Collins St nailed gold and oil. So which commodity is next?

Three years ago, Collins St Asset Management was pounding the table on gold while much of the market remained focused elsewhere. The result was a call that proved highly profitable for its investors.

Earlier this year, the firm identified another deeply out-of-favour opportunity, allocating roughly 20% of its value portfolio to oil and gas when investor interest in the sector was near rock bottom. Those insights were shared with the Livewire audience in February, as seen below. 

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Since then, geopolitical tensions and a sharp rally in energy markets have delivered returns far faster than even Collins St expected.

That success has created an interesting question. If much of the anticipated upside has already arrived, is the oil trade now crowded, or is there still meaningful value left for patient investors? For Executive Director Michael Goldberg, the answer is unequivocal;

"Fundamentally speaking, we sit here today with a chronic underinvestment in oil that needs to be rectified. There is no quick way to do that, and there are no easy alternatives. The only solution is higher prices."

Importantly, that conviction comes despite the firm taking some profits and reducing exposure following the recent rally. While Collins St acknowledges that geopolitical events have accelerated returns and may create short-term volatility, it believes the structural forces underpinning the oil market remain firmly in place.

In the interview below, Goldberg outlines the framework that helped Collins St identify winning opportunities in uranium, gold and oil well before most of the market was paying attention, why the firm has been trimming positions without abandoning the oil thesis, the stocks it used to express the trade, and the surprising commodity opportunity that may be next.

Looking for what everyone else hates

Collins St's commodity investing framework is remarkably consistent.

Whether it was uranium, gold or oil, the team began by looking for sectors that had fallen out of favour with investors. The objective is not simply to buy something cheap, but to identify situations where sentiment has become disconnected from underlying fundamentals.

"We're trying to look under rocks that other people aren't looking under. We're trying to find bombed out sectors or thematics that aren't attracting much interest."

From there, the firm works through four key questions.

• Is demand stable or growing?
• Is supply constrained or falling?
• Are there easy alternatives available?
• Is the commodity trading below its cost of production?

"If we can find those four factors then it's historically, for us at least, been a pretty good predictor that we're going to do well out of investing in that theme."

Goldberg says investors also need a contrarian element to the thesis. If everybody already agrees on the opportunity, the market has likely done the pricing work already.

Why oil ticked every box

According to Goldberg, oil demand remained resilient despite widespread forecasts of peak oil demand. At the same time, investment in new supply was collapsing, funding for new projects was becoming increasingly difficult and viable substitutes remained limited.

"Certainly no one had an interest. It was a bombed-out sector, with ongoing growing demand, and supply massively coming off."

The firm's conviction was strengthened by what it viewed as a growing disconnect between market narratives and physical realities. While much of the investment community focused on the energy transition, Collins St believed hydrocarbons would remain critical to the global economy for decades.

The team also pointed to chronic underinvestment across the sector. Industry spending has fallen for years and remains below the level required simply to maintain existing production.

That backdrop led Collins St to make a significant allocation to oil and gas, with exposure eventually peaking at more than 20% of the value portfolio. Then the market moved much faster than expected.

"I think what we've seen in the last couple of months is probably bringing forward, at least from the equities perspective, expected returns for 18 months or two years."

While the timing surprised the team, Goldberg argues the broader investment case remains intact.

Taking profits without abandoning the thesis

One of the more interesting aspects of the discussion was Collins St's willingness to reduce exposure despite maintaining a bullish long-term view.

Oil and gas positions have been trimmed from roughly 22-23% of the portfolio to around 15%. The decision reflects portfolio management rather than a loss of conviction.

"We have reduced somewhat significantly our oil exposure, but not because we've lost faith in the long-term story", says Goldberg. 

The challenge, he adds, is separating structural drivers from short-term catalysts.

Recent geopolitical tensions have accelerated returns and may have temporarily pushed prices beyond where fundamentals alone would justify. Should tensions ease, some of those gains could unwind.

That possibility is particularly relevant given Collins St's belief that equity markets have not fundamentally changed their view of the sector.

"We've seen oil prices up 50 - 60%, and we've seen equities up 50 - 60%, which suggests to me that the fundamental way the market views hydrocarbons and oil and gas in particular hasn't fundamentally changed."

Longer term, however, the firm continues to see a supply-demand imbalance that can only be resolved through higher prices and increased investment. For now, Collins St remains constructive, but more selective.

How Collins St played the trade

The oil thesis was expressed through a combination of Australian producers, global energy companies and energy-services businesses.

Among the local names, Collins St generated strong returns from Karoon Energy (ASX: KAR), Santos (ASX: STO) and, to a lesser extent, Beach Energy (ASX: BPT). The firm also continues to hold Carnarvon Energy (ASX: CVN), whose value is tied in part to the Dorado project, one of Australia's largest undeveloped offshore oil discoveries.

Internationally, Collins St highlighted Devon Energy (NYSE: DVN) as a standout opportunity.

According to the team, Devon combines strong production assets, shareholder-friendly capital management, buybacks, dividends and growth projects, while still trading on what they view as attractive earnings multiples.

The firm has also profited from energy services businesses and merger and acquisition activity within the sector.

One example was Matrix Composites & Engineering (ASX: MCE), which recently received a takeover proposal at a substantial premium to its prevailing share price. Offshore driller Valaris (NYSE: VAL) was another position that benefited from corporate activity.

For investors, the lesson is that commodity themes often extend beyond the producers themselves. Service providers, equipment suppliers and infrastructure owners can provide additional ways to capture value from the same underlying trend.

The next opportunity

Having successfully identified opportunities in uranium, gold and oil, Collins St believes another commodity may now be exhibiting similar characteristics. The answer is not copper, uranium or lithium.

"The commodity that we're looking at, this might come as a bit of a shock, is almonds", says Golberg. 

At first glance, the comparison sounds unusual. Yet Goldberg argues the same framework applies.

Demand continues to grow globally at around 4-5% per annum. Supply, meanwhile, has been falling as growers remove orchards established during the previous boom cycle. California, the world's dominant producer, has also faced environmental and production challenges.

The firm's preferred exposure is Select Harvests (ASX: SHV), which benefits from lower production costs than many international competitors, proximity to Asian markets and growing processing capacity.

Goldberg also points to the company's reinstated dividend, ongoing buyback program and improving profitability.

Whether almonds ultimately deliver the same success as gold or oil remains to be seen. The broader lesson, however, is perhaps more important.

The biggest opportunities rarely emerge where investors are already looking. More often, they are found in the forgotten corners of the market, where sentiment is poor, supply is constrained, and patience remains in short supply.