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In focus this week: playing spin-offs to beat the market, natural gas in Africa and in pick-up trucks, finding bargains on the stock market and the SITFA.
Spin-offs
A Barron’s article this past week reported there are decades of evidence that support the idea that buying companies that are spun off is a sure way to beat the market.
According to the article, stockholders in the parent company sell off the new stock because they never intended to own the spin-off, but rather the parent company.
Wall Street doesn’t immediately cover the new company, so it falls off the radar for a while, which weakens the stock even more.
Both of these influences have historically made spin-offs a great deal.
But, despite all the evidence, this isn’t an area of the market that’s overrun by buyers. It is, in fact, largely ignored by the crowds. That’s a good sign!
Recent spin-offs like Trip Advisor, up 25% through February, and Post Cereal, up 15% in just a few weeks, are prime examples of how well this approach works and has been working for years.
But, the numbers indicate the best return, or highest rate of return, is during the first few months while the street is playing catch-up on the coverage and the new owners are selling off their stock.
An ETF that plays this segment has had just ok results because, according the authors of the article in Barron’s, they wait six months after the spin-off before buying onto the play. The numbers indicate they miss a big part of the price move by doing so.
Spin-offs, keep an eye on them, and early, too!
Natural Gas in Africa and Pickups
The Journal reported this week that Exxon and Statoil announced a huge new natural gas find in Tanzania. It’s called the Zafarani. This find of 5 trillion cubic feet of gas and another recent find by Italy’s Eni and the U.S.’s Anadarko in Mozambique are cementing East Africa as a major source of gas for the LNG market in Asia.
Exxon also just announced another gas find of 1.5 to 3 trillion cubic feet offshore in Romania.
That’s a lot of gas! We’ll soon have so much natural gas we’ll be paid to use it.
Combine all the gas we have here at home with the new finds in Europe and Africa, and any thinking person would have to wonder why we’re running our cars and trucks on gasoline. Natural gas, according to estimates, could run our cars for the equivalent cost of $1.50 a gallon, and here at home alone we have at least a 100-year supply. And, that’s growing almost daily with every new find.
Well, finally, finally, Ford, Chrysler and GM are beginning to offer vehicles that run on compressed natural gas.
It seems Honda has had a CNG Civic since 1998, and Chrysler will offer a bi-fuel CNG Ram truck in June (bi-fuel means it can run on CNG and gasoline as a back-up), and GM is offering a bi-fuel model truck in the third quarter. Ford has been offering CNG conversion kits for their vehicles for some time.
The GM and Chrysler models will run primarily on CNG and shift to gasoline if necessary for ranges of up to 650 miles.
Most of these trucks will be part of fleet operations, but the number of natural gas refueling stations, which is the big limiting factor for CNG cars, is growing and this could be the shift we’ve been waiting for to increase natural gas use and drive up the price.
I admit this is an early indication, but using natural gas for our transportation needs seems too obvious not to take off. To convert a vehicle from gas to CNG isn’t a big deal and is cost effective right now.
This could be the beginning of the end of gasoline as the primary transportation fuel in the U.S., at least for trucks, and it may be the catalyst we have been waiting for to push natural gas to the fore front.
Watch for the number of CNG vehicles manufactured and an increase in the number of refueling spots as big green lights. It will happen first in trucking.
This is the first really big shift in favor of higher NG use and higher prices in the future.
Bargains in What Looks Like a Pricey Market
The rosy economic news of late, just in time for the election, has finally pushed some investors back into the market, but on arrival they’re finding prices just a little high.
Robert Shiller, the Yale University economist, said in an interview this past week that the S&P 500 is at 15.8 times earnings. The long-term average is about 15.5, so we’re fully priced, at least according to historical standards.
Howard Silverblatt, Senior Index Analyst at S&P, says these full valuations may not hold since earnings growth has dropped from 16% last year to about 6% this year, and 6% growth in earnings may not be able to support these fully valued stock prices.
But despite high prices, the Journal insists financials are still cheap with about a 15% discount to the broad market. The Journal also likes techs. They appear to be fully priced except that their earnings are expected to grow at 10% this year not the 6% estimate quoted earlier. That gives them room to run a bit further.
Mitch Rubins of River Park Advisors, who was quoted in the same Journal article, dislikes financials that make their money by lending money, in other words, banks. He prefers the Blackstone Group. He likes its international exposure, the fact that it isn’t dependent on loans to make money and its 5% yield.
In technology, he likes eBay and Google over traditional equipment manufacturers. He especially likes their double-digit profit growth, the fact that they have more cash than debt and they’re priced in line with the market.
The Journal article also mentioned several high-yield bond funds and ETFs as plays, but as you all know by now, I think you should stick with individual high-yield bonds and avoid bond funds right now.
Individual bonds give you control over the price, leverage, which you should not have any of, and the average maturity of your bond holdings. Both the leveraged and bond funds with long average maturities will give folks a lot of heart burn in the next few years as rates move up.
In fact, I expect the average guy to take another bath, even bigger than the collapse, in bond funds and bond ETFs when rates finally move up. Leverage and maturities are the key here.
The focus is on financials not dependent on loans, profit growth, non-traditional tech stocks, avoid leveraged bond ETFs, and funds and long average maturities.
Shop wisely and keep an eye on the valuations.
And finally the SITFA, but before we get to it…
Last week at the CCR conference in Naples, Florida, a member accused me of making up these stories for the SITFA. He thought they were too funny to be true. I swear this is all true. I don’t think I could dream up this stuff. Most of them actually come from the Journal and Barron’s.
So, here we go!
This week it goes to the states that haven’t legalized medical marijuana. It seems those states are putting their citizens at greater risk than the states that have legalized it.
This is kind of a follow up to the Canny Bus story from last year. The guy who was delivering medical marijuana free in a VW bus. It’s in the archives. It’s really funny.
Anyway…
It seems the 13 states that legalized medical marijuana have seen significant reductions in the number of traffic accidents both with and without alcohol being involved.
There has been an 8.7% reduction in the number of auto accidents and a 12% reduction in accidents involving alcohol where marijuana has been legalized for medical use. That’s a big drop!
According to the authors of the story, the effects of pot on driving are not as well established as the affects of alcohol.
The study was completed by three economists at the Universities of Oregon, Montana and Colorado. They concluded that people who are stoned drive slower and avoid risky maneuvers. The authors described them as very mellow drivers and it appears they’re safer.
One other conclusion of the study was that the users were too busy eating Doritos to drive, except very slowly to their neighborhood food store, so that could contribute to the drop in accidents, as well.
Article by Investment U
