It's time to get some "Energy"!

First half of 2017 is over and earnings season would get full-steam in next 2-3 weeks. Given lack of major pre-announcements, there should not be any major surprises coming out of this season. With Fed taking dovish view on interest rates, markets seem to be loving "Goldilocks" scenario "not too hot not too cold". We already know that some sectors are getting hot like technology especially FANG stocks. At same time, it's worth exploring are there any sectors which are "cold" or "out of favor"? And of course one major sector which keeps on coming on radar is "Energy" sector. It started year on high hopes that OPEC deal in Nov would bring back oil markets in equilibrium and with Trump promises economy would grow closer to 3%. Both of these did not pan out in first half. US shell producers and Nigeria/Libya nullified whatever smaller effect OPEC deal had on supply side and due to lack of any concrete steps from Trump and Congress on tax reforms and infrastructure spending, US economy is still far away from growing at 3%. These two factors caused to oil slip back to $42 (before rising back to $46) and causing energy sector to be worst performing sector in S&P (down by over 12% in just 1H2017) So now question is where is energy sector headed. Here are some factors to look at to make prediction:

• US congress would one way or other decide on health-care before Aug and move onto other important topics like tax-reforms and infrastructure spending, This should get US economy growing closer to 2% (3% growth seems to be pipe-dream)
• US Fed would continue to be dovish making US $ weaker compared to Euro/Yen/Pound. This should give some boost to oil prices
• BRICs would continue to grow at healthy pace with India leading the pack (thanks to Mr. Modi's drive)
• Europe finally would start to grow with all major elections out of way. Merkel is almost guaranteed to win in Sept for another term
• With all these factors, overall world economy should be in reasonably good shape
• Opec would continue to make noises on "quotas" and US shell producers would continue to produce at record levels albeit at much lower costs. This would mean Oil would hover around $42 to $52 range for quite some time

What does all these means to companies in Energy sector. In general, they would be ok due to demand not falling off the cliff and supplies coming at lower cost point. So break even prices for all these companies coming down. Some of the companies/ETF to invest during this pessimism would be QEP ($9), SN ($6), HK ($6), MRO ($11.50), REN ($30), XLE ($65), RSPP ($33), APA ($48), TRGP ($44). The stocks and overall energy sector could have deja-vu like 2016 when they roared back in 4Q2016. Same could happen in 2H2017.

Have a great "Energy" driven weekend!

/Shyam

Tesla: Car company or Tech company!

Tesla is one of the most exciting company around and almost all of the credit goes to its visionary CEO Elon Musk. Over last few years, I have written two blogs dedicated to Tesla
Seeking Alpha by Adding Beta: Tesla = Apple of Cars?
Seeking Alpha by Adding Beta: Should Apple buy Tesla?
And give the action happening with first production Model 3 coming out this week and bear attack on Tesla stock bringing it down by over 10% in one week, promoted me to consider 3rd blog on same company! A ride in my friend's red Tesla (I call it as his mid-life crisis car) and seeing it in action also played a role!
Tesla - is it car company or tech company. This would decide if stock would eventually touch $1000 (from around $300 today) or touch maybe $500. Let's evaluate both sides:

Tesla as car company:
Tesla's major product is CAR and everyone love the product and willing to pay $1000 and wait for 2 years before they can get their hand on Model 3 (I am one of those). Which car company has this kind of power in today's ultra-competitive and ultra-choice world? It's current cars are exorbitantly costly and hopefully Model 3 would change that. It's also a low-volume car-company when you compare it with giants in car-industry like GM, Ford, Toyota and Volkswagen. Its considered as status symbol (even higher than owning BMW or Benz) with additional bonus of creating eco-friendly image. So even as car company, it has all things going for it. No wonder it's most valued car company in US with only 1% volume compared to GM (100K vs over 10 Million). However that's where story is about to change. Tesla needs to learn and perfect volume production and shipments to become a major car company (over million cars per year). That means it would need significant amount of capital to build and expand it's factories and investments in battery packs. Also it would have to build the charging stations across US to make sure that people would be able to take these cars across cities. So in nut-shell, it would have its growing pains to be a major car company and that would limit its valuation. It would still reach $100 Billion valuation by 2020 but further growth would be difficult if it gets valued as car company

Tesla as tech company:
In the ride I took in my friend's red Tesla, I am amazed with the technology integration - the big dashboard with so many knobs, information about surroundings shown right in front of driver, software upgrades to enable autonomous driving/parking features. Tesla seems to be way ahead of competition when it comes to smooth integration of technology, user-interface into final product.  It's at least 2-3 years ahead of all other car companies. It may be at least 1 year ahead of Waymo and 2 years ahead of Apple. It reminded me of Apple when iPhone was introduced exactly 10 years ago. iPhone was way ahead of all its competition (remember Blackberry - the first smartphone with clunky keyboard?).  If Tesla is able to license this technology to some of it's friendly competition, it would become a technology company (similar to what Google is trying to do with Waymo). Even as "Tech" company - Tesla has choice - should it follow Apple iPhone model of end-to-end integration into end-product or follow Google Android model where it could become supplier of "CarOS" for car companies. Both models proved to be very successful in smartphone market. Tesla seems to be heading towards Apple model.  I am surprised that when we compare Tesla with other tech companies, it's cheaper than Netflix, Priceline, Uber, Salesforce and valued at less than 1/10th of Google. So if markets start valuing Tesla as tech company, you are looking at stock touching $1000 in next 3-5 years giving it valuation of $200Billion.

My prediction is that it would be valued somewhere between car and tech company. Of course all of this would be moot if Apple ends up buying Tesla before 2022!
Have a great summer!
/Shyam