Here’s how a top-notch small-cap manager finds oil and commodity stocks
Gary B. GravesMay 14, 2022
In a way, Scott Barbee has spent his entire life preparing for this year’s market. The manager of the Aegis Value Fund has a long background in the oil business, having spent part of his childhood in Saudi Arabia and summering for Chevron while studying mechanical engineering at Rice University in Houston. After working at Simmons & Co. after college with a focus on energy, Barbee moved to the buy side and has managed the Aegis Fund since 1998. Since then, this early oil field experience has proved invaluable. The Aegis Value Fund has consistently outperformed its small-cap value peers. Morningstar has a five-star rating for the fund, saying it will be in the top five percentiles in its category for 2022 and for the past three, five, 10, and 15-year periods. The fund, which includes both U.S. and international stocks, is up more than 6% year-to-date, in part due to its bet on energy stocks, which rose sharply as oil prices surged above $100 a barrel. For example, shares of offshore drilling services company Tidewater have nearly doubled this year. Barbee said part of his success over the years has come from his willingness to buy and hold companies during downturns and wait for a profitable recovery. “Clearly, stable cash flow has some benefits. No question it should have a higher valuation if you have any certainty about the cash flow. But even volatile cash flow should have value,” Barbee said. The Aegis fund is filled with stocks from industries that have come under pressure but have rallied over the past two years. Barbee screens for low price-to-book or price-to-cash companies, or ideally both, to find new names to add to the portfolio. “We’re sort of experts on things that’ve been pushed down to low ratings,” Barbee said. Sometimes this results in stocks from a single industry appearing on screens at once. Barbee said it’s important to separate simply cheap stocks from those that still have a lot of upside potential. “You have to be very careful what comes out of it because it comes to a situation where a lot of things that are cheap for books are big upheavals and you don’t want to experience the worldly downfall story. You’re looking for the cyclical reversals,” Barbee said. Outside of the energy sector, another area of the portfolio where cash could flow is timber companies like Resolute Forest Products. Lumber was one of many commodities that rose sharply in 2021 and this year, Barbee said the broader market hasn’t properly priced moves for lumber, allowing companies to generate tons of cash and then pay off debt or buy back stock.”In the beginning, we found as fascinating these prices as they go up.” started to be seen as very, very temporary… So these companies were just making everything and basically they were generating an annual profit every month for every month that passed,” Barbee said. “And we correctly assessed that it will probably take a little longer than the broad market assumed.” Resolute’s shares are down less than the broader market in 2022, and have more than doubled since early 2021. When to Sell But betting on small-cap stocks can be risky, and the Aegis fund’s sector bias brings additional dangers as well. The difficulty of choosing between these stocks is reflected in the high expense ratio of 1.5%. Barbee said the focus on finding cheap stocks with solid fundamentals is helping limit the downside. “Our risk management work is about buying things really, really cheap. It’s difficult to get injured falling out of a basement window,” Barbee said. Another part of Aegis’ risk management strategy is sales discipline. When Barbee makes a purchase decision, he ties an intrinsic value to the stock and exits the position when it reaches that level, even if it means holding cash for a period of time. “I think the biggest risk you can take in this business is holding stocks where the multiple expansion is past a reasonable level and you don’t want to sell,” Barbee said. Recent Market Drops Despite outperforming for the year, the Aegis fund has pulled back in recent weeks as the general market sell-off deepened. Barbee said he remains bullish on the energy sector, particularly given ongoing global supply issues. Additionally, Barbee said he is taking a closer look at steel stocks and remains bullish on mining precious metals. Aegis has positions in several gold mining companies including Equinox Gold Corp. “The projects we are looking at continue to be very, very cheap relative to the price of gold. So you don’t need gold prices to go up for these companies to thrive… That’s a piston our company hasn’t fired yet,” Barbee said.
Drill rigs stand unused on a company property in the Permian Basin area on March 13, 2022 in Odessa, Texas. United States President Joe Biden imposed a ban on Russian oil, the world’s third-largest oil producer, which could mean Permian Basin oil producers have to pump more oil to meet demand.
Joe Raedle | News from Getty Images | Getty Images
In a way, Scott Barbee has spent his entire life preparing for this year’s market.
https://www.cnbc.com/2022/05/14/heres-how-a-top-rated-small-cap-manager-finds-oil-and-material-stocks.html Here’s how a top-notch small-cap manager finds oil and commodity stocks