Why one CIO is waiting for ‘a serious panic’ in the stock market

(Bloomberg) — The stock market has seen a ferocious rally this past week after nearly entering a bear market. Don’t get too excited about that, says Victoria Greene, founder and chief investment officer at G Squared Private Wealth.

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Greene took part in this week’s “What Goes Up” podcast to share why she thinks the sale isn’t over yet, and to give her perspective on the outlook for oil and energy stocks. Below are lightly edited and succinct highlights from the conversation. Click here to listen to the entire podcast and subscribe to Apple Podcasts or wherever you listen.

Q: Do you think we’ve hit bottom yet?

A: I don’t think we have found a bottom yet. I just don’t think we’re done yet. I think this is a bit more the first leg because I always ask, what is our catalyst, how are we going to get growth? You really haven’t seen many earnings revisions. And so we’re talking about, well, valuations are down. Yes, the P portion of the P/E has dropped. What happens if the E also starts to go down again? That has two parts.

That said, it’s held up — I just don’t think we’re done yet. I think this is more of a relief rally. If you look at the signs of capitulation — the 90% down days, the VIX spiking — we’re just not there yet. Yes, cash balances have definitely increased and yes, we’ve seen some stock sales, but no real panic. Not to sound like a snob, but I need some serious panic. We just haven’t seen that solid, absolute capitulation, selling everything out. We’re not there yet. And then my concern is also, where is your growth. Margins are definitely under pressure and we will have to wait for the Fed to send the economy into recession to stop some of it.

Q: Your company is located in Texas. Does the energy sector affect your customers?

A: It probably makes them a little more optimistic about the energy industry. But some of our customers actually use ex-energy because it depends on their exposures. So if you own a publicly traded company or sit on the board of directors of a publicly traded company, you already have that exposure. So basically we’re trying to diversify and reduce concentration because everyone in Texas is well aware that the oil market is cyclical. So you’re driving up the good times, but you know there’s a downside at some point. And this last decade has been super tough on the energy industry. We had about five crashes in 10 years. And so there’s just this fatigue about, okay, yeah, we’re bullish energy and the energy transition, as ESG comes and comes electric, it’s going to take a little longer to adopt. And we see that playing out here in 2022.

So probably I’d say not to generalize, but the attitude of many of our customers is that the death of energy was overkill. So not to say there aren’t any concerns about ESG or climate change or anything like that, but it tends to make them a little more willing to get a foothold in that segment. So I think it’s a bit of what you know that does affect what you feel comfortable investing in. The same thing happens in California — if you’re in the San Francisco area, you probably feel really comfortable with your tech exposures and a little bit more comfortable with the early stage and the small-cap technology and the innovators.

Q: Which energy companies do you like?

A: This addresses the larger theme of what is happening in the world right now and deglobalization. And as you may see, Russia has moved away from the market, you see all this rebalancing of supply and demand and it’s hitting the commodities harder. It’s not just energy that hits it. It’s fertilizers, it’s all export and some precious metals, palladium. They are a huge, huge supplier of palladium. And so you see this rebalancing and shifting and all these things take a lot of time to redistribute and build supply chains. So our base case is for oil to remain high for the next 18 months. I don’t see it coming back. I don’t see the demand crisis happening. Yes, China, you kind of live and die because of China, but if you look at the travel and consumption in the United States and Europe and where the trends are, most developed countries don’t have a zero-covid policy anymore.

I know Covid is a dirty word these days because we are so tired of talking about it. But it’s still there. That’s what affects China and Chinese demand. Chinese demand may also get a bit messy as China and India are willing to buy cheap Russian crude. Some of it is geographically convenient for them and they can buy it for $30 and they worry about their economic growth. So we can see some demand in China diminish. But overall, I think $90 to $100 a barrel for the next 18 months is clearly possible. You haven’t seen this wildcat mentality come back.

And then, of course, we had the OPEC switch. And so you saw this big de-investment in the oil and gas industry. And even now we are well below the peak. We are still well below the pandemic-era oil and gas platforms. So you’ve seen oil companies — and you’re going to see this theme in the oil and gas stocks that I like, the Devon, the EOG, the FANG (Diamondback Energy), and the Pioneer — they’re US-based with a large footprint in the Permian. They have low breakevens and they are definitely pushing cash out to shareholders. They don’t put it back in the ground. They say, ‘Thank you shareholders for trusting us. Here’s your money back.’ Like ‘I’m really sorry we haven’t made you money for ten years, but here you go. Let’s make some money now.’

But you don’t see that wild mentality that happened with other oil price spikes because that would happen and you’d have a huge influx of, ‘Let’s make more rigs out there’, and only supply and demand would eventually flip it. If you look at the slope of how the number of rigs has increased, it’s a much lower track. Nobody really puts a ton of money back into the capex. So we like the stocks that are just giving our shareholders better returns right now — like Devon Energy at $100 a barrel is like 16% free cash flow yield. They push out 50% of their free cash flow every quarter in a variable dividend. You are talking about a lot of money to wait, and you can still get price increases because they are making more and more money. And if you look at where the earnings revisions are happening, energy is the only place we think earnings are going to go up. And so the P/Es are actually still there, even with this huge price rising in many of these stocks, the P/Es are actually still very nominal and very value oriented.

(These were just the highlights. Click here to listen to the entire podcast.)

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