Get oil on your radar now

Monday, 3 June 2024

[4 min read]

Dear Reader,

Six weeks ago I shared this chart with you:

With it, I asked the question: Could it be this simple?

What I meant was, are the cycles between energy and tech stock so predictable that to make money, it’s simply a matter of rotating from one to the other at the right time?

This is clearly an idea that’s gathering pace.

I came across this tweet the other day that made much the same point, except this time for the commodities space as a whole:

As a tech investor, this prediction doesn’t fill me with glee.

And for the record, I don’t think it’s an either-or situation.

Indeed, energy and AI are two industries joined at the hip these days due to the intense energy demands of AI applications.

As Blackrock CEO Larry Fink said recently:

‘The world is short power.’

In my opinion, the AI revolution will be a major factor in driving energy demands in the future.

But you certainly could make a case that commodities and energy are undervalued compared to tech this year.

And for Aussie investors with a smorgasbord of mineral, energy, and commodity opportunities at our finger tips, this is an enticing thesis to consider.

Anyway, I bring this idea up again today, because my colleague and professional geologist James Cooper has one stock in the energy sector, he thinks is poised to ride this wave.

Specifically speaking, it’s an oil stock listed on the ASX.

Let me explain more…

The last supercycle

Overnight, the OPEC coalition of oil producing nations – which includes Saudi Arabia and Russia – agreed on extending production cuts.

As reported:

‘The Organization of the Petroleum Exporting Countries (OPEC+) on Sunday agreed to extend output cuts through next year, likely keeping prices high through the November presidential election.

‘The alliance said after a meeting Sunday that the move was aimed at boosting slack prices that have lulled despite the ongoing war in Gaza and attacks on shipping vessels in the Red Sea.’

Looking at the charts, you can see why they’re trying to prop up the oil price, which is hovering around U$81 per barrel as I type.

After rising from December through to April, the price of oil has reversed course in May and seems poised to test yearly lows.

It could be a sign the underlying economy is weakening right now.

But my colleague, James Cooper, thinks he’s seeing a signal that the oil market is poised for a new up-cycle sooner than most think.

Indeed, he thinks it could be the last Supercycle we see in the oil sector before we finally transition away to using more renewable sources of energy (and nuclear too, in my opinion).

And yet that fact only makes this oil pick even more lucrative potentially.

He recently wrote:

‘If you believe, like I do, that we’re embarking on broad commodity price inflation over the coming years...oil should not be ignored.

‘In fact, its last hurrah could be quite a sight to behold...

‘As the early 2000s China-led boom demonstrated, oil tends to rise in partnership with other commodities.

‘To show you what I mean...

‘At the beginning of the resource boom in 2001, crude traded as low as US$19.70/ barrel.

‘As I mentioned, crude almost reached US$150/barrel at its 2008 peak.

‘People forget this...

‘But in the last resources boom, oil’s performance was actually on a par with copper. The commodity most associated with those boom years.

‘Just take a look at the chart below from 2000 to 2008, showing the stellar rise of these two commodities:

‘Of course, past performance is not a reliable guide to future results.

‘But history shows energy prices rise alongside metals in major commodity booms.

‘Despite poor public opinion and government opposition...there’s no reason to believe oil can’t repeat this stellar performance in the years to come.

‘In fact, terrible sentiment against oil and gas companies will likely push prices even higher...as development projects face opposition.

‘That’s why you should be open to opportunities in this sector, right now.’

Want to find out more?

Read this special report

James has laid out his entire rationale.

I think, at the very least, you’ll find it intriguing.

And if you’re interested in investing, he’ll show you how to access the name of his favourite oil play (as well as four other resources stocks poised to benefit from a potential commodity boom).

Click here now to get this special report.

Regards,

Ryan Dinse,
Editor, Crypto Capital and Alpha Tech Trader

Ryan is a former financial advisor who over seven years helped more than 600 clients and had more than $150 million under management. This experience taught him that the mainstream investment industry has no interest in helping clients strive for greatness. He was told to make ‘safe’ investment plays and settle for average returns. It wasn’t good enough for Ryan.

In 2016, he embarked on a renewed mission: to help ordinary people lock onto extraordinary trends before they go mainstream. He’s an experienced small-cap trader and an expert in cryptocurrencies. He first bought Bitcoin [BTC] in 2013, when it was around US$600. Today, it’s around US$30,000.

His crypto advisory is a must for anyone looking to make digital assets a part of their long-term portfolio. Check it out here.

His tech advisory Alpha Tech Trader aims to identify and latch onto strong emerging opportunities in the tech sector, wherever they are in the world. Get more info here.

[3 min read]

Dear Reader,

Here’s a happy note:

‘Unusual Whales, a financial services platform that also works to build awareness of congressional insider trading, reported Tuesday that the couple [Nancy and Paul Pelosi] has made nearly $4 million so far off the Nvidia call options the California Democrat disclosed that her husband purchased in November.’

Good for them! A real power couple.

But Nvidia has made a lot of people a lot of money.

Readers hoping to find ‘the next Nvidia’ in these pages will be disappointed. Not only have we no idea where the ‘next Nvidia’ will come from, we’re still baffled...and a little suspicious...about this current Nvidia.

As we reported last week, much of the economy has been made ‘fictitious’ by Fed policy; how much ‘fiction’ is in the Nvidia story? How much of it is based on the fabulous sandcastle fantasy created America’s credit money? And what will happen to it when the next storm rolls in?

In its latest report, Nvidia reports a 262% boost in sales, YoY (year on year). Net revenue, meanwhile, rose 265% with a net profit margin of 57%.

Could this be true? Apparently. Nvidia is about the most amazingly swell thing to happen in the financial markets since Global Crossing was founded in 1997. Global Crossing was set to be the most important company in the new economy; it was thought to control an internet chokepoint — data transmissions. Alas, the company declared bankruptcy in 2002.

Now, Nvidia has the pole position in the AI race. It is growing at a blistering pace with this year’s first quarter sales up more than 600% over the same quarter last year. And it’s expected to keep growing.

It was only four years ago that Nvidia was worth $150 billion. Now it is worth twenty times that much. Along with Apple and Microsoft, it is one of the three biggest companies in the world. Together, these three companies are worth more than the annual GDP of Germany or Japan or any of the world's countries, save two — China and the US.

And so far this year, Nvidia investors have a gain of 132%.

Nobody leaves the office telling his spouse he’ll pick up a Nvidia on the way home. Nobody gets a new Nvidia when the old one shows signs of wear and tear. And nobody upgrades to Nvidia G10...just to be cool.

So what makes Nvidia so valuable? Do you own a Nvidia, Dear Reader? Does it wash your dishes? Does it ease your back pain? What exactly does a Nvidia do?

NBC News took up the question:

‘Nvidia... specialized in graphics processing units (GPUs). As their name suggests, GPUs are better able to render images, which meant that they were first associated with video and computer games.

‘But it turns out GPUs are also able to perform calculations concurrently in a way that regular CPUs cannot — making them more energy efficient and better able to handle sophisticated computing demands.

‘Over time, the other big chip makers began manufacturing their own GPUs to compete —but Nvidia, having enjoyed a first-mover advantage in the space, was where companies began to turn to for GPU needs.’

Here, our GPU needs are limited. But what we’re wondering is how much real need the rest of the world has... and whether it is enough to justify a $3 trillion price tag.

Is Nvidia a real investment, in other words, or just another flash-in-the-pan speculation? Ultimately, the value of a real investment depends on how much money it can make... that is, on how much real wealth it bestows on the world.

By the numbers

So, let’s look at the numbers.

In order to justify a $3 trillion price, assuming an average P/E (after the growth phase), the company should be able to produce about $200 billion of profit each year...and keep it up year after year so that the total return on Nvidia stock at least exceeds what you could get from US government Treasuries.

Can Nvidia do that? Income for the last 12 months was $43 billion. Say it doubles next year. And doubles again the following year. Now, we’re up to $172 billion... within hailing distance of the target.

This assumes, however, that the company sells four times as many chips...while keeping the same profit margin. How likely is that?

It also assumes that new technology doesn’t get any newer, leaving Nvidia stranded on an island of the past... or that competitors don’t steal a march on the company, coming out with better, or cheaper, GPU chips.

It would be almost unbelievable for Nvidia to do all these things. But Nvidia has already done almost unbelievable things...maybe it will do even more unbelievable things.

But the most unbelievable thing of all is that the company must not only hit the earnings target once...it must sustain its position long enough for investors to recover their money. The idea, we suppose, is that Nvidia will become like the Coca Cola company...providing refreshment for generations of AI users...while delivering reliable dividends to investors over many years.

At the current market cap, Nvidia would have to quickly quadruple or quintuple its earnings, maintain them there for the next fifteen years — and distribute all of it to investors — just to make investors even.

Currently, Nvidia pays out only 1% of its income in dividends. At that rate you’d have to wait 1,200 years to get your money back. And that is pre-tax. After tax, it could be 2,400 years.

What are the odds?

Regards,

Bill Bonner,
For Fat Tail Daily