I’ve recently decided to formalize an investment checklist. A company doesn’t have to check every single box, but it should come pretty darn close.
I’ve done most of this most of the time, but I’ve never written it down. But froth and fragility now demand the quill and parchment (I rather enjoyed that phrase 🤣).
I’m sharing this now because I’ve recently made my first investment since the late-march bottom. Back then, I was betting on e-commerce (AMZN, SHOP, MELI). That turned out pretty well.
Conditions are very different now with those names trading near all-time highs. My recent investment is Chevron (CVX).
Before we get to the checklist, it’s important to note that I consider this to be more of a cash alternative than an investment. With anemic bond yields and the best interest rate for savings accounts just north of 1%, I’ve had a bunch of cash just sitting on the sidelines. So anything better than a 1% return on this will be a mark in the win column.
Ok, on to the checklist…
Have you spoken to at least one highly respected person?
Yes. And “spoken” has two meanings here. First, I like to pressure test my ideas against the sharpest finance minds in my friend circle. Second, there’s a shortlist of public market investors and commentators that I follow closely, two of which are Jesse Felder and Warren Buffet. While I have no direct contact, I consider them mentors from afar. Both seem to like what they see in energy markets.
Have you committed the idea to paper?
You’re reading it.
Is the business easy to understand? (have you tried to explain it to someone outside the relevant industry)
Yes. Chevron is an American multinational energy company, one of the successors of Standard Oil. They’re involved in all parts of the energy market, including upstream (exploration & extraction), midstream (transportation), and downstream (converting oil into finished products like gasoline).
This high-level understanding, when combined with the track record below, is good enough for me.
Is there a long (5-10) track record of demonstrated success?
Extremely long. I particularly love 33 years of increasing dividend payments.
What is the source of power?
Massive economies of scale, a strong balance sheet, and cash flow for days.
Is the price reasonable relative to historical levels?
Oil demand, oil prices, and oil stocks are all in the dumps, and it makes sense why (COVID-19). But sentiment seems to be outpacing the situation on the ground. One investment research firm posits that energy stocks, at current levels, represent the most hated sector of all time.
Don’t get me wrong, we’re in a secular trend toward more sustainable energy. But that transition will take time and require boatloads of capital, both attributes that point to the continued involvement of today’s oil majors.
Can you imagine holding it forever?
Not forever, but the medium-term outlook feels right, probabilistically.
Is this, in absolute terms, the best use of capital at the present moment?
As far as I can tell (as a cash alternative).