By: Jon Costello
At HFIR, my job is to find ideas with asymmetric payoffs and a high margin of safety. During times like these, I find myself in an uncomfortable situation.
People subscribe because they expect something of value, usually investment ideas they can act on. I understand that expectation, and I feel an obligation to meet it. But while I can produce investment commentary whenever I choose, I can’t produce attractive investment opportunities on demand. The two aren’t the same thing.
I’ve managed other people’s money professionally since 2007. I consider myself an investor first, and writing about investments is an extension of what I do. Writing helps me organize my thinking and forces me to explain why I believe a stock is worth buying, or why it isn’t. I want this service to succeed, but building a large subscriber base has never been an end in itself. I’m certainly not going to change the way I invest to attract or retain subscribers.
I spend a great deal of my time searching for stocks trading at substantial discounts to intrinsic value. I investigate neglected companies, explore industries that receive little attention, and look for angles on familiar businesses other investors may be missing. I enjoy the search, even when the work leads nowhere. But lately, that’s where an awful lot of it has led. I keep looking and coming up empty-handed.
What’s unusual about the current situation is that it’s the first prolonged shortage of bargains I’ve experienced since starting this service in 2020. For most of the past six years, I’ve managed to find a fairly steady stream of attractive opportunities, particularly among oil and gas midstream companies. Many of those investments worked out well.
Consider how much things have changed. In late 2020, Enterprise Products Partners (EPD) offered a distribution yield of more than 8%, while the 10-year Treasury yielded less than 1%. Today, EPD yields around 6%, while the Treasury offers more than 5%. The investment proposition has changed considerably. Many of the stocks that once offered unusually attractive returns have appreciated, leaving far less room for further gains.
Meanwhile, I’ve been through enough periods like this during my investment career to know how frustrating they can be. I want to find bargains just as much as subscribers want me to find them. But I can’t make them appear simply because I’m looking for them.
So what am I supposed to do? I could relax my standards a little. I could recommend stocks that look reasonably priced instead of genuinely cheap, or turn every company I investigate into a potential buy. That would give me more to publish and make the service look busier. It would also defeat the purpose of doing this in the first place.
I suppose some of the value I can provide subscribers during periods like this is to demonstrate that investors should be comfortable doing nothing. Sometimes it’s best to build cash, take profits on stocks that have become expensive, and wait for better opportunities. That doesn’t mean I should stop researching companies or sharing what I find. But I see no reason to recommend an investment simply because subscribers expect another stock pick.
In fact, I would argue that someone who receives few or no new recommendations for several months may be getting better advice than someone whose investment service delivers five new picks every month. The number of recommendations tells you nothing about their quality. When bargains are scarce, forcing a steady stream of ideas may do more harm than good. I’d rather disappoint subscribers by saying I haven’t found anything worth buying than encourage them to put money into stocks I wouldn’t buy myself.
Of course, I have to consider the possibility that the problem lies partly with me. Perhaps I’m anchored to the valuations available a few years ago, or I’m spending too much time looking in industries where bargains used to be plentiful. I may be overlooking opportunities elsewhere. That’s something I have to keep questioning as I investigate new companies and industries. I’m not suggesting there are no attractive investments anywhere. I’m saying that I haven’t been able to identify many that I understand well enough and that are cheap enough to justify putting capital behind them.
I don’t expect this situation to last forever. I’ve seen enough market cycles to know that bargains tend to arrive in clusters. An industry falls out of favor, the economy weakens, or investors become pessimistic, and suddenly opportunities appear that weren’t available a few months earlier. I have no idea when that will happen again, but I intend to be ready when it does.
We experienced one of those periods in 2025. I established oversized positions in Valaris (VAL), Transocean (RIG), Calumet (CLMT), Warrior Met Coal (HCC), and several other companies, some of which subsequently more than doubled. I didn’t expect those investments to appreciate as quickly as they did. But at the prices available, I considered them about as close to no-brainer investments as I’m likely to find. I committed substantial capital because I believed the potential rewards more than justified the risks.
I expect to find similar opportunities again, although I can’t say when. Nor can I promise that the next group of stocks I recommend will double. What I can promise is that I won’t recommend an investment unless I believe its prospective return justifies the risks. I can’t control what opportunities the market offers or how an investment ultimately turns out, but I can control the standards I apply before committing capital. When bargains return, subscribers will read about the investments I make, just as they did in 2025. I believe access to that work can be worth considerably more than the price of a subscription.
What I’m offering is a running account of an investor plying his craft. Sometimes several new investments will come in a relatively short period. At other times, I’ll spend weeks or months researching and buying almost nothing. I intend to follow opportunities at my own pace and exercise my own judgment, regardless of whether that satisfies the demands of a subscription business.
I recognize that this approach may disappoint some subscribers, and perhaps even cost me a few. That’s a risk I’m willing to take. I’d rather lose a subscriber than compromise my investment standards to keep one.
I’m an investor first. The writing follows from that, not the other way around.
Link to HFIR Energy Income Portfolio on RunPlutus.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of the HFIR Energy Income Portfolio either through stock ownership, options, or other derivatives.