Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AAV.TO, B.V, CRE.V, EMM.V, NPK.TO, NSE.V, SURG.V, TAO.V, TNZ.V, U.UN.TO, VLE.TO, XYZ.V, YGR.TO (Image credit to Gyu Seon Choi on Pixabay)
About a year ago, I wrote about being an “ox” in 2021, with a bias towards energy and materials. Energy stocks have since reclaimed reasonable portions of their former glory after the market realized that they had become way, way too cheap in the face of what could be a looming energy crisis. Much of that re-rate has occurred now, and although the energy names still represent great value, money flow is just down to value-versus-growth market dynamics at the moment. I remain a bull on oil and gas, and seeing the market shake off this morning’s news about a coordinated SPR release is certainly encouraging. There are a number of great energy companies, with great and improving balance sheets, trading at what I think are attractive valuations. That doesn’t mean the market is going to rip them higher tomorrow, but if energy prices even just hang in around this level, the sector is going to generate the kind of free cash flow that can’t be ignored forever. Meanwhile, the mainstreaming of the electrification theme means that copper has been good if you’ve been in the right names, with small-caps generally outperforming relative to the larger-cap names. Uranium and lithium are so hot that they are on fire, while junior nickel, manganese, and rare-earth stocks are largely still waiting for their time in the sun as part of the electrification trade. Gold had my eyebrow up with its recent move up to the mid-$1800 range (despite a coincident strong move up in U.S. dollar), but yesterday gold dropped $40/oz on Powell’s reconfirmation as Fed chair, and today I’m reading about the Turkish lira being in free-fall — so I’d bet the Turkish central bank is out there selling gold today to try to support the lira as they try to figure out which way is up. I feel like gold is on the verge of something here, so my views will be heavily influenced by the direction of the next major move, with an eye on treasury yields and the dollar. Overall, balance sheets in the mining group are improving rapidly, much the same as they are for the energy stocks. It does look like M&A will continue to be a theme for both energy and materials, so I’m trying keep that in the back of my mind when I think about my holdings. The other theme that appears to be alive and well in these sectors is that of discovery/delineation stories. These are stories where a great deal of value and interest can develop quickly, making for some impressive returns if one is lucky enough to find one in the early days. After all, mines and oilfields need to be replaced as they are depleted by the cash-rich producers.