Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Datt Capital principal Emanuel Datt explains how a coal miner could possibly be a great investment and why it's important to practise dollar-cost averaging.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for 4 years, which stock would you want to hold?
Emanuel Datt: It was quite funny because when I read this question, I thought of SelfWealth Ltd (ASX: SWF).
But then I realised, "Oh, well, SelfWealth's whole business is about having a tradable market. Oh, that wouldn't work."
So I think that the stock that we would want to hold would be Whitehaven Coal Ltd (ASX: WHC). Ultimately, that's driven by the reality that the transition to cleaner energy sources will require coal, and lots of it, effectively.
I think that, ultimately, that's driven by the green lobby having labelled nuclear power as dangerous but, conversely, this strengthens the position of fossil fuels. It basically extends what we think will be the time horizon for fossil fuels to be used.
Longer term, the coal market is positively positioned because new mines are generally quite difficult to permit and the output from existing mines is falling, and this is despite relatively stable demand. That's projected over the next 20 or so years.
Accordingly, we think that there's going to be enduring supply-demand mismatch, at least over the next 10 to 20 years [which will] lead to higher prices down the line.
Whitehaven's coal is known for its positive clean qualities, I guess. Its customers are primarily ex-Chinese east Asians — like the Japanese and Koreans. It also has already permitted and advanced expansion opportunities while also, we feel, that it's materially undervalued on projected DCF [discounted cash flow] basis.
If strong coal prices persist, then we feel that Whitehaven will be in a very strong position to potentially cash fund their expansion projects while also making generous capital returns back to shareholders.
The way we see it… Whitehaven is just a pure cash machine, so we'd feel quite comfortable holding this for the long term.
MF: Is it one of your core holdings?
ED: Yeah. Well, we're actually sort of building into it at the moment because we do have a position, but not a big enough position at the moment.
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
ED: Most recently, it's not buying Whitehaven in May in the low $1 range.
MF: Yes, the price has ramped up since mid-May, hasn't it?
ED: Yeah, it's gone up about 3 times.
But we were [still] thinking about buying because we know the history of the company quite well, and we noticed that a particular major shareholder was reducing their stake. Ultimately, we were too fixated on an entry point around $1, and I think the low was maybe $1.10 or $1.20 or something like that.
So, being too fixated, we just missed out because it shot up to $2 very quickly and today it's trading at over $3. Ultimately, we like the company so we're having to put up our hard earned [at] over $3.
MF: It goes to show you, even the professionals are susceptible to anchoring.
ED: Absolutely, yeah. I think it's really just a prime example of just being overconfident in the information that we had at hand.
Ultimately, ideally, we should've staggered our entry given how confident we were in the company's prospects. But… [we had] the bias of hoping that'll pull back to make an entry point at some stage.
It's really a great lesson to practise dollar-cost averaging.