The World’s Most Popular Parlor Game
Released less than four months ago, Wordle is a “stimulating and wildly popular daily word game that has become a cultural phenomenon,” according to The New York Times, which just paid a “low-seven figures” price to buy the game from its founder.
Illuminating just how untrendy I am, I had never heard of the game until this weekend. Perhaps sensing some reputational risk if news of this shortcoming became public, my family brought me up to speed. After being provided the first word, I took an unconventional approach (not surprising for a contrarian investor) to solving the puzzle. Rather than trying to guess the daily word outright, I focused on the yet-unused but high-probability letters, then creating a word that contained as many of these as possible. This way, I was likely to find all five of the correct letters – it would then be easy to put them in the right order to solve the puzzle.
Despite a barrage of comments like, “you clearly don’t understand how to do this,” and “Dad, seriously… you’re not even trying,” my method found the right solution by the fourth line.
But this note isn’t about Wordle. Without a doubt, the most popular guessing game today is “What Is Russian President Vladimir Putin Going to Do With Ukraine?”
Putin is savvy and highly motived to keep his title, so there must be some rational reason why he is assembling a massive military force on three sides of Ukraine. Below we list commonly stated guesses for his build-up. We also provide our guess – which we have not seen stated anywhere yet.
- Re-integrate Ukraine into Russia.
- Boost his perhaps-weakened standing within Russia by showing strength against an outside enemy.
- Prove that he remains highly relevant on the global stage.
- Punish the West for delaying/halting the Nord Stream 2 pipeline.
- Bluff to extort concessions from the West.
- Bolster his standing among allies like China, Iran, North Korea and others by openly challenging the West’s military capabilities.
- Provide something for his soldiers to do, lest they become bored and/or demoralized.
- Demonstrate his power by showing he has a massive army at his personal disposal.
While all of these make sense on some level, we wonder why Putin is being so deliberate. It would seem that he has missed his best opportunity – invading weeks/months ago when the West was unprepared. Today, the West is increasingly aligned in its potential military and economic responses, making an outright invasion much less likely to succeed. The delay violates a lesson that Putin learned long ago, “when a fight is inevitable, you have to hit first.”
We see a more prosaic rationale – paying off his wealthy Russian oligarch allies, whose political support is critical to Putin’s reign. Russia is a major exporter of oil, natural gas, wheat, aluminum and other commodities, and the producers of these commodities are controlled by the oligarchs. What better way to buy their allegiance than by enriching them with high commodity prices? Putin creates a military crisis, which drives up commodity prices, and the bribe is complete. And, perhaps best of all, the bribe is paid for with other people’s money.
There are, of course, many side-benefits, which include all of the eight listed above. And, being opportunistic, Putin might press further on any of these if the situation allows. But the key is the bribe.
Putin would want to keep the crisis going as long as possible, but once the futility of an invasion becomes obvious, and other pressures on commodity prices like warmer weather fade, the crisis will lose power and it will end.
How is this relevant to investors? We currently have a Buy rating on ConocoPhillips (COP). The shares have been driven by sharply rising oil prices, and now appear fairly valued assuming about $95/barrel. We saw real value when we initiated our Buy rating, but not so much today.
The direction of oil prices is unpredictable, but at close to $90/barrel they would seem to have more downside risk than upside risk.
As Ukraine tensions ease (meaning, no invasion) and springtime approaches, oil could easily slip to the mid-$60 range. Also, currently high energy prices provide incentives for U.S. drillers, OPEC+ and other oil-producing nations to produce more oil. We note that OPEC+ meets on February 2. Worries about a possible U.S. recession may also pressure oil prices.
As ConocoPhillips shares have reached and exceeded our 89 price target, and we see the upside and downside risks balanced, we are moving the shares to a HOLD. There is nothing wrong with Conoco as a company and we would be ready to buy again if the share price falls sharply.
Why not move directly to a Sell? In situations like this, where a stock continues to surge above what we believe is a generous price target, we are happy to ride the upward momentum. But, we won’t buy any more shares, and we would likely trim out of some of our position (a third, perhaps). Then, on weakness we would pull the plug.
We recognize that we could be terribly wrong. Oil prices might continue to rise to $100/barrel, or higher. This would push Conoco shares to well over $100 or more, as well. Investing is a game of balance.
Share prices in the table reflect Tuesday (February 1) closing prices. Please note that prices in the discussion below are based on mid-day February 1 prices.
Note to new subscribers: You can find additional color on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Undervalued Stocks Advisor on the Cabot website.
Send questions and comments to Bruce@CabotWealth.com.
Today’s Portfolio Changes
ConocoPhillips (COP) – Move from Buy to Hold.
Portfolio changes during the past month
None.