Non-TSP Investing in 2015

Investing 2015Many of the questions I receive are about my non-TSP investments, which is a little odd considering the point of this website. I do a lot of investing outside of the Thrift Savings Plan because (1) I can only put so much into the TSP and (2) there are investments which you can’t make within the TSP. Most of my outside investments are in great big boring index ETFs which track the business cycle strategy, but I also invest in other areas where I see opportunities which I believe will outperform the market.

In 2015 I believe the big investing opportunities will be in energy stocks and Europe. Note that I am not saying the returns from those investments will necessarily come in during 2015, but I do think the best opportunity to invest in sectors and individual companies in these areas will largely be in the first half of this year.

Energy/Oil

On energy, I wrote last month that I believe we are seeing a once in a generation opportunity to buy exceptional companies at bargain basement prices. Large cap energy stocks are down 20% on average and small caps are down nearly 50%. Oil prices are about the most cyclical commodities out there, so despite all the nonsense in the financial media, I fully expect to see oil prices stabilize in the short term, start to slowly move back up over the medium term, and return to their prior levels over the course of the next few years. Right now I am approaching this with a few different strategies, described below in order of risk and volatility:

Buying the best of the large integrated oil companies: These companies will ride out the current low prices without a problem and stand to benefit from the failing of weaker competitors from whom they can snap up assets or entire companies. And while I am waiting for what I believe to be an inevitable recovery, these stocks will provide a steady dividend income. My favorites in this category are Chevron (CVX) and Conoco-Philips (COP). (I don’t see dividends being cut, by the way, as these companies both have plenty of room to cut in other less obvious areas such as share buybacks). For someone who prefers investing in a sector to avoid exposure to a major event such as BP suffered a few years ago, the Vanguard Energy Fund (VDE) would probably be a good choice.

Buying master limited partnerships (MLP): These are companies which own the pipelines and terminals so they make their money through moving and storing oil. While opportunities to expand will be limited over the next few years, they get paid per gallon moved, not based on the price of oil, so their earning should not suffer much due to the drop in oil prices (although at some point the oil companies who they are moving products for will demand lower prices as their own margins are squeezed). I talked more about MLPs in the December update. My current favorite is Magellan Midstream Partners (MMP), although there are other big name quality companies such as Kinder-Morgan which are also on my short list.

Buying the best of the oil services companies: I haven’t made any purchases as of this writing, but expect to add Schlumberger (SLB) to my portfolio relatively soon. I prefer Schlumberger to Halliburton because Schlumberger is stronger internationally, while Halliburton is more focused on the domestic front, with a lot of exposure to natural gas fracking which is being eviscerated at current energy prices. For those who prefer to buy the sector, there is a Market Vectors Oil Services ETF (OIH).

Buying the best of the exploration and production (E&P) companies: Right now nobody wants to find and exploit a new oil field because it would cost more to do so than they would earn from the effort. But this too shall pass, and the companies which survive this shakeout will rebound strongly when oil prices start to trend back up. I don’t have any individual favorites, and if/when I buy something in this area it will likely be the iShares US Oil and Gas Exploration and Production ETF (IEO) or the SPDR S&P Oil and Gas E&P ETF (XOP).

Europe

The European Central Bank’s (ECB) initiation of Quantitative Easing (QE) should have some fairly predictable results if no other major catalysts intervene. QE in this case means the ECB plans to buy 60 billion Euros worth of bonds each month through the Fall of 2016 or until it is satisfied that Europe will hit their target rate of inflation (a certain level of inflation is necessary for economic growth). The ECB’s principal goal in the bond buying campaign is to cheapen the Euro which will make European exports cheaper for the rest of the world to buy, thereby stimulating growth in the European economy over time.

Everyone has heard the expression “Don’t fight the Fed,” which simply means that when the US Federal Reserve adopts monetary policies which generally result in the stock market going one way or the other, the overwhelming likelihood is that the market will move in that direction over the medium and long term. The ECB is Europe’s Fed. It isn’t as powerful as the Fed, and lacks some of the autonomy which the Fed enjoys in the US so it is subject to more political pressures than our central bank. But by and large my expectation is that this version of QE will be successful to some degree and result in a positive move in European stock markets.

I would not likely be an investor in Europe as a whole, however. Instead, I will be focused on cyclical stocks which tend to do well in a rally and which benefit from a weaker Euro. The sectors I believe will do best over the course of the ECB’s QE are banking, consumer goods and hotels. I have not yet started buying any European stocks, so my research in this area has been much shallower to date.

In banking, the only stock on my watch list right now is Intesa Sanpaolo (ISNPY), which is Italy’s second largest bank and one of the healthiest in Europe. In consumer goods, I might look at Burberry (BURBY), Philips NV (PHG), and Daimler AG (DDAIY). And in hotels my favorite would be Intercontinental Hotels Group PLC (IHG).

An interesting side effect of lower interest rates in Europe is that attempts by our Federal Reserve to gradually move US interest rates higher will likely be stymied in the near term, which is generally good for those of us invested in the stock market. With interest rates near zero in Europe, investors who are dead set on putting their money into bonds will flock to the US bond market. All of that cash sloshing around will drive up the price of bonds (so the F Fund might not start its long predicted decline in the near term) and drive down interest rates. Lower interest rates mean more money chasing returns in the equity (stock) markets, which tends to drive stock prices up.

The Crystal Ball

crystal ball - investing in 2015In January each year, financial bloggers and newsletter writers all throw out a few stocks they like for the coming year. Just for fun, last January I told you about two stocks I thought had a chance of doubling in 2014. Remember that anytime someone tells you they think a stock might double, they are saying that the market either can’t properly value the stock or there is some major inflection point which could move the stock price dramatically either up or down.

Last year’s picks were FaceBook (FB) and InSite Vision (INSV). FaceBook did about what I hoped it would do as revenues increased dramatically, with the share price up over 40% over the course of 2014 and up 63% since I bought it in late 2013. InSite Vision was considerably less spectacular, down 33% for the year (in fairness, InSite did double at one point during the year, unfortunately that only happened after its share price had been cut in half). Fortunately, I invested a lot more in FaceBook than I did in InSite. I still like FaceBook for 2015, although I don’t expect it to have another year like 2014. INSV is still a neat idea waiting for the rest of the world to realize what a neat idea it is, but they don’t have the money to market their products effectively so the key for them will be in their partnerships.

While I will detail the 30 odd individual stocks and funds which I currently hold (and about another 15 on my watch list) in a future post, just for fun here are two highly speculative stocks which I think have a shot at doubling in the next year (or two). I do not recommend that anyone buy these stocks, and if anyone is foolish enough to do so (like me), they should put only a tiny amount of money which they are completely willing and able to lose without any regrets.

Sberbank of Russia OJSC (SBRCY): Sberbank is Russia’s best run bank, relatively free from the corruption and incompetence otherwise prevalent in that sector. Prior to Russia’s Ukraine adventure, Sberbank was expanding into eastern and even western Europe. Sberbank is currently beaten down due to financial sector sanctions established by the US and Europe and the drubbing the Russian economy has taken with the oil crash. It is Russia’s strongest bank and should benefit from consolidation as the weaker banks falter. As sanctions are loosened and oil prices trend back up, Sberbank should do very well. Downsides abound, however, as Sberbank is 51% owned by the Russian government (with plans for that ownership level to drop, but for a controlling minority position to be maintained), as well as its status as an over the counter ADR, which gives shareholders very little recourse. Not a stock I would put money I couldn’t afford to lose completely into, but I believe best case it could be up 200% over the next few years unless Putin really loses his mind. Worst case, I think it will just sit where it is now. I do not yet own Sberbank.

Sequenom (SQNM):  Sequenom’s mission statement is a dense mess of jargon and buzzwords, but the company boils down to this: they have created the best noninvasive prenatal diagnostic tests out there and over the next few years the use of the tests will become standard during every pregnancy in the US and developed world. SQNM is on the cusp of becoming profitable as they license their intellectual property and the various insurance companies begin to add this testing to their reimbursable lists. The risk? Another company could develop something better or cheaper before SQNM really takes off. I own a little bit of Sequenom.

If you have any favorite individual stocks these days, please do share in the comments section below.

The Next Update

Up next will be a fresh look at the economic and business cycle indicators I rely on in making my Thrift Savings Plan allocations. If you aren’t already subscribed to the email list, you can do that here: Subscribe. If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military about once a day at: @TSPallocation

In the meantime, please do continue to share the site with your colleagues so we can continue to expand the community of feds and service members helping each other in a free, transparent, no-pressure environment. You can do that by linking to this site from your own webpage or blog; liking it on Facebook; sharing on Twitter and in other investing forums; or actively participating on our Message Board.

Thanks!

15 thoughts on “Non-TSP Investing in 2015”

  1. what are your thoughts on BX? You reccomended it in a post a few months back when it was around #33. It has been trading bt $36-$38 recently and touched the 52 week high. Too late to get in or is this thing poised for a move into the $40s?

    1. I do own some BX. I anticipate it will be a multi year holding at least. With all such individual stocks my goal is to beat the overall market and I think it will do that over the long term. But I have no idea what it will do short term.

  2. In light of your review on what is going to happen in Europe, with the Bond buy back program, do you support moving some of my allocation to the
    I FUND?

  3. For an LLP I like OKS, It was hit hard by oils decline and has a dividend of 7.15% with todays price. It has recovered from it’s 52 week low (36.67) but is still more than $10. off it’s 52 week high (59.67). Todays close was $45.40.

    1. Meh. CVX is currently at 108.50, so removing a 115 price target means that analyst doesn’t believe it will go up 5.5% over the next year? It might easily go up 5.5% by this time next week if oil prices move up a few dollars a barrel. No telling what it will do short term, but over the medium and long term I feel pretty good about it outperforming the market, and while I’m waiting the dividends will roll in.

  4. I really appreciate your TSP insight. I hope you find my information on Energy/Oil equally insightful. My best recommendation is to stay away for energy/oil for at least 14 months or so.

    – Wells in development and those drilled but not completed will be brought online increasing supply further.

    – Producers are cutting back drilling but rigs that are left are focused on “sweet spots” (highest producing) further maximizing supply (and their returns).

    – Recent leases signed by producers have HBP clauses (held by production), which require drilling and production in order to continue to hold onto the lease regardless of short term economics.

    – Some producers hedge prices on futures market mitigating economic loss.

    – Producer economics will be mitigated by lower drilling service costs, which are declining in response to lower drilling activity.

    Result? Oil production will continue causing excess supply and a further drop in price particularly since we are reaching storage capacity. (I think sub $20) For a really insightful discussion on the topic see a presentation at the Center for Strategic and International studies at https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0ahUKEwihrZ7fnO7MAhVHwj4KHbOVD1YQtwIIKDAC&url=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3DPNQs6gOM5rk&usg=AFQjCNFqMTQJ4QNbwoQDWi7e3reRRi81xg&sig2=Gk8kvCdOUg0D_366RhLaxw

    They have three five year market scenarios. $80 bbl returns by 2017, $70 bbl by 2020, and $50 bbl through 2020.

    I exited my oil/energy related holdings this week narrowly missing this most recent drop. Hope this helps you avoid entering this sector at a bad time. The bottom will come, but I don’t think we’re there yet.

    1. Thanks very much for sharing your thoughts. I would probably bet against sub $20, but otherwise don’t disagree with any of your thoughts. I expect I will keep slowly buying quality energy stocks over the next year if prices stay low because no matter how “different this time” it is, there hasn’t been much more predictable in the past than the energy cycle. I’m happy enough with the dividends while I wait for the capital gains over the next five to ten years.

      1. Fingers got the better of me. That 2 was supposed to be a 3. I believe sub $30 not sub $20. Sorry, mia culpa. Using the March 1986 glut as a model would take oil down to $35 to $36 this time. However, I think this time is worse, hence my sub $30 (vice $20) prediction.

        Your dividend call coupled with your dollar cost averaging plan sounds solid with a ten year horizon. Folks are saying the Saudis could probably factor a two year deficit but probably not a five year without some type of Arab spring repercussions.

        Interesting times for sure!

  5. Hi Paul my only investing is in the tsp right now other than putting a bit in a money market and buying stuff at yard and estate sales and selling it on eBay. But I do want to invest outside the tsp are you going to do another post for investing outside the tsp for 2016. Thanks for any advise.

    1. I am. I wrote most of it back in January and just haven’t had the time to get back to it and get it online. Maybe something to work on during today’s flight.

  6. Why do you use ETFs instead of mutual funds for investing outside of the tsp? Does it have to do with tax efficiency and if so could you explain? Thanks and I enjoy reading your posts every month.

Leave a Reply