Photo: Chris Liverani, Unsplash (https://unsplash.com/photos/dBI_My696Rk).
During his 13 years managing Fidelity’s Magellan Fund, Peter Lynch navigated the fund to returns double that of the S&P 500. From 1977 to 1990, the Magellan Fund’s annual returns averaged more than 29%, with assets under management growing from $18 million to $14 billion.
Mr. Lynch has been credited with bringing a variety of investment frameworks to the masses using common-sense terminology: “Invest in What You Know”, “Growth at a Reasonable Price”, and my personal favorite, “Ten Bagger”— a stock that increases in value by at least 10 times its purchase price.
Victims of Their Own Success
As energy specialists can tell you from experience, “investing in what they know” has been painful over the last decade. OFS bellwether Schlumberger is priced below 2008 crisis levels, as are several global E&Ps. If nothing else, these producers have proven their ability to grow over the past decade, flooding the market with excess capacity. “Growth at a Reasonable Price” is a perfect description of the current backdrop: prices flirting with all-time lows as a result of remarkable production growth.
Back to School
Like any commodity product, oil prices can be simply described as a function of supply and demand. From Econ 101: reduced demand at the same level of supply reduces the market clearing price, as does increasing supply with a constant level of demand.
Currently, public energy equity investors believe that both are happening simultaneously: supply is increasing (ample US shale) and demand is falling (trade wars, coronavirus). The result is rapid declines in commodity prices, and the enterprise values of the firms that produce them.
Peter Lynch On Demand
“Everybody’s assuming the world’s going to not use oil for the next 20 years, or next year. China might sell five million electric vehicles next year, but they might also sell 17 million internal combustion engines. … Near term, liquid natural gas and liquid petroleum gas might replace diesel fuel for trucks.” Peter Lynch, Barron's.
Peter Lynch On Supply
"The difference between a glut and a short is 1 million barrels per day. The world consumes 100 million barrels per day … and shale’s going to slow down. We’ve gone from [producing] 5 million barrels per day in the US, to 12.5. People think that’s going to continue; I don’t think it will."
Peter Lynch, Fox Business
A “Ten Bagger” In the Making?
Historically, Peter Lynch has shown an uncanny ability identify investment opportunities using simple frameworks. After examining both supply and demand assumptions, Mr. Lynch is of the opinion that supply assumptions are overly bullish, while demand assumptions are too bearish. Put these two things together, and energy equities may be poised for a “ten bagger”.