Buffett's cash pile reflects the expensive valuation of the stock market, with the Shiller PE ratio at 38, significantly above the long-term average of 17. Additionally, there are macroeconomic concerns, including potential recession risks due to an inverted yield curve and slowing private sector activity. Buffett likely sees fewer attractive investment opportunities in the current environment.
Stig is bullish on Evolution AB because it is a leading supplier of live casino games and online slot machines, capturing 10-15% of player losses. The company has a 55% profit margin, strong growth potential, and operates in a fragmented market with high barriers to entry. Evolution benefits from tailwinds like increasing regulatory friendliness and demand from younger demographics.
Evolution's margins are expected to decline due to competition and expansion into lower-margin markets like the U.S., where regulatory and labor costs are higher. Additionally, 60% of its revenue comes from unregulated markets, introducing uncertainty. The stock also carries the stigma of being a 'sin stock,' which may deter some investors.
Hari is bullish on Occidental Petroleum due to its strong position in the Permian Basin, favorable regulatory environment, and significant cash flows. Buffett's increasing stake in the company, now at 28.4%, provides financial backing and optionality for future acquisitions. Additionally, Occidental's focus on returning capital to shareholders and its involvement in direct air capture technology add to its long-term appeal.
Occidental Petroleum faces macro headwinds, including potential economic slowdowns and volatile oil prices. The company also carries significant debt, which could be a concern if energy prices decline. Additionally, the success of its direct air capture technology is uncertain and may not contribute meaningfully to its valuation in the near term.
Tobias recommends Alpha Metallurgical Resources due to its strong cash generation, low valuation, and excellent balance sheet. The company produces metallurgical coal, essential for steel production, and benefits from long-term demand for green infrastructure. Its aggressive share buybacks and management's disciplined approach to capital allocation further enhance its appeal.
Alpha Metallurgical Resources is exposed to volatile met coal prices, which are influenced by global steel demand. A slowdown in China, a major steel consumer, could negatively impact the company. Additionally, advancements in electric arc furnace technology, which reduces the need for met coal, pose a long-term risk to its business model.
Evolution AB supplies live casino games and online slot machines to gambling operators. When a player loses money on a game, a portion of the loss goes to Evolution, typically 10-15%. The company benefits from high margins, especially in Asia, where games like Baccarat are popular and can accommodate unlimited players. Evolution's capital-light model and high return on invested capital make it an attractive investment.
Buffett's investment in Occidental Petroleum, now at 28.4% of the company, provides financial stability and optionality for future acquisitions. His initial investment in 2019 included preferred shares with an 8% dividend and warrants to buy common shares at $62.50. Buffett's backing signals confidence in Occidental's management and its long-term prospects in the energy sector.
Met coal is crucial for steel production, which is a key component of green infrastructure like wind turbines and solar panels. For example, each megawatt of wind power requires 120-180 tons of steel, and a single wind turbine needs 225-285 tons of steel. Despite the push for renewables, met coal remains indispensable for building the infrastructure needed to support green energy initiatives.
In today's episode, Stig Brodersen speaks to Tobias Carlisle and Hari Ramachandra. Stig only owns five individual stocks, and in this episode, he outlines why Evolution is one of them. Hari’s pick, Occidental Petroleum, a stock Buffett has recently added to, and Tobias pitches Alpha Metallurgical Resources, a value stock that Mohnish Pabrai has loaded up on.
IN THIS EPISODE YOU’LL LEARN:
00:00 - Intro
01:34 - What to make of Berkshire’s $300B+ cash pile
33:16 - Stig’s bull case is for Evolution (Ticker on the Swedish Stock Exchange: EVO)
41:03 - The bear case for Evolution, including why their margins will likely decline
44:02 - Why Hari is bullish on Occidental Petroleum (Ticker on NYSE: OXY)
47:44 - The bear case of Occidental Petroleum, including macro headwinds
56:46 - Why Toby has invested in Alpha Metallurgical Resources (Ticker on NYSE: AMR)
1:06:28 - The bear case for Alpha Metallurgical Resources, including the role of China
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
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Stig Brodersen’s Portfolio and Track record).
Occidental Petroleum’s 2023 annual report).
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