Valuation Crimes (Guest: Rupert Mitchell)

Kevin Muir and Rupert Mitchell delve into valuation crimes, particularly in the restaurant and oil sectors. Rupert, with a background in the restaurant business, discusses its sensitivity to economic cycles and its role as a leading indicator of personal consumption trends. He notes that recent premature recession predictions have impacted the restaurant sector, which includes full-service, fast casual, and quick service restaurants. Full-service establishments, such as Darden and Cheesecake Factory, are especially vulnerable due to high fixed costs, while fast casual restaurants face significant valuation challenges, with companies like Chipotle and Shake Shack under scrutiny.

Rupert highlights the importance of tracking real-world metrics, such as market cap per restaurant, as consumer spending tightens, leading many to cut back on dining out. The fast casual segment is shifting its focus to wellness KPIs rather than same-store sales, with unrealistic growth projections for companies like Carver, which plans to expand from 380 to 1,000 stores by 2032. Concerns about valuation persist, as the fast casual segment is being valued similarly to software companies, which trade at much higher multiples. The regressive nature of tax cuts for the wealthy is further straining disposable incomes.

Transitioning to the oil market, Rupert presents bearish arguments, citing a macroeconomic growth slowdown and abundant supply from countries like Saudi Arabia, Russia, and Iran. He emphasizes the importance of demand estimates from the global south, particularly Africa, which is often overlooked in discussions about energy consumption. Rupert argues that Africa's potential as a consumer market is significant, especially given its low current consumption rates and rapidly growing population. He likens anticipated growth in energy consumption to a "hockey stick" pattern, where increased prosperity leads to higher per capita energy usage.

Rupert discusses the potential for affordable internal combustion engine cars, which could enhance vehicle penetration in Africa. He stresses that before transitioning to electric vehicles, basic needs like air conditioning must be addressed, drawing parallels with the rapid energy consumption increases seen in the Asian Tigers. He shares insights on his investment strategy, focusing on long-dated crude contracts and the volatility in the market. Rupert views oil as a more significant real asset than gold and mentions his core allocation to crude contracts, along with recent decisions to exit positions in oil refiners. He references a "Canadian oil mafia" basket of stocks, including companies like Meg and Tourmaline, and acknowledges the influence of Eric Nuttall, a prominent Canadian oil portfolio manager.