Last Big Wealth Opportunity For A Decade (or MUCH longer…)

72% of American firms have reported AI as a material risk to their business. But with everyone already long Nvidia and the few remaining beneficiaries, it's becoming too hot for many investors to get involved in the sector. So in this video, I'll show you why the biggest wealth opportunity of the next decade actually isn't in semiconductors, but it's in a sector that analysts think could replace them as the biggest weight in the S&P. So just before I reveal the name, I want to put this in context. We have inflation expectations in blue, and then in white we have our mystery sector. So the two have moved in tandem basically, but it's not only a beneficiary of inflation. Our mystery sector is moving pretty much in line with the AI infrastructure ETF. So what is this mystery sector? Well, I'm not gonna reveal it just yet. There's one more slide. Bear with me. Good things come to those who wait because the thing that the analysts emphasize here is the relative weighting in the S&P 500. The sector that I'm about to reveal correlated with both higher inflation and the AI theme is only 4%. And this is why they think it could be the rotation of the next decade. So let me show you what I'm talking about here. This is an ETF called GNR, which tracks the natural resources sector. You might be asking, what the hell are natural resources? Well, that's a good question. We're essentially looking at commodities here, but specifically 3 sectors: agriculture, energy, and then metals and mining. Now, most people will just buy the ETF and call it a day, but the problem is that you end up owning some of the worst stocks and even a random cardboard box company, I think in this case, as well as the ones that should see much better returns, the ones that we really want to own here. And because it's a pretty volatile sector after all, looking at commodities, we need to be selective so that we only buy things that we can actually hold onto for the long run. So I'll be running this through my model as usual, looking at the 7 factors that define quality. So the two companies that we'll be looking at are Southern Copper, which as the name suggests focuses on copper, and Steel Dynamics, which, well, you can probably work out what that one does. But perhaps not as obvious are the fundamentals that we should be looking for. First up with Southern Copper. So these are all average numbers here over the past 10 years, the median. You can see it has pretty high margins, 52%, especially for a more cyclical name, which all of these are. Double-digit return on capital at about 14%. But a problem that we're likely to come up against with many of these are high levels of debt. But to look at the trends, this is where Southern Copper to me stands out. Having now paid down all of its debt is very encouraging. You might be used to seeing stocks in my other videos like semiconductors, for example, Nvidia trading at 45, maybe 50 times free cash flow. Well, Southern Copper is trading at 13.5 times next year's earnings. This looks like a good expression if you're bullish on copper, which of course is in incredible demand for electrification regardless of AI. And you can see this reflected in the return, 1,000% versus 200%. So turning to base metals and looking at steel dynamics, there is another name in there which you can get in the report. I want to focus on this one because a heck of a lot of steel is going to be needed in the deployment of AI infrastructure. Infrastructure, all of these data centers and everything else that's being built needs a sweet ton of steel. I believe the appropriate word is. So again, here we need to assess the profitability, the efficiency, and the debt position before taking a look at the valuation. So in terms of profitability, whilst it's not particularly high, it is higher than its closest peer and it's relatively stable. So that does get a pass. In terms of efficiency, again, it's not quite as high as the one that we've just looked at in Southern Copper. but compared to its nearest competitor, it's similar. Again, that's okay. It's not getting me particularly excited, but so if we compare A with B, Steel Dynamics and its competitor, gross margins are much better. The return on capital is also much better, and its debt, while slightly higher at 0.9x versus 0.7x, isn't massively different. We're looking at multiples here of 8.8x, 9x next year's earnings. It doesn't look to be overly rich at this stage. And given the performance, it shows that earnings quality is there relative to the sector and relative to its alternative peers. Now, the other half of the sector is in precious metals, and this has been getting a lot of attention for obvious reasons. This segment is where I see the most reasonable valuations, but the standout for me is in Wheaton Precious Metals, ticker WPN. Now, this isn't a miner as such, but instead it has a business model known as streaming. It allows them to receive a future claim to a fixed percentage of production in the mines that they grant a license to. So it's essentially a form of a licensing model, and that's what helps it to have such unusually high margins. So let's just take a quick look at the charts here. Profitability, not only has it been stable, it's also been increasing slightly over the last 3 years. The efficiency, okay, it did face a bit of a wobble here when gold is weak, but again, generally speaking, has been moving in the right direction. And the debt position certainly has, where it's had no debt for the last 3 or 4 years. But this is the cherry on the icing on the cake because the valuation, whilst at 17 times, we're beginning to talk about higher numbers now, it's below the median, the 10-year historical average. So despite the fact that gold has surged and is at record highs and we have all of these tailwinds within the macro themes that we're discussing here, it seems historically undervalued. So that is a very, very exciting play and it's returned nearly 900% over the last decade compared to 200% for the broader natural resources ETF. Now turning to energy. This is where it gets a little bit different because we've seen a huge price shock take place over the last year, and they might not be as direct of a play on infrastructure as maybe the base metals were. So the only name that stood out for me in this sector was actually ConocoPhillips, and I'll go through the reasons why. Margins have averaged 46%. They've been pretty resilient here. The return on capital, uh, 8 to 9%. Again, it isn't the most exciting thing when we're used to looking at 20, 30, 40% even. But for an oil and gas company, you're trying to pick the best of perhaps a bad bunch. It's about as good as it gets. And one of the reasons why it's able to have better fundamentals than its peers is that it focuses purely on exploration without getting involved in the refining activities. The debt levels are fairly modest as well, but at times they have been quite high. So when we look to the valuation, we can see the range here has been pretty tight, trading somewhere between 5 and 7 times next year's earnings. We're looking at EV to EBITDA here. So at 6.5, it's slightly above the median, but it's still within that common range over the past 3 or 4 years. But oil, of course, has moved a heck of a lot recently, and who knows, we might see a rerating here. So does this get me massively excited? I can't say that it does. And when you look at the chart, you can see if you've been following the price of oil closely, it just looks exactly the same. So if you want a direct play on oil, this is probably how I'd do it. But overall, for me, it's not as compelling as what we've seen so far in metals with copper specifically, and separately as more of an inflation hedge. Gold, particularly with Wheaton Precious Metals having that unique business model. So as we're beginning to see, not all companies are created equally, even inside of natural resources. And the sector that I'm about to conclude with here is where this really begins to hit home. Neither of the two companies here contained within the GNR Natural Resources ETF are anywhere near qualifying when I pass them through my criteria. So let me show you why. In the case of Nutrien, which is actually the world's biggest producer of potash, you can see the profitability at 28% margin doesn't look too bad, although this is gonna be more unique to fertilizer companies. But the efficiency, a return on capital of 5%. I can't think of a worse company that I've looked at whilst making these videos with you. But the problem is that even though that is not exciting, for every billion dollars of profit, it has $2.5 billion of debt. And I don't know in what world that is a sustainable or a compelling business model to operate and be invested in. This is another example which you hear me talking about in my other videos. Why I'm always saying things trade at a premium or a discount for a reason. And in this case, even though the sector is seeing a lot of interest in light of war going on at the moment and supply disruption, Fundamentally, there's no reason to own it beyond speculation. Even that has only brought it back to its average valuation historically. When you look at the price, albeit it was listed here, so it's not quite one for one, you can see how it's underperformed for periods absent the price surge in 2021, 2022, last time we had a major war beginning, and again, the move that we've just seen in the last 2 or 3 months. There is no fundamental reason to own this outside of war in the same way that you might otherwise speculatively just get long. So in other words, buy the VIX, the volatility index or futures on that without getting too technical. Now, for me, it is a speculative instrument and it is not a company that I'd invest in for the long run. Turning to the alternative in ICL Group, I don't think this is any better really. These guys are actually Israeli. It's a diversified fertilizer and again, potash producer. The margins going from 28% to 33% are better. That's not too bad and they are pretty stable. Efficiency-wise, well, 8.5% is better than 5.5% return on capital. So again, I'd say these two are looking better and I wouldn't completely rule it out on this alone. And the debt picture, okay, it's not making my stomach churn at 1.5 times, but still it's trending in the wrong direction. So is this a company that I want to be anywhere near? Well, no is the answer. And as you can see, the majority of other investors in the market, those that actually use fundamentals rather than just trading macro, would tend to agree with me. Even with the latest rally, just as we saw in Nutrien, investors see no reason to pay a premium for this stock. It is bang in line with the average valuation, and you can see it's languished for long periods. So again, look at this chart, and it is Garbage. That's why it's lagged the sector. So bringing it back to the watchlist, you can see the companies that we've looked through, Southern Copper, Steel Dynamics, both of which stood out for me. Wheaton was perhaps my favourite play in all of this, maybe alongside Southern Copper. You've got Conoco at the bottom, which just for some broader diversification into energy, I think is worth considering. There'll be a link to the report in the description, as I mentioned, which you can get for free. But these companies that have featured in past have returned hypothetically 700% over the last 10 years compared to the 200% returned by the ETF. This goes to show the value of looking for better quality companies using the process that I teach inside of my programme. So many of these companies look pretty compelling right now, but that doesn't mean going all in on them and abandoning tech completely. What we actually want is a portfolio that profits both from inflation and the disruption of AI. So let me show you how I'm looking to build that portfolio myself so that it would ideally win in any scenario that might play out. So whilst we're likely in a structurally higher inflationary regime now, at this stage it's uncertain to know whether on balance replacing jobs will contribute more inflation in terms of productivity gained than it will in the drop-off from consumer demand. But for now, we're gonna assume that one will somewhat or largely offset the other. That's the way that the analysts are viewing it. So we're going to look at 3 scenarios. The first one being a productivity boom where AI contributes more in helping us to be more productive than it does in displacing jobs and, I don't know, turning the economy into a big mess. The next one is, well, that unfortunate scenario for workers where it actually gets rid of the need for a load of jobs and therefore probably contributes to a lot of unemployment. And then C, where AI, for whatever reason, just fizzles out or ends up being a bit of a white elephant, so to speak, which seems incredibly unlikely, but nonetheless, I'm gonna consider here. So in the first scenario, we're gonna see net expansion in the economy. So there'll be demand for natural resources as AI infrastructure continues to scale, and of course, tech will win. So the way to be thinking about this is like a barbell where on one side You're holding AI, and on the other, you're holding natural resources, the best companies in each, because as we know, we need to be selective. Now for the second scenario, B, if lots of people are out of work, there's going to be less consumer demand. That's going to see an economic impact. However, we're still likely to see those productivity gains as a result. There would still be demand for natural resources, even if the need for an inflation hedge has kind of dropped off. So AI, of course, wins. And on this side, one probably nets out the other in terms of the impact on natural resources in the near term. Longer term, as the economy would improve from the recession, productivity continues to gain, AI continues to scale. It's likely that once again, both sides would win overall. But it's this third scenario, no matter how unlikely it may seem, that we should consider. Because this is where we might not make money overall. So if in some bizarre reality AI simply plateaus, then that would be great news for workers, wouldn't it? But it means that tech is gonna get absolutely smoked given the sky-high valuations and expectations that it's been trading on. So on this side of our barbell, that's gonna take a big hit. But things like semiconductors are still gonna be in demand. Albeit not to the same extent as with AI succeeding, just in general with electrification. So in the near term, this would undoubtedly take a hit, but I'd expect it to recover after that. On the side of natural resources, this is kind of interesting. It doesn't seem to be a consensus trade right now as it relates to AI. So if AI falls off, it might not be affected too greatly because this was just going to be new additional demand coming from that theme, and valuations aren't sky high or priced for perfection on the basis of that outcome just yet. So we'd probably see normal demand for a normal economy. But the thing to remember once again is that ever since 2016, and certainly since the pandemic, we have left the period of no inflation and zero interest rates, and we are in a structurally higher inflationary environment. So that isn't likely to go away or fall all of a sudden into an environment where commodities are irrelevant. But unless you know the right stocks to look for in AI, then you might end up with the wrong barbell, very much like the time you tried to curl 50 kilos in the gym. Woo! So watch this video next, which shows you how to do that so you can build the perfect portfolio, even if I can't promise bigger biceps. Try it! Ah! Yeah! Yeah! Free audio post-production by alphonic.com.