We all want to believe the Trump administration will prove favorable for the economy and, by extension, investment markets.
However, not even Trump himself can say how things will work out. In truth, the exact opposite economic outcome may occur.
If you accept that it is impossible to predict what’s going to happen with the general economy over Trump’s first term, how can you organize your portfolio to be sure your assets survive and even prosper?
At this year's SALT New York conference, Cathie Wood, founder, and CEO of ARK Investment Management LLC, spoke about her view on Bitcoin, the outlook for Tesla and Ark's investment process. Q2 2021 hedge fund letters, conferences and more The investment manager explained that the team at ARK has a five-year investment horizon, with a Read More
As readers of any duration already know, I believe there is only one pretty much foolproof way to invest and sleep well at night. And that is to buy great companies at great prices.
Easy to say, but how can one find great companies selling below their intrinsic value? The answer involves multiple facets, many of which are explained in our free Dimes for Dollars Report.
While there are several key themes we are investing in sync with now, I will mention just one here. If we are right—and so far, we have been—investing in harmony with this trend should continue to be money in the bank.
An investment theme you can (probably) count on
And that key theme could be summed up as “Energy Prices Are Locked in a Range.” Despite blatant attempts by OPEC to sink the industry, and constant assaults by the enviro-loonies, US fracking may be down, but it is certainly not out.
In fact, it is getting more efficient with every passing day, with new technologies now allowing US oil producers to make money at oil prices as low as $35 per barrel.
Meanwhile, US energy giants like Exxon are also adjusting to the new normal of lower prices by slashing costs and improving efficiency.
Toss into the mix a near-certain détente between Trump and Putin, which should result in more Russian oil coming onto the market.
Russia is the world’s third-largest oil producer, so its fiscal budget depends heavily on oil and gas revenue, and it won’t be cutting production anytime soon.
As global energy prices are set at the margin, with new supplies always waiting in the wings at the right price—and with the right price trending toward $40 a barrel or less—the pricing power of Saudi sheiks is greatly diminished.
Unless the Middle East is turned into a parking lot, energy prices are likely to remain in a tight range around where they are today. For years.
So, which businesses benefit from low energy prices? There are a number, but one we like is refining. That’s because refineries make their money on the spread between the cost of their feedstock (oil) and the price they get for their refined products. Thus, as oil prices fall, they have greater latitude to expand their margins.
A real bargain compared to S&P 500
In the August edition of Compelling Investments Quantified, we recommended a refiner selling for a price-to-earnings ratio (P/E) of just 10.78 and a price-to-book ratio (P/B) of 2.36. As a kicker, it paid a dividend yield of 2.60%.
? By comparison, the average S&P 500 stock trades for a P/E of over 24, and a P/B of 2.87 while paying a dividend of 2.08%.
So, a good value. In just over a few months, we are already up almost 15% on the position, but as the stock has a long way to go before it reaches its fair market value, we expect to hold it for some time to come.
What if the market crashes before we take our profits?
No big deal, as the company has a very healthy business and a ton of cash. People are not going to stop using refined petroleum products. After the dust settles, the company will almost certainly bounce back quickly. Remember, it’s not a loss unless you sell a stock while it’s down.
I sincerely don’t know a better way to invest and would strongly suggest you train yourself to laser focus on value.
Fortunately, building a winning portfolio isn’t particularly complicated. Mostly, it requires deciding on the exact criteria a stock must meet before you’ll buy it, then having the patience to wait until you find the stocks that meet those criteria. There’s a lot more on the topic in our free Dimes for Dollars Report.
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By David Galland, Gallet / Galland