Analysis Across The Chasm
Perspectives, by Mark Robertson, Managing Partner December 2nd, 2016
During our stock studies, we are sometimes confronted with a Kobayashi Maru, a test that seems to defy a solution.
The last time we remember seeing this on a fairly widely spread basis was while attempting to do stock studies during the Great Recession of 2008-2009.
The Kobayashi Maru is a training exercise in the Star Trek universe designed to test the character of Starfleet Academy cadets in a no-win scenario. The Kobayashi Maru test was first depicted in the opening scene of the film Star Trek II: The Wrath of Khan and also appears in the 2009 film Star Trek. The test’s name is occasionally used among Star Trek fans or those familiar with the series to describe a no-win scenario, a test of one’s character or a solution that involves redefining the problem.
Petroleum (Integrated): Composite Sales. Industry sales were impacted during the 2008-9 Great Recession. One could argue that barrels of oil are having their own recession (perhaps even Depression) over the last year or so. The long term growth rate is 3-4% — a trend that aligns fairly well with macro global economic growth rates and energy consumption.
Recessions and large speed bumps wreck SSG-based trend analysis. Ken Kavula and I were faced with challenging studies much more frequently during the Great Recession.
Cyclicals are challenging. Sometimes a 10-year visual analysis isn’t enough to build an image and understanding of long-term growth. We advise beginning investors to avoid companies like this. The price collapses can be catastrophic as economic cycles unfold. But Peter Lynch suggested that significant rewards await experienced investors who can pass the seemingly no-win scenario test. It is in this context that Hugh McManus chooses companies like Bank of America (BAC) … [Yes, Virginia, financial sector stocks are often quite cyclical] … BP (BP) and Conoco Phillips (COP).
Sweet 16: Screening Results (11/30/2016). Growth: Long term revenue growth forecast. Projected Annual Return (PAR): Long term return forecast based on fundamental analysis and five year time horizon. Quality Ranking: Percentile ranking of composite that includes financial strength, earnings stability and relative growth & profitability. Vs 52 Wk Low: Current price vs. 52 Week Low. Source: Manifest Investing StockSearch Feature.
Petroleum Integrated: Industry Price Chart ($DJUSOL). This 20-year price chart displays annualized price appreciation at approximately 4%, a figure that over the long term should “resemble” growth. Source: www.stockcharts.com
Hugh has chosen a number of these companies for the Round Table tracking portfolio. It is worth noting that Hugh has the highest relative return among all participants and contributors. His time horizon is truly massive and he seeks opportunities that are, in Cy’s words, “more temporary than terminal.” He invested in BP (BP) as the leak in the Gulf was dominating the news cycle.
The rhinos (Wall Street analysts and institutions) overreact. Period. In the case of Petroleum (Integrated) companies, I wouldn’t be surprised to see that 2020 actual result more closely match the trend line shown in the accompanying figure. Sometimes, experienced investors simply have to look across the chasm — imagine what it may be like on “on the other side.”
Captain James T. Kirk, as a cadet, was victorious in a No-Win scenario by changing the rules. He reprogrammed the simulation. When faced with a chasm, sometimes you just gotta invest like Captain Kirk.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.