A curious mixture of reports today from the funds frontline: the shale cash tsunami, an interesting value idea or two plus an excellent new thematic infra ETF

Lets’ start with a familiar topic: US energy stocks. As I’ve said many times in recent months, I think this time it might actually be different and that US energy equities might be regarded as good value. I’m invested in a couple of players, notably DianmondBack. I was put on to that stock by the folks behind the Arbrook US equities fund who’ve been wondering whether that supposed capital discipline by shale producers will hold. Well, according to the funds latest monthly report, it seems so. A wall of cash is heading towards investors. The chart below “shows the gross cash coming into the public producers (in grey) and their spending on equipment and property (in red) and how the incoming cash has recovered while the spending has stayed subdued. There are recent new efficiency improvements like utilizing such techniques as simul-frac and at the margin electric pressure pumping and 3D printing, however, the biggest driver we believe has simply been the switch away from growth at all costs. Gone are the days of the land grab and today the operators are behaving like a mature industry”.

Dylan Grice and colleagues at Calderwood Capital have stepped up their regular publication  Popular Delusions and are now producing a mid-month Delusions. It’s excellent reading with lots of practical ideas. I was especially drawn to their discussion of SPACS. These strange vehicles have warrants and options built into them which can act a bit like the old subscription shares of old investment trusts. In effect, by buying into a SPAC you get an upside warrant that may or may not have value. For the vast majority of cases, they have no value because the opening valuation of the assets ported into the SPAC are hugely inflated. Thus the warrants are deep underwater because of an initial pricing issue. But sometimes, in a few cases, that is not the case. The Calderwood team has been digging around the growing wreckage of the SPAC space in search of warrants that might actually have some value.

They reckon they have alighted on one: Arena Fortify Acquisition Corp (ticker: AFACU, disclosure on the part of Calderwood, long). The sponsor behind the SPAC is called Arena Investors LP, which is not insignificant a $2.2bn private credit hedge fund. According to the Calderwood folk, they ‘know Arena quite well and think very highly of their CEO/CIO Daniel Zwirn and his team.

“Arena is considered one of the best private credit funds with their deep-value approach to lending. They lend when asset coverages are high but so are the yields. The focus of this SPAC is to find recently bankrupt or restructured firms trading at very low prices. Given Mr. Zwirn’s seat at Arena, he likely sees many deals that fit this description and given his deep-value approach to investing we trust him to find and structure an attractive deal for shareholders. The units, which come with 0.5 warrants per share, currently trade at a slight premium to trust at $10.12 and this SPAC only has 1.25 years to find a deal. At that price, the downside to AFACU is less than 1% and the upside could be big…Moreover, we think the warrants could have significant upside, not just to the $1.70 theoretical price calculated above (which would imply fair value of the units at $10.85), but from the business value that Mr Zwirn could create with a restructured deal. Though AFAC may be looking in the resource sector, something the current market will not be excited about, we like the value creation that may come from this approach. We also find it interesting that AFACU should benefit from an equity market downturn, as it increases the probability that Mr Zwirn finds a good deal.”

Sticking with Calderwood they have also picked up on an excellent blog called yet Another Value Blog by Andrew Walker who has done a fantastic deep dive into Charter Communications, probably better known as the telecoms brand Spectrum. It’s a cable operator morphing into a broadband play with a mobile business. The ticker is CHTR. The shares trade at $605 the last time I looked with a TTM PE ratio of 27.60. Other measures include 10.9x EV/EBITDA, and 17.5x EV/ unlevered FCF.

The key point here is that cable businesses are very ‘old school’. That’s tended to mean screwing the legacy customers for more money, while steadily compounding earnings growth and then buying back its shares. These cable dinosaurs are widely disliked and thought to be going the way of steam railways. But if a cable operator reshapes their business into an exciting digital broadband infrastructure business, then a whole new world of investors awaits, willing to pay extravagant multiples. Hardly any sexy new digital infra businesses trade at anything close to the multiples above. Remember infrastructure commands much higher multiples!

Walker reckons that by ~2025 Charter could earn $60 a share in free cash flow and if that is the case, “with the continued growth runway Charter will have I expect the stock will trade for >20x free cash flow. That combo would put Charter over $1,200/share, or just shy of a double from today’s share price. That’s a very nice IRR for what I view as a largely de-risked story, and the returns should be even higher over at Liberty Broadband given their leverage and continued share buybacks at discounts to NAV.”

All of which segways nicely into a brand new ETF that has emerged within the last few weeks. It’s from the thematics specialists at Global X in Europe: its called  Global X Data Center REITs & Digital Infrastructure UCITS ETF (VPN) and it seeks to invest in companies that operate data center REITs and other digital infrastructure supporting the growth of communication networks.

The main $ ticker is VPN while the sterling class is ticker VPNG. You can find out more about the fund HERE. Its really for the active thematic stockpicker as it has only 24 stocks in the index with the TER at 0.50%.

The top holdings of the ETF are in the box below. I think this is an excellent idea for a thematic ETF, if somewhat concentrated. I doubt the index will set the world alight in the next few years, but this is a solid, quality tech investing idea, chock full of solid earnings compounders.

Lastly, I couldn’t help but finish with this tech-related comment from Albert Edwards at SocGen.

“Put a date in your diary to look out for my Global Strategy Weekly on 2 Dec 2031. For I have a similar feeling that in a decade’s time FAANGs (and US tech generally) will go the way of the BRICs as another example of acronym investing going horribly wrong. Indeed, only recently I noted that despite US IT’s EPS relative now declining sharply, its nosebleed PE valuation at 30x looks vulnerable vs the market’s 22x – the widest gap since the Nasdaq bubble”.

I’m not sure I agree with Albert on this. The old ‘normal’ PE ratio of between 15 to 20 (constituting fair value), is now 20 to 25 in a low interest rate environment. And if 20 to 25 is fair value then 25 to 30 for fast growth sectors is probably not unreasonable. That said, its worth noting that the average PE ratio for the FAANGs is currently running at over 40 – see box below. Note that Amazon skews the number massively.

FAANG valuations.