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David Trainer says the Fed and liquidity remain a salient driver of markets (0:23). Big opportunity now in energy and industrials (3:40). This is an abridged conversation from Seeking Alpha’s Investing Experts podcast.
Transcript
Rena Sherbill: David Trainer, welcome back. You’ve had a few recent articles on Seeking Alpha talking about some ETFs and sectors. How are you thinking about things?
David Trainer: Well, I think the most important driver really of markets these days is the Fed and liquidity. As long as we’re pumping more liquidity into the market, fiscal, monetary, whichever, I think we’re going to see stocks start to just continue to move up in the way we have.
And we’re inventing new meme stocks all the time. Nvidia (NVDA), Arm (ARM), et cetera. And I think we’re seeing actually a bit of a sophistication, improvement, I believe, in our retail investing base where to be a meme stock, you don’t have to be a junk stock, right? Walmart Inc. (WMT) even taking a big run.
Walmart was a focus list stock of ours for a long time. It got expensive. We took it off the list. It’s had a huge run up this year. And I think what’s happening is that this liquidity is potentially, excess liquidity in a lot of individual and retail hands is getting smarter.
I think the bored apes got bored with chasing meme stocks, and they said, I don’t have to put my money into a junk stock that’s about to go bankrupt, why don’t I invest in Walmart? And just take some risk off the table and do just as well probably.
So, I think that that’s a positive movement, but Rena, in terms of the overall market, I think a lot of that really just depends on what the Fed’s doing and where people see rates and what that means about excess liquidity.
RS: It’s funny because this is a lot about what we were talking about in July. And the more things change, the more they stay the same. How are you thinking – there’s a lot of talk, and we’ve been talking about this on the podcast about, there’s not going to be rate cuts probably for the first six months of the year, at least. How are you thinking about that? And do you agree with how the Fed is handling things?
DT: Yeah, look, I think it’s a tough situation. I mean, I think I would have been much more different, much different about it earlier on would have raised sooner and not waited for as long. And so that creates a very different backdrop. And I think that the Fed’s doing the right thing in the current circumstances. It’s a wait and see kind of situation, and they don’t know there are a lot of theories that there’s a big lag effect that catches up very quickly with respect to raising rates.
And so, the economy falls off a cliff, spending and things like that fall off a cliff. That’s not what appears to be the case. So, it appears that despite the rapid increase, it wasn’t so high that it forced the engines of commerce to halt.
It is slowing them down, which I think was the Fed’s intended effect. And I think they got to continue to see it hopefully continue to gradually slow. And that’s what they want is a soft landing.
And in that process, what I hope is that that investors get smarter, and they chase fewer junk stocks to the traditional meme stock and put their money a little more intelligently into businesses that actually create shareholder value and will in the long term create value for them.
RS: So, what does that look like for you? How are you looking at worthy investments?
DT: Yeah, that’s easy. That’s energy and industrials. The infrastructure of our economy, the physical infrastructure, the technological or digital infrastructure is important as well, but it’s overvalued. And where we’re seeing real pockets of opportunity are in energy and industrials materials. Certain stocks in those sectors are really attractive.
One, a case study poster child for that is, Warrior Met Coal, Inc. (NYSE:HCC), a report that we published on Seeking Alpha. It came out a few months after we gave it to clients. And a lot of what we do on Seeking Alpha now is on individual stocks is going to be pretty significantly delayed, but Warrior Met Coal was just an awesome example.
I think it’s up 60% since we first put it on our focus list. And it’s an awesome example of a business that’s really overlooked, but super important and overlooked for a lot of reasons, right? The title of the report is, Coal in Green Clothing. Because people mistake, or they don’t understand that there are two types of coal.
There’s thermal coal and metallurgical coal. The coal that’s really bad for the environment that everyone says needs to go away is thermal coal. Metallurgical coal, on the other hand, is not nearly as bad and not even close. And it is also an essential element in the production of steel. And steel is an essential element in the production of alternative energy equipment.
So, windmills, solar panels, they all require large amounts of high-grade steel. And so, going up the value chain, we identified Warrior Met Coal – at the time it was trading as if its profits would permanently decline by 50% or 60%. And it’d been thrown out with the — that baby had been thrown out with the coal water, right? The thermal coal water.
And in reality, they are not a business that is bad for the environment. And they are in a growth sector where we need to get back to the producing, the steel needed to keep the economy going. And that’s in building bridges and building the materials required for the transition to clean energy.
And so, that’s a great example, I think, in terms of materials, industrials picks, one of the picks we’ve had on that front that has done really well, and we think will continue to do well. And what I love about that, Rena, is that kind of stock is that the risk reward is so much better, right?
You got great – all of us, all our long ideas they’re going to have great cashflow, right? Great free cash flow yields. And yet, it’s super cheap, and it’s in a growth business. Not a sexy one, not one that people talk about, but still a growth business, an essential business.
NVIDIA (NVDA) news may trump the Warrior Met Coal news all day long, but you can trust that this is a business that’s going to be around for a long time, and it will create value.
We think the narrative is shifting finally in a positive way because we were building bridges to nowhere when we were effectively betting the world and the economy and the industrial complex on green energy. Just not there yet. It’s going to take a couple of decades or more to build up enough green energy production to handle the demand. That’s the bottom line.
And this has been a big part of our research for a couple of years now as we’ve been putting more and more energy names on our long idea and focus lists. Our focus list, by the way, has been an extremely strong performer since really 2021. It’s really strongly outperformed the market. We’ve been adding energy names consistently because when we do the research, we see fossil fuel demand and use going up over the next few years and not going down for 30 years. And when it does, going down marginally because there’s just not enough energy from windmills, solar panels, et cetera to take over.
Bottom line, even the Energy Information Administration projects this. Anywhere you look, if you’re doing your diligence, you’re seeing energy demand is going up and green energy production is just not growing faster.
And that’s why you’ve seen folks like Larry Fink backpedal on being so heavy-handed about forcing people to get out of fossil fuels. It’s kind of a disaster. In many ways, we’re seeing brownouts in California and other parts of the world because now we don’t have the energy to support our needs because we basically sold off all these fossil fuel assets. Now, they’re buying them back, and people are just waking up to the fact that, look, fossil fuels aren’t going to go any time soon.
And by the way, if you don’t want energy prices to go through the roof, you need fossil fuels to fuel the world until green energy is ready. And that’s a ways off.
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