Have Policy-Makers Given Investors a Secular Growth Story for Cyclical Stocks?

Our research is empirically based and tends towards places that are uncomfortable and out-of-favor.  In 2020, as investors gorged on crypto, loss-making tech and growth stocks of dubious merit, we wrote a wall-of-work explaining the empirical case for the opportunities in energy and staples.  One sector we purposefully avoided was the mining sector.

Our small and midcap model accumulated a mining weight roughly 3x the index by June 2020.  Trying to pitch oil, gas, and grocery stocks amidst a speculative frenzy was a plenty-miserable affair.  Miners struck us as a bridge-too-far.  Interestingly, despite their explosive performance, the fundamentals have run even faster.

These commodity stocks face operating challenges that vary widely by geography, the resources they are extracting and relentless cost pressures from ruthless competition.  Worse, a good deal of the long-term thesis for end-demand relies on the movement to a green electric grid and shift the world from internal combustion vehicles (ICE) to battery electric vehicles (BEV).  That led to further hesitation.  Here’s why:

In 2021, Toyota explained that three hybrids (HEV) cut CO2 output by the same amount as one BEV. At the time of publication, Toyota had sold 18 million hybrids.  Those 18 million HEVs cut CO2 output by the equivalent of nearly 6 million BEVs.  So, 18 million hybrids got us the benefit of ~6 million battery electric vehicles.

The difference? The batteries used to make Toyota’s 18 million hybrids would only make 260,000 battery electric vehicles.  The importance of understanding this cannot be overstated.

Let’s beat it to pieces using this very real-world example:

  1. You are intent on reducing the world’s CO2 emissions and you have some batteries
  2. Those batteries can make either 18,000,000 hybrids or 260,000 battery electric vehicles
  3. 18 million hybrids will reduce CO2 by the same amount as 6 million battery electric vehicles

Same number of batteries. You get the benefit of 6 million BEVs by building hybrids rather than actually building 260k BEVs.   20x the CO2 reduction by building hybrids

We thought facts like these would resonate with environmentalists looking for the most efficient method to cut CO2 output.  We were wrong.  To the degree society cares about the CO2 benefits, the limitations around mining supply and the impact of battery manufacturing, the appeal of hybrids and plug-in hybrids is obvious.

But that narrative is in the “middle,” less prone to polarization, dogma and, apparently, policy adoption.  To be clear, Toyota has long embraced a scientifically driven approach to CO2 reduction that included everything from hybrids to pure BEVs.  As Gill Pratt, the remarkable head of Toyota Research Institute explains, their diverse approach acknowledged the limitations in supply chains and the benefits of a diverse set of scientifically sound solutions to a complex problem.

For the open-minded, we highly recommend reading some of his work found here, here, here and here.  Reading his practical and evidence-based thoughts, it is difficult to believe the press has lambasted this company’s environmental intentions and credentials.

Under relentless pressure from environmental groups, Toyota appears to have recently caved.  In October the press reported the company may be overhauling their approach to electrification.  The world appears to be going “whole hog” on BEVs as the solution.

For fans of Tesla’s stock and the green grid, we think this article may be of great interest to you.  The electrification of transportation is going to require a massive amount of mining.  The stocks are incredibly cheap.  KCR’s model portfolios are investing in these stocks and, if you are a believer, these stocks may offer tremendous leverage to a long-term secular story.

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The Big Dig & the Quest for Minerals to Electrify Transportation

Keep Digging minerals needed for EV batteries have companies on hte hunt

[i] “Revised Version, March 2022,” annotation is on the second page of the report, after the cover page, before the executive summary in bold red

[ii] Executive Summary, page 11

[iii] https://www.iea.org/news/clean-energy-demand-for-critical-minerals-set-to-soar-as-the-world-pursues-net-zero-goals video, between minutes 6 and 12

[iv] IEA, Page 44

[v] IEA, Page 44

[vi] IEA, Page 28

[vii] IEA, Page 5

[viii] IEA, Page 50

[ix] IEA, pages 135 – 138, page 190

[x] IEA, pages 120, 130, 125,

As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for a simple, concentrated, low turnover, and hard-hitting GARP investing strategy, we would like to talk with you.  Similarly, if you are looking for a model portfolio of the most proven and durable dividend payers that is simple to implement, please let us know.  KCR also offers a wide range of easy-to-use but sophisticated tools like our Equity Duration product, which allows you to estimate a given portfolio’s interest rate and inflation risk. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.

Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seek independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling, or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as a result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

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December 2, 2022 |

Categories: White Papers

December 2, 2022

Categories: White Papers

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