up. This was a great conversation. And Austin, I’m sad that you’re leaving, but maybe hopefully, if I’m on another time, you will be there too and we can continue a conversation.
Austin Hankwitz: Most definitely. I will personally open up my phone right now and follow you on Twitter assuming you have a Twitter and we can connect there for sure.
Raul Shah: I do. Yeah, yeah. That sounds great. Awesome.
Daniel Snyder: Awesome. All right, Raul. Thanks for joining us today.
Now, Austin, before we get out of here, man, I mean, it’s been a great what? Well, we’ve been doing this probably six months now or something like that. I mean…
Austin Hankwitz: You mean, six months, really that long. Oh, man, time flies if it has been. Jeez. You’re right. It has I mean, we started doing this in what, like, September-ish, maybe.
Daniel Snyder: Like July, I thought.
Austin Hankwitz: July? Oh, gosh.
Daniel Snyder: We’ve had great group of people joining us week after week. Everybody that’s been here live with us every Wednesday from 12 to 1, we love you guys. We appreciate you guys coming to hang out. I mean, the reoccurring names we see in the chat, we definitely notice. We read all of your chats.
Just a reminder, if you need more Austin in your life, Cash Flow Freaks on Seeking Alpha, he is there. You can always chat with him, talk to him, go follow that $2 million investment portfolio, which I know I’m personally going to be following because I think it’s a great idea and also makes total sense, right. Like yeah, as you invest for your money to make money and I think it’s a great setup.
So, obviously, everybody, make sure you stay in touch with Austin. You can find him on TikTok, on Twitter, Seeking Alpha. I mean, you’re everywhere, dude. You’re everywhere.
Austin Hankwitz: I appreciate it. And that’s the thing, too. Like, it’s $2 million portfolio for me, but maybe that’s a $200,000 portfolio view or a $20,000 goal view, right? Like, this is a journey. There’s a long journey. We’re all doing this together. And it’s all about transparency, it’s about education, reflection. And I’m excited to welcome everyone with open arms and have a good time over the next several years doing it.
Daniel Snyder: I tell you what, man. I’m going to miss having you here on the show every week, but we are going to totally have you back on, and I can’t wait to follow the journey. We’re going to – well, I’m going to ask you probably every time, like, where is the investment portfolio at? [indiscernible] this. And I just, like, do a little additions like that.
But all right, guys, we’re going to go ahead and get on out of here. Happy New Year, everyone. Thanks for joining us in the Investing Experts Podcast, and we’ll see you next episode. I’m Daniel Snyder.
Austin Hankwitz: I’m Austin Hankwitz. I will see you guys here very, very soon. And don’t forget to leave a rating and drop that 100 emoji. Because if you drop the 100 emoji, we know you’re an insider. We know you’ve been rocking with us for a while. And I appreciate reading a man. I love it. So, thanks, everyone. And I will see you all here very, very, very, very soon. I just won’t be in next episode. See you guys later.
Daniel Snyder: All right. Thanks again, Raul. And, Josh, let’s get on out of here.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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