In this episode of Industry Focus: Energy, Jason Hall and Nick Sciple discuss energy and how the coronavirus can have an impact on the sector. Jeff Bezos announces $10 billion for Earth Fund, which will give money to programs to tackle climate change. We'll also look at Jason's most recent stock purchases and answer one of our listener's questions on Pattern Energy (PEGI +0.00%). Finally, we'll have some updates on the baseball cheating scandal.
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This video was recorded on Feb. 20, 2020.
Nick Sciple: It's Thursday, Feb. 20, and that means we're talking energy. I am your host Nick Sciple, joining me today is Motley Fool contributor Jason Hall. Jason, how's it going?
Jason Hall: It's fantastic. It's really good. Pitchers and catchers have reported. Spring training is kicking off. I've got something to buy me time until college football starts in August. So I'm good; life's good.
Sciple: You know, I have some hot takes on the Astros. But I'll save those for the end of the show. We've got a great show planned for everybody.
Hall: I have a feeling our man behind the glass is also going to want to chime in on that too. So, yeah, let's save that for the end, but that'll be fun.
Sciple: Yeah. Absolutely. We've got a great show planned today. We're breaking down how energy investors should be thinking about the coronavirus, getting some of Jason's most recent stock purchases, and we'll answer a listener question on Pattern Energy. But first, we have big news this week in the charitable donations front. On Monday, Amazon Founder Jeff Bezos announced a $10 billion donation to create the Bezos Earth Fund, which will fund programs to combat climate change. Jason, what were your thoughts when you saw this giant donation from Jeff Bezos?
Hall: Yeah, so the cynical part of me is, like, "Yeah, well, I think he's just tired of everybody beating up on him for being so rich." It's funny how people become immensely wealthy and immediately become the obvious target for everybody. And it's amazing how this guy is just taking a beating. But then I think back, historically, this isn't new. Billionaires -- and especially, you're thinking about going back to the industrial revolution and working forward in the United States, it's not uncommon to see people who've been titans of capitalism do things like this. So I think it's fantastic; it's interesting. We'll see what they do with it.
But I think if you look at some of the things that Amazon has done in terms of just trying to use renewable energy to run its data centers and that kind of thing, I think Bezos gets it. I really do. So I think it's a big positive.
Sciple: Yeah, I think Amazon has made several moves when it comes to trying to be greener this past year. So they announced plans to order a large number of these Rivian electric vehicles. They're partnering with Rivian to create these Amazon-branded delivery vehicles, which should hopefully reduce their missions in a meaningful way. We'll just have to see, I think. You know, whatever you think about ultrawealthy people, when folks take that money and donate it to good causes, whether that's the Gates Foundation, which I think is one of the best charities out there today, or what Bezos is doing today, I think that's really where you can start paying dividends well beyond your lifetime, if you're someone who has this type of wealth. So hopefully, good things come of it.
On less optimistic news, I suppose, in the past week coronavirus has continued to play out. We saw Apple reduce its guidance for the year. And the International Energy Agency last week came out and said that the virus is set to cause oil demand to fall for the first time in a quarter since the financial crisis back in 2009. So, Jason, as you're looking as an energy investor at what's going on with the coronavirus, how are you thinking about that?
Hall: You know, it's funny. I think just thinking about it from even just beyond energy markets and thinking about it holistically as an investor. It's another reminder that there's not really an effective strategy -- an effective exit strategy -- that investors can use to avoid potential short-term losses from these kinds of things. Let's go back a year ago. This wasn't on anybody's radar; it couldn't have been on anybody's radar. You can't plan for any way to exit the market before something like this happens. So it's a reminder that you really have to have a long-term investing plan. You have to build your thesis when you invest in a company based on the company's prospects to be able to survive and even potentially thrive through these kinds of things, these unexpected -- so you own companies that have a good margin of safety and good cash flows and that kind of thing.
So I think that's the biggest takeaway for me is, you know you can't use this as an example of how you could have avoided losing money, besides holding good companies through it and coming out the other end. On the other hand, I think, these kinds of things, what you can do is you can plan to use them as buying opportunities, if good businesses get a little bit beat up, maybe unnecessarily, you know you keep a little cash in your portfolio, so you can opportunistically buy when those things happen. But I'll be honest with you, you know -- just look at it. Kind of poking around in the markets, I don't see any obvious buy opportunities right now.
So you mentioned Apple, as an example, Apple's stock is up since late January; it's kind of strange. I don't see any direct correlation stocks that have lost value. It doesn't really seem to be an associated thing. So, obviously, I haven't looked at every Chinese affected stock. But, I think, in industrials and energy particularly, I don't see anything yet, but it's worth continuing to watch, because who knows how long this is going to play out. I think we're going to see a year of impact from this at some level, but it's really too early to say.
Sciple: Yeah, to your point, when you look at the markets, with the notable exception of energy, it doesn't seem the market has responded in a really meaningful way to the risks that the coronavirus has faced. I think, when you look at the energy market itself, you understand why energy is being affected in a negative way, just because, when we look at the oil market there was already an oversupply --
Hall: Dude, let's be honest. I just want to say this right now. Energy investors are always looking for a reason to sell. I mean, the past five years have been misery; it's been absolute misery. Their fingers are always on the trigger, ready to pull the trigger and sell at the first notice. So, well, you just don't know when it's going to come back. So, I'm sorry I cut you off, but I'm so frustrated with oil and gas right now. So, OK, I feel better. As you were.
Sciple: Yeah, I know. It's just tough for these businesses, both, in that, conditions were already in a position of oversupply, and then you have China, who is one of the largest consumers of oil and gas worldwide -- I mean, if you look at the industrial market, obviously, one of the biggest manufacturing economies in the world as well. So you already have this oversupply in place, and then one of your biggest demand drivers just falls off the market and there's really not a lot that these producers can do. We've heard that the Saudi energy minister, but back in January, had originally thought this might not have very much impact on oil, this week came out and said, "This is like a burning house. This is an emergency. We need to do something to correct this." There have been talks about an emergency OPEC meeting to deepen production cuts to try to adjust this oversupply.
But when you look at this market as an investor -- to your point, Jason -- there's really not much you can do to predict this. But even the businesses operating in this space, there's really not much they can do to adapt until these markets open back up; there's just not much for a manager to really do.
Hall: Well, as an investor, let's take it to the next level. I think the bigger challenge is, let's say OPEC takes some steps and they cut production to kind of prop up prices. Here's the thing. When demand does start to come back, there is so much supply out there on a global basis. You think about the Permian Basin, you think about the Eagle Ford, you think about some of these big shale plays. There is this massive amount of oil that is -- I haven't seen the latest numbers, but in terms of wells that are drilled but uncompleted, which essentially means that all they got to do is go out and frack them and connect them to a pipeline -- they can bring these wells on in a few days. I mean, it can happen so incredibly quickly.
And there's a massive amount of oil that they can bring on within a few weeks. So even when demand creeps back up, there is so much oil that can be swung back into the market so quickly, I can't really see a way for investors to predictably, with any kind of precision, know where to invest to potentially profit from that, because the oil can rush back in so quickly. You know, any surge in prices can get beat back down in a week or two. So it's really tough right now. It's definitely in that too hard box, you know. It really is.
Sciple: Yeah, I agree completely, Jason. Even before these coronavirus risks came online and really affected demand in a meaningful way, as I pointed out, there was already -- it's difficult to see what the industry looks like in a few years given this oversupply situation. I think, right now, as an investor, I just want to wait and see how things play out. I don't think this is an opportunity to jump in to any of these companies. It's just really hard to see what this industry looks like a couple of years down the line, especially if this outbreak continues to play out. So I think it's time to wait and see. And as we get more information, maybe there'll be an opportunity to invest.
Hall: I think the best advice I can give people that are looking at the energy markets for opportunities based on this right now is, go look at consumer goods. [laughs] Honestly, you know that's where the big names, the recognized names, like, think about Starbucks. They have a big presence in China. Think about Apple, obviously. You know those are the ones that people are going to think about, traders are going to think about. Hilton Hotels is an example, they're planning to close a bunch of hotels temporarily. Airlines, right? There may be some big names that people think about. Those get voted down, get sold off real quick. Look there, because there's predictability on the other side to how those companies can generate meaningful results that lead to returns for investors. Is that fair?
Sciple: No. I think that is fair. It's just, David Gardner likes to talk about, when you're investing, you want to see dark clouds that you can see through. I can't see these dark clouds right now.
Hall: Yeah.
Sciple: Jason, moving on to maybe stocks that maybe we want to buy, you've done a few purchases recently. What are some stocks you bought recently and why?
Hall: I have. So, I bought... here's one, and I know you're not a fan like I am. I bought Ford recently.
Sciple: What was your thesis on Ford, Jason?
Hall: So I didn't buy it because I'm expecting it to beat the market. I mean, let's face it, Ford's businesses, it's kind of a mess right now. Its China business is down a quarter. It's losing money there. It's losing money in several other markets around the world, markets that [laughs] other automakers are doing well in. And it's spending $10 billion or $12 billion to kind of turn things around. New vehicles, changing some of its manufacturing, it's spending a ton of money on this. But it pays a dividend yield -- you know, it's double digits, it's sustainable. This is a business that, even after having some people calling it kind of a dumpster fire of the year last year, still generated almost $2.8 billion in adjusted free cash. If it's a business that's struggling that's still generating almost $2.8 billion in adjusted free cash and has a dividend yield that's that high. I'm kind of interested in it.
Let's talk about the sustainability of the dividend. The Ford family, I think they own somewhere between 60% and 65% of voting shares. They want the dividend to continue. So it's highly unlikely that the dividend is going to get cut. It's especially true when you look at Ford's balance sheet; Ford carries more than $30 billion in total cash. I think about $20 billion to $25 billion of that is actually tied to the auto manufacturing business. And the debt that it carries is very low interest, very well structured in terms of when it has to be refinanced or paid off.
So again, I think if this is a business that's struggling, it's still one hell of a strong business considering all the things that it's going through.
Why did I buy it specifically? I read an article about it maybe a week or so ago. We bought a new house last year, late in the year, and locked in a really favorable interest rate. And my wife and I were thinking, you know, let's start paying a little extra every month, so we can bring that mortgage down as quickly as we can. I started thinking about it -- I'm paying 3.75% interest on this mortgage. That is cheap money. I have little doubt that if I invest that money, especially today, you can invest a few hundred bucks in stocks and there's no trading fees, so you don't feel penalized by paying $5 or $6 on a small amount of money to buy stocks. So I feel I can get a far better return over the long term by investing every month, investing that money in a basket of high-quality dividend stocks. So I bought Ford, just based on dividend arbitrage; I guess is the best way to put it. I think, over time, I'm going to earn a total return that's going to far exceed what I'm paying an interest on the mortgage. And I think I'll just be in a better position to do that 10 or 15 years from now. And Ford is one of the first stocks that I decided to buy a little bit of.
Sciple: Yeah. I think, to some of your points on Ford, this is a company that has just been in the middle of this massive restructuring that's kind of just colored the company over the past year or so. But if you look out over the long term, they do have the most popular truck brand in the U.S., which is the most profitable model. They just came out with this new Mustang EV that has gotten some very positive reviews. So we have some signs of a turnaround for Ford, but in particular, if you're investing for the dividend, you know, this is a company yielding about 7.5% right now. So, a definitely a robust dividend. And you know, folks might not be particularly excited about Ford right now. But if you look -- this is a company, about 100 years of track record. Elon Musk likes to call this out -- only Ford and Tesla are the only U.S. automakers to not have gone bankrupt. So at least for that track record, Ford has some staying power.
And your other recent purchase, Jason, probably gets folks a lot more excited than Ford, that's Virgin Galactic, which has just been a monster performer these past few months.
Hall: Yeah. And I'm going to be honest with you. This is one that I did something pretty rare for me. This is a bit of a fire, it really was, because again, this is a speculative investment. This is a company that doesn't have revenues. We don't really know exactly what its operating results are going to look like. We don't know what kind of valuation -- really, you can kind of draw out and sketch out all of these different valuation ideas and try and project, but at the end of the day, I think, it's what they call, it's a swag, right? It's a scientific wild-ass guess. It really is.
But what, I think, is really compelling to me is, in a way I think that Virgin Galactic is taking a similar approach to building a business to what Tesla did. Tesla targeted -- you know, instead of building a cheap Prius competitor, decided to build a sexy, fast, beautiful, really interesting, really fun vehicle targeted to premium buyers when it brought the Model S to market, and then the Model X, so it had the larger version. And it's continuing that with the with the pickup. So it started with these -- it kind of built a multibillion-dollar revenue business targeting people to make a little bit more money in the premium market.
And so, I think Virgin Galactic is doing the same thing with this space tourism business. So, you know, $250,000 for an hour and a half of flight time, basically is what it works out to. So, two days of space camp and 90 minutes of flight time for $250,000. So,the idea is that's a starting point and that's going to build a business and then over time it's going to expand to a mass market and you're going to start looking at things, like, long-haul travel that's much faster. You get out of the atmosphere, you know, you can get around the world. Instead of taking a day to get from the East Coast to Australia, turning that into a few hours. So it's a really, really compelling business.
And I think it's one that I decided, based on its leadership and based on somebody with the reputation of building really, really interesting businesses. I think it's one that I'm willing to risk a small amount of capital in to start, follow closely, and then over time, if it plays out, this is one that I could definitely see buying more. But for now, I'm just going to kind of sit back and watch.
Sciple: Yeah, I think we did a podcast on this. Me and Luis Sanchez, back in August, talked about this business. You mentioned the $250,000-per-ticket price. Yeah, so to your point, this is a company that, it's the only currently publicly available space tourism company, which I think has been a big driver for the stock. You've seen that in the past with Beyond Meat, these companies that have low float that are the only pure play to invest in this sector. However, if you look at the underlying numbers the company gave out when they went public, they do put forward a path to profitability in the relative near term.
So I believe, the numbers we called out in that podcast back in August is that, to be a profitable business, they need to do about a thousand flights per year, which, relative to their target market, there's 2 million people in the world with net worth greater than $10 million. You can say that's the target market of folks who can afford to pay this $250,000 per flight. To have a profitable business on a year-on-year basis, they need to capture a thousand of those people per year; that's 0.1% of the total market. So that sounds pretty doable to get the profitability.
However, one thing just to notice there. A thousand people a year -- at least when we did this podcast back in August -- there have only been 570 or so people who have ever been to space. So you're looking at roughly doubling the number of people who go to space every year for this company to get to profitability. Right now, they haven't taken anybody to space yet, but they're the only player doing it, and so that's really driven a lot of interest in the stock. And it's just been a monster performer when it comes to lots of folks piling into the stock, trying to get on to this trend.
Hall: Yeah, it's kind of ridiculous. Just a little inside cooking here -- Feb. 10 is when I bought it, so 10 days ago today, so seven trading days. And my investment is up 81% as of 1:30 on the 20th. So there you go. [laughs] But I tell you, another article I wrote about my Tesla experience about how I almost made $35,000, but didn't, because of my habit of not sitting on my hands. I'm leaving this one alone; I'm not selling, I'm going just -- to apply a stupid betting term -- I'm going to let it ride, baby! It's just so compelling, I think it's so interesting, I'm going to watch and I'm going to enjoy the ride for whatever it works out to as an investment.
Sciple: Yeah, from my perspective right now, I'm just going to watch and see. I want to see them get a couple of flights off -- you know, proof of concept on this business before I really want to hop in. But there's tons of excitement. On Tuesday, Fidelity reported that Virgin Galactic was bought more than any other stock, so more than Apple, more than Tesla. You've seen option volume over 10X since December. So just massive interest in the stock. Very frothy right now, but again, it's the only player that you can possibly invest in this space tourism business, and there's a lot of interest there.
Hall: Yeah, I fully expect that if I were to buy this stock today, there's a very reasonable potential that if I bought it today instead of 10 days ago, 10 days from now I would have lost half my money. I think that that is the kind of volatility that this investment could have. Because we don't know. It's all speculation at this point, right? I mean, if you think about the trading volume we're talking about, you know, this is a company with no revenues that's getting more trading volume than the most profitable company in the entire world. There's your context.
Sciple: Yeah. So this is one of those, I think, if I were to buy it today, that's one of those, you buy it and you never look at the price for the next three years. And assuming this business executes as they have said, they should theoretically be profitable by 2021 and really growing meaningfully, I would expect, after a few safe flights, the TAM or the number of people interested in doing this type of space travel, probably increases meaningfully. However, if the first few fights don't go well, I can see that going the other way.
So a lot of variables there, but really a big opportunity for this company. The only way public investors can really invest in this trend right now.
Hall: Right. That's it.
Sciple: Before we went away, we had a listener question from Rob about Pattern Energy. I know that's one of your favorite stocks, Jason. They got an offer to be taken private a few months back and that offer was to buyout the business at $26.75 in all-cash deal. Rob says: "Shares are currently trading about $1 above that. It's pretty clear there aren't other buyers interested to come in and buy Pattern Energy." He asks, "Why is that happening? It seems like it could be dividend-related." But he just wants to know, what's going on? Why is it trading above the deal price? What can you tell him, Jason?
Hall: Yeah, his assumption is correct. Pattern pays a $0.4220-per-share dividend each quarter. And the deal is expected to close sometime in the second quarter of the year. So it still has a couple of dividends to pay before it closes, so the market is baking the value of those dividends into the share price. So yeah, that's why it's trading at that premium.
So my thoughts are, if you're an investor, I think, the way you want to think about it is, if you own these shares in a taxable brokerage account and you've owned them for less than a year and you have a gain, you may just want to continue to sit on it so that you can take advantage of the lower long-term capital gains rate, if you can get past that one year of ownership of the stock. Because that could substantially lower the amount of tax you have to pay on your gains. If that's not a concern for you and you have other ideas, yeah, I think now is a reasonable time to exit. I think one of the challenges, though, is if you're looking to reinvest that capital into another yieldco.
The past year or so has been absolutely gangbusters for pretty much all the yieldcos out there. I mean, you're looking at -- Brookfield Renewable Partners is up 90%. TerraForm Power is up 72%. These stocks have really, really run. And I think in the short term there could be some risk, that we start to see some market kind of give up a little bit on some of these. But I think if you're just ready to move on, if I can offer a couple of suggestions up there. I think, I really like Brookfield Renewable Partners a lot. Brookfield Renewable Partners is working to finish acquiring the remainder of TerraForm Power it doesn't already own, so we'll see how that plays out.
But I think one that's really, really worth a close look -- that I have been following for a while -- is Atlantica Yield. It pays a yield that's just about 5%, even after its stock price has gone up pretty substantially over the past year. It's one of the smallest yieldcos out there. But I think it's really interesting, because in addition to renewable energy, it also has some investments in water desalinization, and we could see it continue to invest in that area. And I think that's going to be, kind of, maybe an underappreciated growth area over the next decade or so.
So I think I'll probably put Atlantica Yield at the top of my list of stocks right now to replace in your portfolio, if you decide to sell Pattern Energy.
Sciple: Yeah. And if folks want to see some more detailed discussion on some of those companies, Jason and I did a podcast back on Jan. 16, that you can go back and listen to, where we talk about Atlantica Yield, we talked about Clearway Energy, we talked Brookfield Renewable. So it should give you a good introduction to a lot of those potential businesses you can invest in.
You know, we teased it at the beginning of the show. Jason said pitchers and catchers have reported. I want to get your takes. What are you thinking about this Astros scandal, Jason?
Hall: So, before I answer, Austin, can you contain yourself while I respond, or do you need to jump in here first?
Austin Morgan: Go for it.
Hall: OK. Attaboy. I think if you just look at how many players that normally don't really take stances on things, like, Mike Trout is a good example. This is a guy that doesn't -- you know, he usually kind of toes the company line, so to speak, on these kinds of things. So for him to speak out in the way that he has, I think that really does say a lot. I think it's ugly. It's definitely a black mark on the game right now, but nothing's going to change, you know. These guys aren't going to get penalized.
But I think on the other side, if you're an Astro, if you're one of these guys that have this reputation as being such a great hitter, you know, one of the best in the game, you know, you have to be motivated coming out of this, right, to prove that you're not just a product of knowing what pitch was coming. So I think the thing I'm going to be most interested to see this year is, how do their best hitters perform? You know, we'll see. I think that's going to answer a lot of questions. If these guys come out and kill it again and they're one of the top two or three offenses in baseball, then I think that's going to shut up a lot of people, but if they struggle -- if even one or two of them struggle, you know, it's going to continue, it's going to exacerbate things and this is going to continue to be a big deal. So we'll see. We'll see.
Morgan: I don't think the MLB could have handled this any worse. It's been horrible, and I think it's going to continue to be horrible, because the Astros refused to admit that they cheated. They just say, "We broke the rules. It didn't affect the game." And it definitely did. I think there's enough backlash that the commissioner is going to have to do something or he's going to be gone.
Sciple: Yeah. I think, you know, tying into business, I guess, and management and how important that is, I think baseball is a good example of a league that's really just not gotten it right. I mean, you've got this Astros cheating scandal, that's No. 1. But when you look at BAMTech, what they do on video -- they are one of the only leagues that hasn't embraced Twitter and YouTube and all these sorts of things, which has really held the game back. When you look at a game that's really struggling to grow among younger people, when you have tarnishing how competitive and fair -- we think the sport is as well just not embracing new media. I just think that really leaves a lot to be desired in the leadership of that league.
Morgan: Trevor Bauer had a great rant about that exact thing.
Hall: Oh, yeah, I know, and he was spot-on. Absolutely spot-on. As a Braves fan watching Ronald Acuna kind of bring that personality in life, it kind of opened my eyes a little bit, too. And yeah, I think, you know, the NFL has been labeled the "No Fun League," because of all their celebrating penalties and stuff over the years, but baseball's got to start embracing these guys.
Question, Austin. This is for you. What's the over/under on Alex Bregman's home runs this year -- 30:30? That's, what's the over/under?
Morgan: I'm going to go under, and they've been cheating the whole time.
Hall: Yeah, fair enough.
Morgan: Astros didn't win 83 games [...] on the 85 hit by pitch.
Sciple: Wow! I'm going to go over and I'm going to say 100.
Morgan: I think the prop bet is 85. So I'm definitely going over.
Hall: Yeah, I think you take the over on that, but here's the thing. I think if the league actually starts to come down on pitchers and suspend pitchers for hitting these guys, the union is going to revolt. I mean, I think you could see a team walk out of the stadium.
Morgan: There were already talks of an MLB strike last season, so.
Hall: Yeah, because the contract coming up and all that kind of stuff. So yeah. I mean, honestly, I think there's -- so Justin Verlander pitching batting practice, I'm going to say he's going to hit five of his own guys in batting practice. You can take the over/under on that.
Morgan: That's good.
Hall: That's good, right. Come on! Can you imagine that, you're in there [...] you're facing Verlander and he hits you in the hip with a 95-mile-an-hour cutter?
Morgan: Hard pass.
Sciple: We shall see. So we'll be watching coming up later this year. I hope you all enjoyed our nonsense discussion on baseball, and we'll be looking forward to having Jason on again, sometime soon. Maybe we'll talk about college football next time.
Morgan: Hey, Nick, the Bulldogs had the No. 1 recruiting class this year.
Sciple: Oh, no. What are we going to do?
Morgan: Yeah. Let's play Alabama this season. How about we do that? Third game. Let's do that.
Sciple: All right. Fingers crossed.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for his work behind the glass. For Jason Hall, I'm Nick Sciple. Thanks for listening and Fool on!
