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Let me set the table for you, we have Warren Buffett sitting out the market rally for years, and complaining he had nothing to buy, or invest in. No exaggeration, he was just not participating, I am not the only one that was thinking he is finally slowing down. In rapid succession, Berkshire (BRK.A) (BRK.B) announces just last month that they are acquiring Alleghany (Y) for $11B, then he buys a big chunk of Occidental (OXY), and then just a few weeks later, he buys an equally big hunk of HP Inc. (HPQ). All the more surprising since this is not an Apple (AAPL), there is no brand moat or unique technology to lock in customers. More importantly, HPQ has to compete on price, there are quite a number of competitors out there making products as good as HPQ. The fact that HPQ bought Poly after the investment means that they recognize that they need to expand their portfolio and try to create some unique capability. Seemingly, this is breaking a lot of Buffett rules as I understand them. The only thing I can think of is that HPQ was too dang cheap, it is throwing off a lot of cash, which means they are a well-run outfit. That is the nub of today’s article, savvy investors are finding that the market is way undervalued.
Look at another well thought of player, they specialize in tech private equity – Thoma Bravo. They made an offer to buy Anaplan (PLAN) for nearly $11B, a great cloud-based enterprise planning tool that has a network effect letting all the planners work together. I thought it was a brilliant concept when it IPO’d. Then, like many tech names, the stock price fell so low with all this crazy selling that Thoma Bravo just had to buy them. Then we have Elon Musk offering to buy Twitter (TWTR). You are laughing, Musk is some kind of free speech nut that wants to make TWTR a 1st amendment haven. Let me pose this question; if TWTR was well run and monetizing ads properly, the price wouldn’t it be so high that Musk couldn’t afford it. Not even the richest man in the world would not want to risk half his fortune on TWTR to make a political statement. Yes, I am saying that TWTR if it had some dynamic leadership that was willing to fix the horrible UX (User Experience) could easily be worth double. Dorsey, well, I am not a fan of his executive capabilities, aside from that he’s a grown man with a nose ring. I don’t understand why he is revered at TWTR, he kept it just as it was mostly. Do we really need to wait over a decade for an edit button? Anyway now he is putting all his attention on Block (SQ), which was once Square, destroying all that brand equity. For what? So that he can have a “me too” crypto trading app? Anyway, how is THAT stock doing? Dorsey is a great start-up executive, I give him all the credit, but once a company is running well after say 2-3 years, Dorsey should just accept his limitations and move on to start another great company. I digress like I always do, still, I can’t resist saying, at a start-up having a nose ring while you are approaching 50 is probably a positive. In any case, TWTR having no super-voting share class is easily acquirable for the right price. Musk thinks he can improve the business and have it make money. Otherwise, he wouldn’t try to scoop it up with a “take it or leave it” offer.
Also, late Friday, the aforementioned PE company Thoma Bravo is rumored to be looking to make an offer. After the poison pill, Musk is looking for other investors as well. If it wasn’t a bargain, how would he get other investors? Let’s not forget that Alphabet (GOOG) (GOOGL) bought Mandiant for $5.4B. Amazon (AMZN) finally closed on MGM Pictures. Where am I going with all this? Simple; when a market is operating, and not just trading and investing, but for the ultimate reason why the Stock Market was created; the buying and selling of companies. Almost all, except for Alleghany are tech names, oh, and also MGM. Ergo, the market is unlikely to fall much further if at all. In fact, I think we are fixing to rally. As I said last week, once we hit 2.89% on the 10-year, the market paused at that level and closed at 2.82%. I still maintain that the 10-year will consolidate at this level and lower to 2.2% or 2.3%. We should have a nice rally.
Looks like we are gonna be in the chips
We should have a bounce in the chips sector as more news trickles in about the improving supply picture for chips. More new cars are rolling off the line, not a huge amount but better than before. I will tell you, keep your eyes peeled for the newcomers to start lifting their projections for how many cars will be sold, the likes of Lucid (LCID), Rivian (RIVN), or even Fisker (FSR), start selling without big wait times, then we will know that the flood gates are opening. Suffice it to say that Ford (F) is going to be selling their F-150 Lightning, and they will be beating the bushes for any available chips, even that would be interesting to see if the lots will see a few more units sitting there. General Motors (GM) not to be outdone has the Hummer with a full-court press and so is the Silverado, I don’t think the General is going to make these announcements and not have the chips to build a decent amount.
We know that used car prices have come down significantly, some are saying it’s because people just won’t pay ever-higher prices. What I am saying is that more new cars are available and THAT is pushing down car prices. Perhaps it’s a combination.
The long and the short of it is, we will soon pass the peak of inflation in fact. Lael Brainard (a Fed board member) said lower inflation in core hard goods and the recovery will be sustainable in spite of the rate raises. Jeff Gundlach the “Bond King” also said we are at peak inflation, meaning it’s slowing. There were a few other luminaries that came around to the notion that supply bottlenecks are easing, and that should give pause to the ten-year interest rate. I am not alone in this notion. I think we are ready for a rally in tech names and the market overall. The only area and it is a big one where prices are not going to fall so quickly is oil and gas. That said, the number of drilling rigs being put to use is soaring. The most active ones are smaller operators, either private equity-funded outfits or smaller long-time frackers that may not have the best acreage, but at this price and even at 80, they are making money, so they are drilling. The amount that the US is producing is growing but not enough to make up for the Russian shortfall. Add the news that Libya has once again shut down its oil production, and we just have to expect WTI at over 130 this summer. Then again, the consumer is flush in the USA, and airline tickets are going to be really expensive. I expect the summer driving season to approach pre-pandemic levels. This all points to economic growth, not stagflation, not this year and I doubt most of 2024. We will be safe from recession, let alone stagflation. So what is my plan for next week? I want to buy Microsoft (MSFT) tomorrow anywhere near 280. I bought a bit in my long-term account since it has a dividend, I see no reason not to take a position in my trading account.
MSFT is under like 70 points from high and it has a safety aura about it. Last week my article was about how the large-cap tech names were losing the most right now. Though I didn’t list Microsoft, it is down quite a bit already. If it does fall back to 270, I will make multiple purchases of MSFT. MSFT has bounced twice from 270-ish. I think it bounces again once the 10-year shows it reached a top and is consolidating. Meanwhile, I like our Mid-Big Cap techs like Adobe (ADBE), Intuit (INTU), PayPal (PYPL), DocuSign (DOCU), and Zoom (ZM), they have already based as I showed in my last piece with really nice charts if I say so myself. If you didn’t read it yet, you should, it will make this article easier to understand I think.
PayPal is getting bought in size by institutions
DNB Asset Management, a large European money manager with $98B in assets, significantly raised its holding in PayPal. DNB bought 1.1 million PayPal shares in the first quarter to raise its investment to 1.3 million shares. That’s good enough for me. I will add more shares to my PayPal position this week.
I still want to add to my oil names first as a top priority, so I will move more capital from tech over to oil. That said, I am still in all of the names I have been sharing with you all along.
My Trades
The first new oil name I am unashamed to admit came from Jim Cramer. He recommended HighPeak Energy (HPK) last week, so I bought some shares. It’s taking off like a ROCKET. Since this name was once a SPAC, there are warrants so I may trade this name that way. At this point, the rise was so parabolic that I am thinking of selling and waiting for it to break down to buy the stock or the warrants on the slide. As far as Cramer, I usually have a laugh because somehow I am always in the stock he will feature or I’ve already traded it. I will take a stock idea from the devil himself if it is a good one. Good for him…
Refining is just fine
PSX is still down about 10% from its ATH. Refineries are said to have the largest piece of the profit pie in energy right now. It’s called the crack spread, the worth of the constituent product compared to the price of the crude. I touched on this last week or the week before. As expensive as our NatGas is perceived here, it is a ⅓ of what it is in Europe or in Asia. That means our refineries that use NatGas to cook the crude in a vacuum to release the different grades of oil have the cheapest operating margin anywhere in the world. Needless to say, I started buying it last week and will continue to do so, on any weakness. I am still in the specialty refiners I introduced last week, and I will grow them over time.
A cheaper way to trade Occidental Pet
When OXY acquired Anadarko, warrants were issued with the strike price of $22. So it is a way to leverage OXY on the price action. The downside is the risk that if OXY crashes under 22, it will be worth zero. The chances of this, as the market is so strong for its product, risk seems low, barring any acts of god or corporate scandal. Warren Buffett is in the stock and that is a valuable stamp of approval. At the end of Thursday, the warrant closed at 37.72, the strike was 22, so there is a little premium to the stock price of 59.34. If you intend to execute this warrant and not just trade it, you need to monitor your broker’s stock alerts and be prepared to execute the warrant. Once the warrant tender date is announced, the arbitrage between the warrant price and the stock price will close. However, as I was watching the warrant, there were as many as 2 points swinging below the stock price for a moment. It ranges around, though I was watching for only one day. If one would want the leverage, I’d just go and buy a bit to start and watch the arbitrage. In fact, that is what I did.
Insider Focus
Confluent (CFLT) Brad Gerstner Major Shareholder Buy 104,200 shares @ $39.22 $4,086,724.00 4/6/2022; CFLT Confluent Brad Gerstner Major Shareholder Buy 135,000 shares @ $38.58 $5,208,300.00 4/8/2022; $9.3 Million is not nothing.
My Take: I noticed this insider buying independently and found it to be very interesting. For those who may not know, Gerstner has a reputation as one of the most astute tech investors. Gerstner is a founder of Altimeter Capital, which is both a Venture and a Hedge fund. So many of the tech companies that went public in the last 5-6 years, probably were looked at by Gerstner as a startup looking for venture capital or had the opportunity to look it over. Obviously, he was buying as an individual with this investment, which I find even more interesting. You should note that I said I found this independently because I was reviewing comments on the last article, which I do periodically and also before I write the current one.
Someone asked if I still was in Confluent, which of course I am. Based on this new piece of info, I’ll add more shares this week. I’d like to believe that I’d report to you if I decide to completely eliminate a position I’ve written about. If not, I will remedy this now. I am no longer in UiPath (PATH), or Lemonade (LMND), or SoFi (SOFI), or Palantir (PLTR). That isn’t to say that I wouldn’t get back into any of them. Perhaps they debuted at a PE or PS ratio that is no longer viable. I still do think these are all very viable in business models and technology. Also, I am comfortable with the management except for PATH, not because they are inept, but because they are not putting themselves out there as much. There are several other names that I don’t mention every week because I don’t want to seem promotional. That said, some fine individual in the comment section of last week’s article said I left out Upstart (UPST) because I am in this for the money. I just put up fancy titles to get people to read my stuff, to get the big bucks. I don’t do this for the money, which is ridiculous. I love the stock market, trading, and investing. I don’t make a “living wage” from the income coming from the articles. I write because I love to write and share my opinion. I write because it helps me be a better trader. I write because I am a writer. That said, I am launching a subscription service. Why? Well, first because the wonderful people at Seeking Alpha invited me (several times) to do so, saying that providing an everyday commentary would be helpful to you all. It means that I have to let go of other things that I am doing to support myself, so it makes it necessary to start this service. I have another very good reason, I am very excited to bring you a brilliant young man who has a completely different approach to trading than me. He is also very successful at trading on his own, and the only way I could get him in front of you is to partner with him on this service. He has a completely different approach than I do, and between the two of us, we will have an exciting service to offer.
So in summary: I hope I was clear, if we are really in such gloomy circumstances, would there be a bid from Musk for TWTR, maybe. Then why is everyone saying that TWTR is in play? Why is Thoma Bravo ready to make a bid of their own. I bet there will be others. Why is Warren Buffett, CEO of Berkshire Hathaway, acquiring Alleghany, an insurance and reinsurance company selling for 11 times earnings if he thought the market was about to drop further? When you see a series of takeovers and companies investing in huge chunks, it means that they feel comfortable in that market sector. It’s time for us to start getting comfortable too. I think, at these prices, other big trades and acquisitions will be announced, and yes, there will be additional deals in the tech area. That said, I still want to build my oil and gas names, the stars are aligned for this sector to outperform.
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