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Roundtable: Energy and Industrials in 2020

In the final Industry Focus: Energy episode of 2020, Nick Sciple and Motley Fool contributors Jason Hall, Matt DiLallo, and Lou Whiteman break down the year that was and look forward to what's coming in 2021. Topics include: trends that will change and stay the same in 2021, overlooked stories from 2020, favorite stock picks, and more!

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on December 18, 2020.

Nick Sciple: Welcome to Industry Focus, I'm Nick Sciple. It's our end of the year special here on the Energy and Industrial show. I'm joined by Motley Fool contributors Matt DiLallo, Jason Hall, and Lou Whiteman to help me break down the crazy year that was 2020, maybe talk about some trends that will stay in place going forward, some that will go back to normal, some stocks that we're watching. Lots to talk about. I'm excited to have you all on the podcast. Guys, what's going on?

Jason Hall: This is fun. It's been a couple years since we did a big roundtable Industry Focus. I'm pretty excited to be on with these two guys.

Matt DiLallo: These are always fun, I'm excited to see Jason again, we always have fun together.

Lou Whiteman: Always an honor. [laughs]

Sciple: Running into the 21st century, as Jason said, the last one of these we've had, we've had the Motley Fool Writes Conference that everybody's down in Alexandria, we're all get together, but now, we're on Zoom using the magic of Zencastr, we can all be together. Just a heads up for our listeners, this episode is going to air on New Year's Eve. We're recording it on December 18th, 2020, ahead of the holidays, if the Martians come down to Earth between now and then, that's why we're not talking about it. I don't know what the investing implications are, but I hope they leave me alone. That'll be my takeaway there.

First off, before we get into some of these topics, I just wanted to address the haters. I thought that'd be a good place to start. If you look back this year in 2020 with the worst-performing sector in the S&P 500, the energy sector down to 29%. When I checked recently, if you look back over the past year, the past three years and the past five years, the energy and industrial sector are trailing the S&P 500 as a whole. Many are saying why should you have energy and industrial stocks as part of your portfolio, how would you respond to these lewd accusations, Jason Hall?

Hall: First of all, I think there's a little bit of, "Yeah, OK," [laughs] particularly when it comes to the energy sector. There's context, I think is important. If you look at the way that the sectors are divided up, the energy sector is oil and gas. That's what it is. It's oil and gas and that's all that it is. As of this writing, it's down almost 35% in 2020 since the beginning of the year. It's hard to predict what 2021 is going to look like. We do know that the bigger trends are transitions away from oil and gas, so there's no getting around that. That doesn't mean every oil stock is in a void, every natural gas stock is in a void. I think there are some good companies there. I think there's some good companies that could prove to be good investments, but I do think it's going to be one of the hardest industries as an entire sector to outperform because energy is transitioning to other sectors. You look at the utilities, you look at some of the industrials, and even tech companies like solar stocks are generally considered semiconductors manufacturers in the tech sector. The face of energy is changing and that's going to make it hard for the oil and gas sector to remain relevant and a profitable area to invest as an entire sector.

Sciple: Matt, Lou, anything to add there?

DiLallo: Well, I think oil prices is what drives returns here, because if oil prices are going to go up again, then you're just not going to have a good year, but if demand comes back that growing back when you had all these under investments in the past couple of years, you can see energy just shine one of these years, maybe it's 2022 when we're back to normal and the industry hasn't come up in oil prices, breaks seven years, something like that, it's just so in price share and that makes it so difficult as an investor, who knew that we were going to blow up this year and it just wasn't on anybody's radar and that's just been the problem, just had blow up after blow up.

Whiteman: I'll say as a more industrial generalist, as the aerospace guy and airlines guy this year, I am certainly glad that industrials aren't my entire portfolio, trust me, but I am glad they're a part of my portfolio and I believe to just this diversification work this year, if you're thinking like we talk about here at The Fool, you're thinking in terms of decades, I believe diversification works a lot of different ways. Like I said, glad I'm not in aerospace this year, I have a feeling there will be a year in the future that I'm glad I'm not all cloud. That's my best argument for these stocks as part of a diversified portfolio.

Sciple: I would say this regardless of sector, you've got to pick your spots. I think, right now, if you're looking on a relative valuation basis, you're probably going to find better odds fishing in the industrial, energy space than maybe you can find in some of these other areas that have gotten more attention. Well, we might talk about some of that later this year. We mentioned off the top just how crazy 2020 has been. I don't think anybody needs a reminder of that, but if you had to boil down at this sector or the areas that you covered down to one headline for this year, what would be your one headline for 2020? We'll start with you first on this one, Lou.

Whiteman: I think my headline would be, it could've been worse. The thing is, and especially even with the airlines, if you look at where we are and the airlines got hit probably as bad as anyone, but here we are, December, less than a year later, the stocks have almost come back in some of the worst sectors. They are alive, we're still in business. I mean, I think that was a real point for this year, the resiliency of the economy, but also the resiliency of the industries that got hit hardest. It could have been worse.

Sciple: I think that's one thing I think about maybe ask you this, Lou. As far as the vaccine and the pace of the way things have been, I mean, you couldn't have imagined a better outcome when it comes to recovery for any of these businesses. When you're in the middle of the pandemic, if you said six months from now, we're going to be rocking and rolling with vaccine distribution. I think Biden is supposed to get it on Monday here after we're recording. Could it have been much better for these companies when it comes to the recovery?

Whiteman: Well, so far, I think it's just speaking to airlines specifically, the one thing that was really lost was how healthy these companies were coming into this. Every down-cycle has seen airline bankruptcies. This was a much worse hit and yet we didn't see bankruptcies. That's partially to the government, certainly the CARES Act was a big part of it. But just partially, this was an industry that was more ready for this than they've ever been. Look, we are at the beginning of a very long and this isn't going to be over anytime soon. But at least now with the vaccine, you can see the light at the end of the tunnel, you can start putting a date or an idea of how long it will last. I think you can say the worst is over.

Sciple: My official wedding date was July 17th, 2020. I thought we weren't going to get the bachelor party and I think we're going to make it to Vegas this year. So, things are looking bright. Matt, what's your one headline for 2020?

DiLallo: Maybe the oil prices I think was the thing that who ever saw that coming. Just a complete implosion of the oil market where you had the pandemic hitting at the same time Saudi Arabia and Russia decided that they were going to duke it out on prices and just totally created the oil market and the same with industrials. It's still standing and part of that's because they spent the past about four or five years recovering from the last one and so we had a lot of better capitalized oil companies still turning to bankruptcy. Chesapeake Energy finally went under and several others, but the industry survived and it should survive. The question is, when is demand going to come back and how are they going to make money for shareholders in the future? Because they haven't done that in so long. But we're still kicking and that's I think a good thing.

Sciple: Yeah. It's been wild to see just this whole development for these companies this year. They've already had a tough end and then you get the pandemic whacking them over the head. Again, it's been interesting to see them navigate that. Jason?

Hall: Yeah. So, I think their context, it's easy to lose, especially for people that don't follow oil and gas very closely, is that the entire story of the oil crash this year is not the pandemic. Yes, that's been huge. I mean, that lopped 30 million barrels a day of oil consumption off in the second quarter for six or eight weeks. But the bigger story that drove it started in early February when Saudi Arabia and OPEC tried to work with Russia to keep the market stabilized and Russia bulked, and Saudi Arabia went full on war. I mean, full on war at one point. This was in March when the battle really happened and Matt alluded to it, but I think it's really important to understand it. Saudi Arabia was ready to increase their oil output like 15% and increase the amount of oil product that they were exporting. I think at one point, they said like a 20% increase. This is the country with the largest, cheapest oil reserves on earth that was going to absolutely drown the global market with excess oil.

Then of course, within a few weeks after that, the U.S. goes into lockdown, the pandemic, it becomes clear that the implications for oil consumption were dire, and OPEC circles its wagons and works with Russia to take a big 10 million a barrel a day cut. U.S. producers realize that they have to start backing off on their development completing wells simply just to survive. But the bottom line is, even if the coronavirus pandemic didn't happen, I'm convinced that this would have been a brutal, brutal year for American independent oil producers because Russia and Saudi Arabia have spent the past four years stabilizing the markets, and U.S. producers have soaked up essentially every barrel of global oil growth. The U.S. grew production a massive amount, I think from about eight or nine million barrels a day in 2016 to, like, almost 13 million barrels, Matt?

DiLallo: Yeah. Somewhere around there.

Hall: I don't know if that's exactly right, but it was more than 10 million barrels, and at the same time, if you look at Saudi Arabia and Russia, who were the second and third largest oil producers, they were essentially flat, right? These are countries that rely on oil revenues to fund their governments and their social programs. These aren't private companies, these are entire countries that have millions of citizens that depend on those revenues. This was going to be a battle of the year, so I think that's the bigger context that's easy to miss. What that tells me is that informs me that going forward, you can't just look at Exxon's stock price, or Phillips 66 (NYSE: PSX), or ConocoPhillips, or any of these guys and just assume that the price is going to be what it was back in 2018 or 2019. It's not that clear.

Sciple: Yeah. I think it's important to note when you look at global oil and gas, a massive proportion of those reserves, those commodities are controlled by national governments, and national governments sometimes have a different set of incentives than a for-profit business might have and that's one example you're talking about there, Jason.

Hall: Yeah. I think it's just really important context and interesting. Go ahead, Nick.

Sciple: No. That's all I got.

Hall: I was going to say the interesting next step from there is that even with commodity prices being crushed and it being such a tough year, we've still seen wind and solar gain cost advantages, right? That to me is just the real power of the energy transition right there.

Sciple: Yeah. So, you're talking about this growth in wind and solar that maybe is a decent transition to the next topic I have for us. With 2020, it's been this year of huge change, with this rise of remote work, people working out at home, all these sorts of things. So that begs the question, what's the trend or change that took place in 2020 do you think stays the same going forward? We'll start with Matt on this one.

DiLallo: Jason alluded to it about wind and solar but especially solar. Right now wind is. Actually, I've seen some of the natural gas power plants out there to do wind and solar is rapidly getting there and within two or three years I think solar is going to be the cheapest by far and that's with adding energy storage batteries. That's just incredible, because you look back a couple of years ago and there were just so many concerns, like, how are we going to get to this future? We're there. We're right at the cusp of the solar explosion and the numbers can double the amount of capacity. I think they are projecting 10 gigawatts of new solar capacity added between now and 2022 per year and that can double in 2023 to 2030 time-frame. That's an incredible amount of growth, and so I'm just spending a lot of my time looking at solar stocks and who's going to benefit from this because the trend is there cost-wise. For all these years it has been the government's help, and the government can accelerate this and there needs to be more government policies to accelerate this, and that's where the Biden administration's going to come in. But it didn't work to the point where that's just kind of greedy for what this industry can do so I'm really excited about solar.

Sciple: Yeah. The stuff that comes to mind for me, Matt, I saw in an IEA report recently, it said, "If you look in 2020, they expect for the new additions for energy, 90% of those to be renewable, with only 10% coming from hydrocarbons." So, just this massive shift over where the new dollars are moving to.

DiLallo: We're even seeing one of the big players out there is Brookfield Renewable (NYSE: BEP). It's a stock that we talk about on Fool a lot. Right now they're hydro, that's their big business and solar is less than 10%, and they came out this year and said, within the next decade that they expect solar to be the No. 1 producer by capacity, and that's just because they see so much growth. They've done a bunch of deals this year, they just see the returns are really fantastic in solar and that's just been such a great trend this year.

Hall: Matt, you mentioned Brookfield, so there is a point that I wanted to make real quick here. Probably the two buy signals for me on solar that have happened over the past few years. The first one was Brookfield Renewable when they made some pretty big investments to expand their solar portfolio a few years ago and that they have accelerated. That was the first big green light. When Brookfield says, "Okay, we're going to go this way," that means that they can make money, right? That's huge. As an investor, that's what you want to look at, especially in these commodity-driven industries, is when a big player with a successful track record of allocation to things that make money says, "This is what we're doing," it means there's money to be made there. Then, the other thing that was more recent was NextEra Energy (NYSE: NEE). I think this was last year. I'm pretty sure it's NextEra Energy's CFO on earnings call, made a statement that they saw within five years and this was something you said, but I heard this from an industry executive first, said, "We see within five years, solar-plus batteries will be cheaper than natural gas." That's huge, right? Again, NextEra Energy, this is a company that has a very clear track record of making money in the utility space and they're saying, "We're going to make a lot of money in renewables."

Sciple: Yeah. Jason, did you want to hop in with your trend from 2020 that you think is going to stay the same moving forward?

Hall: Yeah. It's one that I think we saw a big blip on the radar this year but I think that the trend is going to revert back to where it was and that's natural gas exports. I think liquefied natural gas. North America has a tremendous amount of it. Australia has a tremendous amount of it. There are other places in the world that have a lot of it, and there's markets and the places where populations are growing, where the middle class is growing, where the energy consumption is growing that don't have access to low-cost energy and natural gas is far preferable to coal, because it doesn't produce all the particulars that are terrible for health. The greenhouse gas emissions are lower. I think we're going to see probably late next year, maybe 2022, before we really see a full recovery in investment in that space. But I think it's going to recover because the demand for that energy is still going to be there and natural gas is going to provide a big supply of that going forward.

Sciple: Absolutely. Lou, what is your one trend from 2020 that you think is going to stay the same going forward?

Whiteman: The first thing that came to my mind here was logistics, and at this time last year, there were a lot of discussions going on. A lot of companies are thinking about outsourcing supply chains, outsourcing logistics, trying to simplify operations, and COVID really accelerated that trend. We've really seen a push in the second half of this year toward some of these companies, these logistics providers taking over operations, and I think that was the spark and this is a trend that we're going to see over the long term. It's going to create opportunities for operators, for warehouse REITs, a lot of different people. Couple that with the mega trend of e-commerce, the fulfillment challenges it requires, logistics had a great second half of the year. I think FedEx was up 80% for the year. UPS, XPL, a lot of them are up 40%, 45% or more. These are businesses that even without the vaccine shipments have a lot of tailwinds heading into 2021 and good long-term prospects and I think we're just going to see more of the same for the next few years.

Sciple: Yeah. I think one of the things you hear about in this industry, maybe I can get your thoughts on it really quick, Lou, is Amazon's (NASDAQ: AMZN) going after trucking and Amazon is going to get in there and gobble up the market. Is this one of those where you think that's a threat, or the market is growing so quickly that there's going to be lots of winners here?

Whiteman: Well, I'll quote one of my favorite things Jason always says, is that when a company comes in, that means they see opportunities. I think that's the case for Amazon. I mean, for Amazon it's interesting, because in a way, they are trying to turn a huge cost into a profit so they have different incentives that it's a little different. But yeah, there's so much going on here, and quite frankly, in just e-commerce, the business consumer, there are a lot of companies out there that have demand that don't want to do business with Amazon and so yeah. I mean, FedEx just reported this week. This is basically the year-over-year comparison to the beginning of their divorce with Amazon, and everything was up, margins are up and they see room for margin improvement in 2021 even after the pandemic settles down. So no, I don't. I mean, Amazon's more proof-of-concept that is a competitor but no, they are going to be fine despite Amazon.

Sciple: Absolutely. Those are the trends we think that 2020 put in place, we think we're going to continue going forward, on the other side, what's something that 2020 brought forward that you think, "You know what? We're going right back to normal here once people are allowed to do that in a safe way?" Jason.

Hall: This is a little more on the industrial side than real estate space. You know, 2020 has been an accelerant for e-commerce. There's millions of people that never would've anticipated buying something online, they do it now and it's comfortable. I mean, [laughs] if you had asked me about Wayfair, this is a company that sells furniture on the Internet. Let's just assume there's this massive pandemic and everybody's isolated and we have the worst recession and essentially, how do you think Wayfair is going to do next year? I would've probably said they're going to go out of business. They are crushing, sales were up like 45%. As much as we've seen e-commerce become established, I think the second half of next year, physical retail is going to do very well. I think that's going to be really good for some of the real estate, the retail REITS out there like Tanger Factory Outlets (NYSE: SKT), ticker SKT, I think it's in the right space. You look at Realty Income, I think they're going to do well. I think people are still sleeping a little bit on that. Also, I think it's going to be a great year for the convention industry. A company like Ryman Hospitality Properties, that owns these big event properties, because even if we'd have more remote work or some hybrid model, it's going to make things like big events more and more important, even if work changes, it's good for industries like that. I think those are some trends that I see a lot of positive for.

Sciple: I think that makes sense kind of travel-related retail. When you look at where the Tanger Outlet Centers are, they often buy places that are high. I travel areas, I remember that when I always used to go to, growing up wasn't fully Alabama on the way to the beach. If you're thinking this idea that there's going to be more folks traveling, there's some of these retail locations that are really targeted to those types of customers. I think that that's a really interesting one, Lou.

Whiteman: I want to be careful here and I may split some Harris because I do believe in the long-term trend toward the electrification of the automobile. I really do believe that's a sustainable trend. What I don't believe in is the software like valuations we've seen in 2020, not just for the manufacturers, but also the parts suppliers. Autos, for 100 years, it's been a capital-intensive, labor-intensive business with low-margins and switching out the powertrain shouldn't change that. If anything, the tech that's coming into automobiles is increasing input costs. I love the trend of electrification, I think it's here for good. I believe there could even be some oversized winners and maybe a couple of these valuations will hold. But in general, it has been an amazing year for EV stocks, EV suppliers, parts suppliers, Lidar and all things attached to the second generation of the automobile. I can't imagine that trend continuing with the way it has this year.

Sciple: Time to find out how many of them actually grow into those valuations.

Whiteman: Yeah. If you look at it, it's going to take years even in the best case scenario.

Sciple: Yeah.

Whiteman: I love the trend of the vehicles, I don't like the trend on the stocks right now.

Sciple: Yeah. I agree with you. I think maybe the short answer is that there are too many companies, I think there's going to be some winners here, or ain't going to be dozens of them and there's dozens of them out there planned right now, trying to become those happy few there at the end. Too many people are assuming that the automakers that already have hundreds of factories are not going to be able to make the transition. I think that's a mistake.

Whiteman: Yeah.

Sciple: That's a great point too. Matt, what's your trend that you think reverses after 2020?

DiLallo: Playing on both of those things, like Jason is very bullish on, just travel again. Next I don't see, for example, offices that have been crushed. Because we work from home and people don't think people will be going back to the office, I think people will be going back to the office. People are going to be driving, commuting again, they're going to be flying on business trips again. They are going to be going to stores and travel and in the long-term [...] but short-term, I think gasoline and refiners, we could just see a big spike next year. We had a lot of capacity cast this year because of COVID, but they're going to be just a big tight market next year, people are driving again, flying again, so I think refiners can have a really tremendous year next year. That would be like a short-term, trade right there will be your thoughts on 2066 year marathons, there can be great stocks next year.

Sciple: Absolutely. I think in all these industries, do you think about maybe getting a star for capital in 2020 for whatever reason, when that demand comes back, we're going to have to adjust. These are real industries that require moving real goods in the real world and take some time for those things to snap back. We want to move on to our next segment. For our listeners who don't follow energy and industrials as closely as we do on a daily basis, there's lots of stories that may have missed their radar this year. What's the one story from 2020 that folks overlook, that folks should have paid attention to, that we should bring attention back to, Jason?

Hall: I think it's one thing, which is what's happened with offshore oil? We're at a point where just about every major offshore oil drilling contractor went through bankruptcy this year. So far at this riding Transocean has managed to make it, but Matt, I think they owed a big payment a couple of days ago. Again, today's the 18th as of this record, but I think they owed money a couple of days ago. I may have heard that they were thinking about not making that payment, which would have potentially put them into fall. It's possible every major offshore oil driller in the world publicly traded, then the world will have filed for bankruptcy during this year. That has enormous implications because at the end of the day, as Matt's point, at some point, all of this underspending to develop those resources is going to catch up to the world's ability to produce enough oil, to meet the demand once it recovers. Lou mentioned the EV theme. EV is not going to replace all the automobiles in five years. The average car on the American roads is over a dozen years old, so even when the only thing that's being made is electric vehicles, they're still going to be a lot of gasoline vehicles driving. I think that's a big one, because these companies went bust because nobody was drilling offshore. That's the bigger underlying thing that I think we don't know, when that comes home to roost, we don't know how that's going to affect oil prices, gasoline prices, and what the implications are for there. I think they are pretty big.

Sciple: Because historically there's lots of cycles in oil and gas boom and busts, it's a hallmark of the industry. Is this something where this bust in the case of the offshore folks, is worse than we've seen historically?

Hall: Yeah. Here's the thing, the industry was just getting bailing all the water that they took on back in early 2014. They were just getting that water out of the hole. They were just [laughs] getting to the point where they will float to use as many ridiculous bonds as I possibly can in one sentence, and then this happened. You have these companies that are heavily leveraged, they carry massive amounts of debt, it also costs what? These things are hundreds of millions of dollars. They have huge amounts of debt and they pretty much depend on steady cash flows from long-term contracts to keep things moving, and every oil producer in the world that had any flexibility to end a deal, they did. They walked away, even if they paid a penalty, they would do it to get away from these big deals.

What we've seen this year, particularly in the Permian and a lot of the U.S. shale plays is that a lot of that oil production has helped bridge the gap, because these guys were living on money they spent in 2019 to drill wells that just needed to be completed. The completion costs are lower, so there have been a lot of completing wells and bridging that gap. So, the output on the flip side, these offshore places, they take years and years and years, sometimes decades to really develop. The full price that we pay, we're not going to know for a number of years before that lack of development catches up to demand. But I think it has big implications. We just don't know exactly what it's going to look like.

Sciple: In a lot of ways, we're a little bit off the edge of the map in oil and gas with this whole field thing and all that stuff. Matt, what's your one story from 2020 you think folks overlook?

DiLallo: Green hydrogen is something that has come to my attention this year. It's been floated around as an idea for years. Is this going to be that eventual emission free fuel that can get us to those not zero targets that everybody is talking about? During the second quarter, I was reading through NextEra Energy's conference call and they mentioned that they were getting into this, and that spoke my attention, because they're so good investing in renewables, and then I saw Brookfield, they're getting into this oil deal upon power to supply that with renewable energy. There's just been so much under the surface talk about green hydrogen and iis future is years away, but it could be this mega market for renewables. The thing that stood out for me and that investors should really plant a radar, it's on my radar now, and I'm really excited to see. Because of the potential, this could be the fuel that we need to get us to that emissions-free future.

Sciple: Matt, for folks, listeners who don't know what green hydrogen is, can you explain that, the 10,000-foot view of what green hydrogen is?

DiLallo: Yes. Hydrocarbons refers to hydrocarbons, that's in oil and gas and probably that would spit back carbon. We want the hydrogen because that's what burns up and gives us energy. Green hydrogen uses renewable energy to produce hydrogen from water. Your output from that is oxygen, which is not a bad thing. That's why it could be such a great fuel. We could use renewable energy, and we can basically store it in hydrogen and burn the hydrogen in, for example, natural gas power plants. They could be used to power trucks and cars, and planes. There's a lot of pilot projects out there to use it in jet fuel. It's just as potentially great [...].

Hall: I think the dirty little secret that I just want to make sure it's abundantly clear for folks who don't know. Essentially, every bit of hydrogen that's produced in the world and used for industrial applications is a byproduct of steam forming from natural gas. That's how most of it is made. It's not a clean fuel. It comes from natural gas, so it is not very clean. [laughs] This is huge.

Sciple: So, this prospect and, again, it comes back to those themes that you all talked about earlier about the cost of energy production from wind and solar is becoming lower and lower to where it makes economic sense to now do this. To talk about these energy transitions has been a buzzword. You heard a lot this year and that's a big driver. Part of that is going to be some of these hydrogen fuels. Lou, what's your story from 2020 that the folks overlooked for you?

Whiteman: It speaks to how far this company has fallen that could ever be overlooked. But General Electric, maybe the stock of the 90's and it's been really hard times down, I think, 80%, 85% from it's all-time high in the summer of 2000. They finally maybe, hopefully, appear to be one of the myth. This is a company that basically, just in all sorts of industries, did market topping acquisitions, took on huge amount of debts. Businesses like their big energy business didn't live up to expectations. They've had three CEOs in the last couple of years. This one, the current one, Larry Culp, seems to be doing a good job trying to get the balance sheet together. They have, I think, $40 billion or so worth of divestitures to try and stabilize things. They have a plan in place. It's very early. I'm not personally an investor, but it's for the first time and maybe nearly a decade for this company, it feels like they're moving in the right direction. Considering how far they fell, I think that's pretty amazing story with everything else going on. Not appreciated yet but the markets maybe.

Sciple: What would you do, if you're a shareholder in GE today, you'd stay the course if you've held on this long, I think there's light at the end of the tunnel now?

Whiteman: Absolutely. I mean, if you've held on this long, you have to stay the course. The more intriguing question is, is there are really amazing assets in that business. It's just been muddied by all the things that aren't so great. Is it time to get in yet? For me, it still feels too early. I do believe in the potential of some of the businesses, but it is a multiyear transformation and maybe we're through year one. I'm still watching it play out. This is the first time, and as long as I can remember, that I'd even considered and asked myself the question, do I want to look at GE? That either speaks to my insanity or Larry Culp's good work.

Sciple: There you go. Let's move ahead. I think folks like it when we give them some stock picks, some companies that are on our radar. What is one energy or industrial stock that you're excited about for 2021? Let's go right back at you, Lou, let's keep you on the hot seat.

Whiteman: I get some feedback when I call this an industrial, but I'm going with it, and I mind if anyone's listening to this podcast before they probably know it's AerCap (NYSE: AER). AerCap is in the business of buying airplanes and leasing them back to airlines. No surprise, this was not a good stock to own as the pandemic hit it up. AerCap actually underperformed most of the airlines, which is understandable given it's a highly levered business with the market really failed to appreciate just how conservative this management team was and how well this company is able to weather the storm. They have had issues. They wrote down billions of dollars in the aircraft valuation just in the last few months. They've differed hundreds and millions in lease payments, but they still have billions in liquidity and they have more unencumbered assets.

With a vaccine, we talked about this earlier, I'm not ready to say the airlines are going to get healthy next year, but the worst appears to be over. As the airlines get a little bit healthier, the odds of them paying their bills go up and the revenue should normalize for AerCap. There's a lot of pent-up demand for air travel. AerCap, I think, is the best way to play into that, just because this is a business airlines arguably need more now with their balance sheets in ruins, thanks to the COVID crisis, than they even did a year ago. It's better than Boeing, better than buying an airline. If you believe travel will come back, take a hard look at AerCap.

Sciple: Yeah, for our listeners, that's ticker AER, just to remind you there, and if you want to hear us talking about that company a little bit more in depth, I believe it was in November, we discussed AerCap. I believe the name of the episode was "the best way to invest in airline recovery" [A Vaccine Is Coming. Here Are the Airlines That Will Recover First] or something like that. I'll throw a link in the description of the podcast for folks to check it out. Matt, what is your favorite energy and industrials back for 2021?

DiLallo: It's clearly energy, which is a renewable YieldCo. They own solar plants, wind towers, wind turbines and some natural gas power plants. There's a clean energy play. They got hit hard, I think it was last year when the California Utility PG&E went bankrupt. They were a big supplier of power there, but they got through bankruptcy this year and [...] increase their dividend by 50%. It's growing since then and they have a lot of deals in the pipeline to acquire assets. They've got a parent called Clearway Energy, which is owned by a big private equity firm, that's giving them gross flexibility and they think they can grow their dividend another 8% next year, and 5% to 8% over the next couple of years. Up there with your NextEra and your Brookfield, which is another one of those really solid renewable energy [...]. I really like dividends, so that's a good stock for my portfolio. They've turned the corner, they know what they're doing, and I like what's [...].

Sciple: What's that ticker, Matt?

DiLallo: CWEN.

Hall: There's two, I think it's good to see. There's CWEN and then there's also CWEN.A. The A-shares, I think, are the non-voting shares, and then CWEN, you get a vote. That's the difference between them. I love that business too, Matt.

DiLallo: Yeah.

Sciple: All right, that's another great renewable energy company, and for folks who have been listening all year long, that's one that Matt and I have talked about, and I think Jason and I have talked about on the podcast, if you look back at some of the episodes we've done on renewable energy, so that's another one. If you want to get a little bit more information on it, you can go back to the archives. We talk about this every week, it's nice. Jason, what do you like in energy and industrials for 2021?

Hall: This is normal for me, it's hard for me to just pick one of anything. But I'm actually going to make it and this will be surprising to a lot of people. I'm going to pick a company in the oil and gas business. I'm going to go with Phillips 66, ticker PSX. Here's a couple of reasons why. No. 1, the point Matt was making earlier about, as things do start to normalize, that's great for refiners. That's going to be really good for refiners, and Phillips 66 is one of the best refiners in the world. They have some of the most advanced, most efficient refineries, and they can generate massive cash flows from it.

The other things that I like about Phillips 66, this is a business that's embedded in the North American natural gas story. Whether it's their pipelines, to get that gas from production to markets, or whether it's monetizing that natural gas and their giant and growing petrochemicals business, so you think about fertilizer, you think about car tires, you think about plastics for the healthcare industry. The feedstocks that come out of their petrochemical factories have massive value and there is growing demand around the world. This is a company that benefits in a lot of ways. They participate in the energy transition, they've already got one refinery that's making biodiesel. They have a refinery in the Bay Area of Northern California that they're converting to produce renewable fuels. This is a company I think is going to participate in the transition. The stock right now is down like 41% from the beginning of the year. They are a buyer of oil. They don't produce oil, so they are on the right end of that transaction, and they benefit from the recovery of demand, so PSX, again, it has a great dividend. What's the dividend yield right now, if I were to ask?

DiLallo: It's around 5% I think, the last time I looked.

Hall: Let's see, it's 5.4% today, and they've held firm on the dividend and the cash flows are getting better, so it should prove pretty stable. That's where I stand on Phillips 66. I bought not too long ago, I bought in the past couple of weeks too.

Sciple: Awesome. That's AerCap, Phillips 66, and Clearway Energy, and the energy in Industrial space. I will give you one just for fun. I think Berkshire (NYSE: BRK-A) (NYSE: BRK-B) is a great pick in the energy and industrial sectors. You talk about an industrial company that grows cash flow during a global pandemic, you talk about something that touches pretty much everything that's going to come in global trade. Charlie Munger did his interview at Caltech this week, he said a lot of great quotes, every time I hear him talk, it's great, but he talked about the railroad, Burlington to Northern Santa Fe. He said, basically, if you want to take something from the Port of Los Angeles to Chicago, and you don't use our railroad, I don't know how you're going to do it. And Berkshire has lots of those types of assets. One of the biggest producers of renewable energy in the world through Berkshire Hathaway Energy, gobbling up assets that some of these other companies don't want to own this year, bought Dominion Energy's pipeline assets. That's another one of those assets that it's really difficult to build new pipelines in 2020, but if these are the types of things that if they disappeared overnight, we would notice really incredibly quickly. Generates predictable cash flow for this company, I don't know how you lose money in Berkshire Hathaway over the next several years unless the whole stock market really blows-up on you. If you just want steady, dependable exposure to this industry, that's probably going to give you gains, at least on an absolute basis. You can sleep at night pretty comfortably, I think you can do a lot worse than just Berkshire. Even though it's boring and nobody is going to give you any awards for saying that Berkshire's in your portfolio. I think it's a very simple way to get exposure to some of these trends in a way that you can sleep at night pretty comfortably.

Hall: Pop quiz for everybody. Berkshire Hathaway, price-to-book rate value, so you use that as a pretty good metric considering the asset-heavy aspect of their business and then their portfolio of equities, it's about 1.2 times book value right now. Before 2020, when's the last time you could consistently buy it for that book value?

Sciple: 2016.

Hall: Consistently, how about 2012? That's the last time on a book value basis, it was the cheapest. It's touched that a little bit for a couple of weeks here and there. Early 2016 it came down for about a month. This is a great time to be buying Berkshire.

Sciple: It's a brilliant slip there. [laughs] That's what we've got in Energy and Industrials. We opened the show talking about, you know, we needed to address the haters about why you should own energy and industrial stocks. We thought it would be fine to pick some that aren't in the energy and industrial space, give some picks. Let's do that, Lou, do you have a favorite non-energy and industrial stock that you're excited about for 2021?

Whiteman: It's like we planned this net, because speaking of Berkshire, perfect. I'm going to go with Boston Omaha (NASDAQ: BOMN), and the ticker there is B-O-M-N. This is one of those so-called baby Berkshires. Right now, it's just a couple of businesses. It's billboards, it's world broadband, it's a lot of insurance assets, but the model is similar to what Berkshire Hathaway tried to build. These are businesses that are set up to generate strong operating income, strong cash flow which is fueled to grow and find new businesses. Now, this is a much smaller version, much earlier version, and the stock has been a real loser for most of the year. I think it was trailing the S&P by 40%. It's come back some, but there's a lot of that execution risk here, because not everyone can be Warren Buffett, so that is the danger. But I really like what they've done. I really like the team here, and it's an interesting setup that I enjoy being a shareholder and following and see what becomes of it.

Sciple: I own Boston Omaha, Lou. I think it's Warren Buffett's great grand-nephew or something like that, is one of the leaders of the business. But you look at, yes, there's the billboards business which as you look at the economics of that business, it's really tough to get new billboards put up, but those assets have some value. They also have the surety insurance business, very reliable income, and one thing I did want to ask you about, very thematic for 2020, what are your thoughts on their SPAC that they did this year?

Whiteman: It's fascinating. I didn't touch on it, but it's fascinating, and who knows, why not? But this is a company that has cash. It makes cash, and the question as an investor is, what are you going to do with the cash? It's 2020 and they did a SPAC. [laughs]

Sciple: The exciting thing, the background on this SPAC is they had had some previous investments in homebuilding and some structural things, they couldn't own it in their existing structure without getting into some regulatory issues. I think it's an exciting company, I like a lot of the moves they're making. Matt, what about you? Outside of energy and industrials, what's the stock you're excited about for 2021?

DiLallo: Lemonade, which is a fintech company that does insurance. My real agent actually showed me when we were buying a house, I bought it and I checked into it. Compared to our traditional insurance we're doing in the process, it was so simple to get insurance through them and the cost was so much better than what I was given from traditional insurance. One of our houses is insured with Lemonade and I'm following it on Twitter. A bunch of different financial gurus that I follow on Twitter like it and I'm really looking into it. It seemed like as soon as I was about to buy, it popped and I just couldn't pull this trigger because I was stubborn like that. But that's what I'm really excited about and I want to own it before 2021.

Sciple: Awesome, I love it when you have this great experience for a user and you're like, hey man, this thing is public, let me see if I can go and invest in that, it's always super-exciting. Jason, what about you?

Hall: I'm going to go with Magnite (NASDAQ: MGNI), ticker MGNI. This is a company that's right at this confluence of ad spending and the shift away from broadcast TV to connect the TVs. A lot of people are familiar with The Trade Desk, ticker TTD. These are companies that are complementary. One is on the sell side, one is on the buy side, so they don't really compete, which is really good. They are also great for ad agencies to work with. It's a business that's really complementary and it's also in an industry that is still at the very early stages. So market cap is less than $2 billion, it's probably about $1.4 billion or $1.5 billion a day. Trailing revenues are less than $200 million, and there are hundreds of billions of dollars every year that gets spent on TV and video ad revenue. You think about these giant deals that sports channels pay to get sports content. They're spending that money because they're going to get a lot more in ad revenue. Ad revenue is a big thing, and this is a company that's in the right place. I think it's a little overlooked right now, and this is a company that I could see being worth $20 or $30 billion in 10-years.

Sciple: Awesome. I talked about Match Group on a recent episode of the podcast. I like that one a lot. I think they've essentially cornered the market on dating in 2020. I think that's even more so when you look at this past year during the pandemic. If you are a "traditional dater," you had to figure out something if you wanted to stay in the dating market. That's pulled even more people into that industry. If you look even before the pandemic, trends were toward more than two out of every three couples meeting online. Match Group essentially controls all the platforms of significance in that industry; Tinder, Hinge, Plenty of Fish, their namesake platform, lots of others, OkCupid. It really got a significant share in that industry.

As we move forward in 2021, people are going to go back out into the real world and do real dating. That's a continued tailwind for this business. Really, the takeaway for me is this is a business valued at $40 billion. If you don't have a relationship with an online dating platform and you're somewhat in the dating market, you're at a structural disadvantage to everyone else in the dating market. The predominant payers on this platform are going to be men. Women are, I think the stat is 25 times more likely to get a match than men. Clearly, the folks that are paying to get extra swipes and things like that on these platforms are men. If you know anything about men, if you want to get into the bar where all the chicks are or whatever, you will pay whatever it costs. Thirsty dudes will pay more. Whatever the number is, they will pay more. This company is $40 billion, it's worth more.

Whiteman: Nick's bullish on thirst. [laughs]

Sciple: Very, very bullish on it. I don't think I would ever bet against it. I can't tell you the number of times that you're in your young 20s and there is a place where this is the bar where everybody has to be at. If they charge five more dollars for cover, you will pay. Match Group, they're working the door at the great big bar of the 2020. I would like to turn a little piece of that. That's my takeaway there.

Another one I really like is Redfin, and you see this other inflection and how people are shopping for homes in 2020. You've seen all these people, this flood of people are into the housing market. Part of that's because interest rates have been so low. Part of that is this opening up of remote work. Redfin really sets up perfectly for millennials entering the home buying market. Once you get a realtor, you stick with them. If you ask the typical homebuyer, nine out of every 10 say they're going to use the same realtor they used the first-time through. When you're acquiring customers in this market, you want to get the first-time homebuyers. Redfin set up for that market. Millennials are super cost-conscious because we can't afford to buy homes, that's why you see the average age of a first-time homebuyer ticking up. That puts Redfin in a good position as someone whose innovation is lowering the cost.

Second off is across all age demographics, it doesn't matter. The first-place people are going to find homes online and Redfin has been an online-first platform from day one. They're going to continue to take a share. Overtime, what essentially they're doing is aggregating demand for folks to come buy homes. They are going to go to Redfin, they'll look for homes to buy, that will give them opportunities to attach lots of other services on whether it's brokerage or title or all those sorts of things. The last thing that I think is interesting with Redfin is, if you look at the way people find mortgage brokers, the predominant way is through referral. The bigger this business gets, the more folks they acquire, it gets easier and easier for this business. If you project out five years, they continue on this growth trajectory, it becomes harder and harder and harder for the incumbents to compete with Redfin. I think it'll be a snowball rolling downhill. We're going to turn around 10 years from now and they're just going to be collaborating in this industry. Those are two that I really like.

Hall: One of the things they're really focusing a lot too right now on, Nick, is getting employees licensed brokers. They're going after this market in a really big way.

Sciple: Yeah. If you look at management right now in recent quarters, the big thing they are saying is we don't have enough agents to meet demand. No. 1, we don't have enough agents to be able to service all the transactions we'd like, and then, No. 2, on the buyers side, there's just not enough entry-level homes to service all the buying demand. There's not enough homes for sale. It's a good problem to have if you're servicing and industry and there's more demand than you could possibly meet even though you could try your hardest. Those were a couple I'm excited about, Match Group and Redfin.

I think we have time for one last segment before we hit the road. This is going to be about an hour long episode. But you know what, it's the new year and I think, folks, a lot happened in 2020 so there's a lot to talk about. Last thing, hitting the road, do you have a New Year's resolution, a lesson you learned in 2020 that you're going to take forward with you and try to implement going forward? Jason, I'll let you go first with this one.

Hall: I think the lesson I learned is that really, the same things work that worked in years before. As much as we look at this year and we have the fastest 30% drop in history and then the fastest 30% or 40% gain in history, the fastest full recovery from a market-crash. All of those things happened in one year, and that doesn't normally happen. But what we've learned is the things that still work is buying great companies, paying a good value, and then holding that company for as long as possible, that still works. We certainly learned that it doesn't work to try to time your way around it. It might be some of you, could you imagine deciding to sell in late March? Looking at everything that's happening with the anticipation that this is going to be a long, deep recession or a long, deep market crash, and here we are heading toward the end of the year and knocking on a 20% gainer for a full-year and up, like, 110% from the bottom. The stuff that works still works and I've resolved to remember that and not make dumb mistakes like selling great companies that I love that are growing like crazy just on valuation, because that's the thing that doesn't work that I have done a few times a little bit that have hurt me in bigger ways. That's my thoughts and my resolution.

Sciple: That's great, Jason. Life moves pretty fast. I think that's my takeaway. The Ferris Bueller line, life moves pretty fast. I think in 2020, there's no better illustration than that. Matt, what about you?

DiLallo: I'll just focus a little bit too much on value and I'll look at a stock. I mentioned Lemonade, it went up as I'm watching it. I need to get away from not buying when I see a great company and just look at the long-term picture instead of "Oh, it just went up 20% since I started looking at it." Buy a little bit and hope that it comes down, because if it does, I can buy more. If it doesn't, hey, at least I've got some of it. I just don't want to do more of that. I've been sitting on cash as the markets go down. I was shopping heavily when it went down. But as it's going up, I've just been sitting on my hands a little bit too much and I missed some still great companies that I could have gotten better valuations if I just bought even though that went up.

Sciple: So, get some skin in the game, that's a good one. I think sometimes we can be hesitant, but sometimes, you just need to fire away. Lou?

Whiteman: That's great. I can end this by being in the wet blanket. [laughs]

Sciple: Let's go. I love it.

Whiteman: It feels like my new year's resolution, and I think I'd advise it for all investors, as it feels like a good time to have that blunt conversation with yourself about risk tolerance to gameplay what you will do if it goes down, to still yourself, get ready. I want to be clear, this is not a market prediction. I don't know if stocks are going up or down in 2021. But if we're honest, we've had a really good run. I saw a stat the other day that Dallas gained 20,000 points in the last 20 years. 60% of that has come in the last nine months. Hopefully, we're going to keep going up for years and years to come. But the worst mistakes happen at those moments, like in March, when it's, "Oh, God, what do I do now?" It feels like a good time to just talk to yourself, to prepare yourself for that, just in case we don't go straight up, just to make sure there isn't a panic decision then or it catches you off-guard.

Sciple: Yeah, I agree with that, Lou. Maybe I'll leave you all, I guess, my lesson, big one, is I don't know. I think that's the big takeaway from this year, is anytime you thought you were certain about what was going to happen next or what's going to happen with XYZ company, the answer was I don't know. I think this year, as for my portfolio, to Jason's point, as it turned out, if you'd have told me in March that this will turn out being one of the best years I've ever had as an investor, I never would have believed you. Maybe to circle back to what Matt said too, at the end of the day, the things that you're looking for in companies are the same. No matter what's going on in the stock market, you're looking for the same qualities when it comes to businesses that have long sustainable advantages. If you know that, you don't have to know anything about a lot of the other stuff. I think knowing what you're good at, paying attention to what you know, and trying not to get too confused about all the stuff that you don't, that's a lesson I am going to try to take going forward. But that's a lot easier said than done. It's really hard to do when all those emotions are flying when the stock market is down lots of percent.

Hall: Nick, there's one other piece of information that is incredibly handy to managing your emotions, and that's knowing when your financial goals are. When are you retiring? When is your kid going to start college? When do you want to buy that vacation property? When do you want to try to pay off your mortgage? Whatever. If you know when your goals are, it's a lot easier to look at that date and see how far away it is, and not do something dumb like sell just because the S&P 500 has gone up 67% over the past nine months, right? Because you're not retiring for 10 years or 20 years, you have plenty of time to ride out those ups and downs. Also, it can be a reality check. If that date does get closer, then you might say, well, it is time for me to shift these high-volatility assets into bonds or into cash, because I'm going to need it and I can't risk the downside now because I'm going to need it next year or whatever.

Sciple: Yeah. I think knowing your goals, knowing the problem or the game that you're playing, which in our case is long-term picking companies that have strong advantages that can continue to compound those advantages year-over-year. If you stick to that game, I think you're going to have success in the stock market. That's the game that we try to talk about every week on this podcast and we'll continue doing it in 2021. Hopefully, it won't be quite as exciting as 2020 [laughs] but we'll see. It's really been great having you all in this round table to break what was this wild year, break it down a little bit. This is fun. Matt, Lou, it's really good to see you guys.

DiLallo: Good to see you.

Sciple: Definitely. I wish you all a happy new year. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Heather Horton for mixing the show. For Lou Whiteman, Jason Hall, and Matt DiLallo. I'm Nick Sciple, thanks for listening and Fool on.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Hall owns shares of Amazon, Boston Omaha, Brookfield Renewable Inc., Phillips 66, Realty Income, Ryman Hospitality Properties, Tanger Factory Outlet Centers, The Trade Desk, and Transocean. Lou Whiteman owns shares of AerCap Holdings, Berkshire Hathaway (B shares), Boston Omaha, FedEx, Phillips 66, Realty Income, Redfin, Tanger Factory Outlet Centers, and The Trade Desk. Matthew DiLallo owns shares of Amazon, Berkshire Hathaway (B shares), Brookfield Renewable Inc., Clearway Energy, Inc., ConocoPhillips, FedEx, General Electric, NextEra Energy, and Phillips 66. Nick Sciple owns shares of AerCap Holdings, Berkshire Hathaway (B shares), Boston Omaha, Match Group, and Redfin. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Boston Omaha, FedEx, Lemonade, Inc., Magnite, Inc, Match Group, Redfin, Ryman Hospitality Properties, and The Trade Desk. The Motley Fool recommends AerCap Holdings, Dominion Energy, Inc, NextEra Energy, and Tanger Factory Outlet Centers and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, short February 2021 $40 puts on Redfin, and long January 2021 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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