Expanding our energy exposure

After nearly six weeks of declines in the broader energy sector, our team took the opportunity Friday to initiate a position in Exxon Mobil (XOM) on behalf of clients in the Flagship strategy. 

We believe Exxon is the ideal conduit to add large-cap energy exposure given its diversified approach to energy markets, strong balance sheet, low break-even costs (company target of $35/barrel), and a 4%+ dividend yield.

We have a constructive view of oil’s price and its ability to act as a hedge against inflation over the medium term. Given the structural underinvestment in expanding operations, the ongoing war in Ukraine, and the sheer amount of time it would take for the companies to unlock supply, we expect oil prices to remain relatively dilated. 

As we enter a period of potentially slower economic growth, the key debate is whether demand destruction would tame oil prices sustainably. Our view is that the commodity super-cycle we’re in the midst of will require a credible supply response to abate high prices vs. prices retreating from the demand side. We see no credible supply response on the horizon but will continue closely monitoring any developments on this front.

Energy makes up roughly 5% of Flagship's benchmark, the S&P 500, so we’ve reduced our underweight positioning a bit with this investment. We’re mindful that energy markets are notoriously volatile, so we’re starting with a small position. We’re excited to add energy exposure to Flagship with this investment. 

Touching up the edges into market strength

As we continue through this bear market, we took the opportunity to trim several core holdings into the market strength on Friday morning. Our thesis continues to track in each holding, but these moves felt prudent ahead of an uncertain period of quarterly earnings for many consumer-exposed companies.

Alphabet (GOOG): As businesses feel the pressures of inflation and potentially weaker demand in the coming quarters, we believe Google’s core advertising business could feel these headwinds. With a masterful track record of allocating capital, we expect Google to come out of this stronger than before, but it may be in for a rocky period near-term.

Amazon (AMZN): After yet another record-setting Prime Day, the world continues to look to Amazon for two-day delivery, cloud services, and much more. Having said that, Amazon has to work through a bloated workforce, rising costs, and potentially reduced demand over the coming quarters. The stock may see continued volatility as a result.

Booking Holdings (BKNG): For this leader of online travel agencies (OTAs), a combination of slowing gross bookings and potential mean reversion in consumer travel warrants caution in our view. With relevant exposure to travel in the form of other holdings like Disney (DIS) and Mastercard (MA), we’re trimming our highest beta travel name ahead of Q2 earnings.

Charles Schwab (SCHW): Continuing to be beneficiaries of a rising rate environment, our long-term thesis on Schwab remains unchanged. However, the first wave of bank earnings this past week hasn’t instilled much confidence for peers, so this trim feels prudent.

S&P Global (SPGI): The uncertain macro environment coupled with rising rates have caused new issuances – a key revenue driver for the ratings agencies – to slow. This compounder has sorted through uncertain markets before, and we remain convicted in the long-term story here.

Uber Technologies (UBER): A ~0.30% addition to Uber brings our weight to ~1.25% of allocated capital within Flagship for clients with an aggressive risk profile. Uber has been in cost-cutting mode, and we’re optimistic that Dara’s plans will steer this mobility giant to profitability over the medium/long term.