Tariffs, Uncertainty, Which Stocks to Buy
Investing themes and what is on my watchlist for the following days/weeks/months
In the last months, and especially since yesterday, markets have been digesting the uncertainty stemming from the tariffs. I will not discuss the potential macroeconomic consequences of this because I just don’t feel qualified enough. And to be honest, many who do comment aren’t qualified either.
What should be important for us - value investors - is that additional volatility and a potential market correction create opportunities to invest in some great businesses at good prices.
I want to show you which companies are on my radar at the moment and which investment themes (or “buckets”) I have been digging into recently. This is a part of my watchlist, related to the topics I wanted to discuss today:
Two of these companies have already hit my price targets, and I will be buying and posting deep dives in the following days. Make sure to subscribe to receive these updates.
Let’s dive right into my investment “buckets”:
Small investor “edge” (or “special situations bucket”)
Many great value investors (Buffett included) started with under-the-radar micro/small caps, which are not investable for large institutional investors, and made their initial fortunes there.
This “special situation” can be anything from restructuring (management change/change in capital allocation strategy, spin-off, post-bankruptcy) to catalyst-driven (liquidation, M&A, divestments) to special balance sheet situations (net-net, hidden asset, negative EV, etc).
The problem is that you’ll find a truly great “special situation” maybe a few times a year. If you don’t like extreme concentration (like me), you can’t follow only this approach. So, I expect the “special situation bucket” to be 30-50% of the portfolio.
Monetary debasement / inflation
Inflation is already here, and I believe that in the next decade, we will see more of it1.
Now, how to protect yourself against it?
Exposure to Hard Assets
Hard assets are known to be natural inflation beneficiaries. The more scarce and the more important for the economy the particular physical asset is, the better it is protected, since people can’t stop consuming it. Examples are:
Land & water
Natural resources
Energy: oil, gas, coal, uranium
Industrial metals: iron, copper
Precious metals
Rare earth elements
Food and fertilizers
Aggregates: cement, sand
Timber
Infrastructure
Real estate
The Disadvantaged Business Model
It’s good when your revenues are exposed to hard assets - they will grow with inflation. But if you have high operating expenses or high capital requirements, they will do the same, thus offsetting the benefit.
That’s why miners, for example, are bad compounders. When the resource they mine is cheap, they hardly have enough cash flows to survive and sometimes even need to raise debt to stay in the game.
When the resource is expensive, they have enough cash coming in, but they have to reinvest everything to repay the debt, refresh their equipment, and build/acquire new mines. And they have to do all this at the top of the cycle, when everything is expensive.
Real estate or infrastructure companies are also not great, even though they have a more stable cash stream in comparison to miners. They require a high initial investment and employ a lot of leverage. It makes them very sensitive to changes in interest rates. Plus, to grow, they again need to invest a lot and raise more debt.
The Better Business Model - Owning a “Tollbooth”
The better way to get exposure to hard assets is through owning a “tollbooth”.
The royalty and streaming business is the ideal example. Gold streaming companies, like FNV or WPM, or oil and gas royalties, like PSK.TO or VNOM are just collecting their “tolls” on the volume of the produced resource.
These companies benefit from low operating expenses and minimal capital requirements, enabling them to maintain little or no debt, achieve higher operating leverage, and invest counter-cyclically. This results in higher profit margins, strong free cash flow conversion, and ultimately, superior long-term compounding of capital.
Another approach is to get exposure to unique real assets through companies that have established strong market positions by making substantial upfront investments and achieving economies of scale, ideally operating within industries protected by stringent government regulations.
In such cases, once fixed costs are covered, a business can scale efficiently through increased volume/price. For example:
Cheniere Energy is the largest operator of LNG terminals in the U.S., and building new terminals from scratch is nearly impossible due to strict regulatory barriers and significant capital requirements (“tollbooth” on LNG flows).
ADM dominates grain and seed processing. Many of the things you have on the table pass through ADM's processing infrastructure, making the company virtually irreplaceable at this point (“tollbooth” on food flows).
Exposure to Financial Flows
The cheaper the money, the more of it circulates within the system. So it’s appealing to invest in businesses that naturally benefit from this expanding nominal pie:
Payment processors (e.g., Visa or Mastercard) are probably the best example. These companies profit directly from rising transaction volumes. The more you pay for products every day, the more they earn. And it’s without any risk to their own capital, all while being almost irreplaceable in the current financial system.
Financial Exchanges (e.g., ICE or CME) are similar to payment processors. The more volume and volatility there is in financial markets, the more they earn without risking their capital. They all have very entrenched positions and are additionally protected by substantial regulatory barriers.
Brokers (e.g., Interactive Brokers) across various industries—financial, insurance, or commercial real estate—also benefit from higher transaction activity, capitalizing on increased economic circulation with limited exposure to capital risk.
Market makers (e.g., Flow Traders) also benefit from higher volume and volatility on financial exchanges. The only downside in relation to all the above-mentioned models is that market makers risk their own proprietary capital.
Future themes “bucket”
Besides the broader inflationary theme, there are several other, narrower themes that I follow. It’s a double-win if I find a company that satisfies the previously mentioned criteria while also being exposed to one of these themes. In no particular order:
Energy density (continued use of high-density sources of power, like oil, gas, nuclear power, hydro power, and geothermal power)2
The green transition is slower than expected (e.g., Hybrids vs EVs, Coal is still needed, especially Met Coal, etc)3
US and global gas prices convergence (US gas prices are much cheaper than global, and it should change with more pipelines and LNG terminals being built, and a potential usage of natural gas as a power source for data centers)4
Data centers / AI
Passive investing
Crypto
Moats “bucket”
And the last “bucket” is for moats. Obviously, I try to own companies that have strong moats:
Economies of scale
Network effect
Intellectual property
Monopoly / Duopoly
Strong Consumer Brand
"A brand is a wonderful thing to own during inflation"- Warren Buffett
Conclusion
I try to invest in companies that have an overlap of several investment “buckets”. Unlike special situations, the main problem with “quality” companies is that their quality is often well-understood by the market, and the market rewards them with premium valuations.
As a value investor, it’s hard for me to buy something that is too expensive. However, periods of market volatility—like the one we're currently experiencing—create windows of opportunity.
Hopefully, we will be able to grab some great companies at fair (or even cheap) prices in the next weeks/months.
Disclaimer:
This article is for educational purposes only. This is not an investment advice. I may buy or sell these securities at any time. Please see the full disclaimer here.
References:
Of course, I am not a genius, and I borrowed most of these ideas from others (Mohnish Pabrai’s “shameless cloning” in action). Here are the links to some of the sources that I could remember. I highly encourage you to read these:
Horizon Kinetics (highly recommend reading some of their market commentaries and interviews)
Yes, it's on the watchlist in case of a really good drop - at 20% mid-cycle cash flow yield. But may never enter my portfolio, especially if there are other more interesting stocks entering a buy zone for me. Interesting also due to 30% backing from Berkshire.
Oxy is a pretty high cost producer I think?