Time to Buy Energy?

IMG_0123There are two fundamental strategies to stock selection – growth and value.  With growth you try to find the stocks in companies that are expanding and will continue to do so for many years.  You profit when the company grows and their share price increases along with the growth.  Eventually they’ll also pay a dividend that will increase in value each year, providing income maybe ten to twenty years down the road.

The second type of investing, value investing, involves picking stocks that are beaten down in value, and therefore are cheap compared to where they should be in price.  Generally the best thing to do is to find industries that are out-of-favor and select stocks within that industry, rather than buying individual stocks that are having issues.  If a whole industry is declining, good and bad stocks will all decline in price.  When the industry recovers, so will most of the stocks within that industry.  In fact, the companies that emerge will do better than they were doing during the last boom time since the weaker companies will have vanished, leaving market share for the survivors to grab up.

If an individual stock is falling because of issues at the company, however, there may be systematic issues with the company.  Many of these companies will take years to recover, and may disappear entirely.  One example in my portfolio where this happened was with Pacific Sunwear, which I had bought at $20 per share, then again at $2 per share once the price had dropped, thinking that they were cheap enough to be worth taking the risk  and waiting for a recovery.  In that case they over-expanded and the taste for their products turned.  Since that point the whole company has filed for bankruptcy.  The company had systematic issues that didn’t disappear with a turn in the economy.

Right now an interesting place to be from a value investing standpoint is energy.  I held a few oil and gas companies just when the energy market peaked about a year ago, leading to some big losses.  I mistakenly decided that I wanted a hedge against inflation and energy seem like a good inflation hedge, so I bought in, right near the top.  The price of oil then dropped through the floor, taking many of my investments down 80% or more.

I sold many of the companies I had purchased, such as Oasis Petroleum and Ensco PLC, since I didn’t see them coming back for a long time.   Others, however, like Greenbriar and Cameco, still seemed like good places to be as a long-term investment.   Greenbriar makes rail cars and was doing well during the oil boom because of all the oil that is shipped by rail.  They also have business beyond oil, however, so they should do well in any booming economy where a lot of things are being shipped.  I therefore bought more shares after the fall and plan to sit on them for several years, waiting for the recovery.

Cameco is the world’s largest uranium producer.  They were hurt both by low oil prices and by the Japanese nuclear accident.  Nuclear power, however, is the only currently viable energy source that doesn’t produce carbon dioxide, and with many countries imposing carbon taxes and other measures to reduce CO2 production, nuclear may become much more popular.  I therefore bought more shares of Cameco after the fall.

These are not short-term position.   It takes time for industries to recover.  Over long periods of time, however, mixing in a few value positions with growth positions can pay off well.  We’ll see what happens for me with these two positions.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

My Quandry on BJ’s Restaurants

Regular readers will know that I’ve been buying up BJ’s Restaurants for sometime now.  I first bought at $40 or so, saw it climb to $60+, decided it was overpriced and sold off, making a nice profit.  I started buying again when it sank into the 30’s, and then made another, smaller profit this spring by writing covered calls on the position, which eventually resulted in the shares being called away.  To read that adventure, the initial post in the series can be found here.

I bought back in, little-by-little, on the way down from there and am now sitting on about a 10% loss.  I tried to buy a few more shares last week, only to see the stock rally away from my limit order of around $27.

BJ’s has a chain of casual dining pizza restaurants with microbrew beer.  I really like the stock for many reasons.  The company is very profitable.  They have no debt and a lot of money from operations, meaning that they can use cash from operations to grow and make investments rather than racking up large loans.  This says to me that they know how to run a business.  They also have plenty of room to expand, currently only having restaurants in less than 20 states.

This issue, however, is the ugly cloud called Obamacare that is hanging over the whole economy.  The healthcare law, formally known as the Affordable Care Act (ACA), was supposed to be in full force starting this January.  This would mean that employers with more than 50 fulltime employees would need to provide healthcare that meets the standards of the ACA (meaning the cost of the insurance would be higher) to their employees. All insurance plans offered to individuals would also need to meet these standards, meaning that a lot of the plans on the individual market would be cancelled, forcing individuals to go without insurance or pay $200-$500 a month more (or even more than that) for plans with higher limits and more services.  Even small businesses that had fewer than 50 fulltime employees would need to provide insurance that meets that new standards if they chose to continue to provide insurance.

The requirement for large employer plans to meet the new standards was delayed a year (probably illegally since the law was never changed by Congress, so this might change suddenly if anyone challenges the delay in court).  The requirement for individual plans remains in many states, however, as does the requirement that small employers offer plans that meet the higher standards, meaning they will need to pay a lot more per employee or, more likely, quit offering coverage.  This all means that 1) people are going to be paying a lot more of their income towards healthcare (or to pay the 2% of their income-tax if they go without insurance), particularly young, healthy individuals who spend little on healthcare now, 2) a lot of people are going to be placed on part-time status or laid off entirely since the cost to pay for their salary and healthcare cost will be more than they produce by working for the employer, and 3) salary growth will be slowed or salaries will even be cut, if the worker’s share of the health insurance payment grows, as employers deal with higher health insurance costs.

None of this looks good for the mid-priced casual dining segment who get a lot of their income from the disposable income of young people.  If suddenly all of the people in their 20’s and 30’s are spending 10% of their income to pay for the healthcare of those in their 60’s – 80’s, they might not have much money left over to go out to eat.  Even if they decide to go without insurance and pay the 2% tax, that owuld be $2000 per year out of the pockets of someone making $100,000, which might make those individuals on a mid-level income  LA decide to eat in more.  Restaurants like McDonald’s might do well as people scale back on their spending, and places like Ruth’s Crisp Steakhouse will probably do just fine since rich people and politicians (whose dining bill is picked up by lobbyists) will still go out for a ridiculously overpriced meals, but places like BJ’s might see a substantial drop in business.

I’ll probably therefore hold where I am and not build on my position in BJ’s.  I still like the business, but the effects of the ACA on the segment might be severe.  Hopefully as the estimated 80 million people lose their insurance next year when the large employer mandate kicks in, the outcry will be large enough to overturn the law.  All of this leads to uncertainty, however, which is what the stock market hates.  Expect a bumpy road ahead, even if things continue to go up for a while.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Now is Not the Time to Buy Bonds, Maybe

The conventional wisdom says that you should own your age in bonds.  If you are 20, you should have 20% of your investments in bonds.  If you’re sixty, it should be 60%.

The idea is that as people get older they need to get more conservative with their money, gradually shifting from uncertain growth investments to more certain income investments.  An ideal situation when you’re living on your savings is to have your bonds and dividend paying stocks paying enough interest to cover your expenses so you don’t need to sell stocks to raise cash.  Money just magically appears in your accounts as you need it.

The trouble is that we are not living in normal times.  To try to spur the economy, the Federal Reserve lowered interest rates essentially to zero.  When that didn’t work since no one had good enough credit to borrow money and businesses didn’t see any reason to expand with no one buying anything the Federal Reserve started buying buckets full of long-term bonds to bring down long-term rates.

This caused home mortgages to go down to unheard of levels.  No one was interested in buying a house, however, since so many people were upside-down in their mortgages.  People who could, however, refinanced their existing mortgages, reducing their payments and freeing up cash.  This has started to help the economy somewhat, but the recovery still isn’t much better than the recession.  Part of the reason is that unemployment benefits are so good that many people choose not to go back to work, meaning there are a lot of people not producing anything or moving up and increasing their income.

The good news for borrowers is that the economy has been so bad that interest rates have stayed low.  This has caused stock prices to go to new highs.  Bond prices also increased initially as rates were lowered, but have stayed in a trading range ever since.

Normally one would want to have a  substantial amount of savings in bonds later in life.  The trouble is currently that when rates do go up, either because the Federal Reserve raises rates to temper the economy or because inflation picks up because of all the easy money out there, bond prices will fall.  We could easily see declines of 10-20%, which would wipe out years’ worth of interest for bonds paying 3-5%.  Dividend paying stocks would be hit too unless the economy does start to recover and the underlying businesses start posting good profits.

The trouble is, sitting on the sideline waiting for this bond collapse that will occur eventually may leave an investor in cash waiting for years.  (These kind of things are easy to predict but very difficult to time.)  This could mean sitting in money market funds earning 0% when you could have been earning 3-5% for the next three years.  The internet bubble was similar in that it was obvious stocks were ripe for a fall back in 1997-1998, but the party continued on for a couple of years after that.

So, what to do?  It probably is best to have some bond exposure.  Sure, you’ll be looking at a reduction of 10-25% in price when interest rates rise, but if you hold long enough you’ll regain much of that loss.  Buying shorter term bonds would also be good, as would picking bonds which are below their redemption price (typically 100) per bond).

Spreading out into income investments would also help.  Buying dividend paying stocks would allow income both from dividends and price appreciation.  Stocks are also a good inflation hedge – if held long enough – since the price of the property of the company will increase with inflation and they will be able to pass along price hikes to their customers normally.

Another option is to get into real estate, either by buying rental properties or buying REITs.  These are also a good inflation hedge since the value of the real estate will increase with inflation.  There is some correlation with interest rates since investors will want a better return for their money when interest rates climb and higher rates make it harder for people to afford a loan, but in general bonds and real estate don’t move in lock-step, meaning you real estate portfolio may be up when bonds are down or vice-versa.

A final good source of income are Master Limited Partnerships (MLPs).  These typically own things like oil and gas pipelines and generate lots of cash.  Energy prices will also climb with inflation, making them a good inflation hedge.  The downside si that the tax treatment can be very confusing, even in an IRA.  It is well worth an hour with a CPA before buying into these to make sure you won’t be filing a dozen state income tax returns.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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