Many 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.
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).
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
In 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
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