Situation: Commodity producers have a dismal record. Spot prices fall whenever mining (or drilling or harvesting) becomes more efficient. To make matters worse, supply-chain management and investment has become increasingly global and professionalized. Nonetheless, copper sales remain the best barometer of fixed-asset investment, particularly the ongoing proliferation of industrial plants and equipment in China. Silver has a growing role, thanks to the buildout of solar power. And gold remains a check on the propensity of government leaders everywhere to finance their dreams with debt, as opposed to revenue from taxes.
Mission: Use our Standard Spreadsheet to highlight the largest companies producing gold, silver, and copper.
Execution: see Table.
Administration: Gold and silver prices remain stuck where they were 35 years ago but are characterized by high volatility. Commodity prices (in the aggregate) trace supercycles that last approximately 20 years. The most recent came from a 1999 low and fell back to that level in 2016; since then it has ever so slowly risen from that low.
Bottom Line: The basic rule for commodity producers is that 3 years out of 30 will be good years, and you’ll make a lot of money. But over any 20-30 year period, you’ll lose money (measured by inflation-adjusted dollars). Our Table for this week confirms these points but does show that copper (SCCO) is worth an investor’s attention. But beware! That company’s share price is falling because of a falloff in trade with China and could fall further if a trade war takes hold.
Risk Rating: 10 (where 10-Yr US Treasury Notes = 1, S&P 500 = 5, and gold bullion = 10).
Full Disclosure: I do not have positions in any commodity producers aside from Exxon Mobil (XOM), but do dollar-average into the main provider of mining equipment: Caterpillar (CAT).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label coal. Show all posts
Showing posts with label coal. Show all posts
Sunday, September 9
Sunday, July 29
Week 369 - High Quality Producers & Transporters of Industrial Commodities in the 2017 Barron’s 500
Situation: Here in the U.S., debt/capita is growing at an alarming rate and is now greater than $60,000. U.S. Government debt is almost $20 Trillion and has been growing at a rate of 5.5%/yr (i.e., twice as fast as inflation) since 1990. By 2020, the Federal budget deficit will start to exceed $1 Trillion/Yr and the dollar’s status as the world’s reserve currency will be threatened. The gold reserves that stand behind the U.S. dollar (currently worth ~$185 Billion) would have to be increased on a regular basis, as would foreign currency reserves (currently worth ~$125 Billion)
The US economy is no longer capable of growing fast enough to balance the budget for even a single year, without introducing draconian measures. Nonetheless, it is worth noting that those can be effective given that Greece appears to have emerged from that process successfully. But the U.S. could not go through that process and still remain the “top dog” militarily. So, the trade-weighted value of the U.S. dollar will fall at some point, and we will no longer be able to afford imported goods and services. Before that happens, U.S. citizens will need to gradually move their retirement savings into commodity-related investments, as well as bonds and stocks issued in reserve currencies other than the U.S. dollar.
Mission: Use our Standard Spreadsheet to highlight large U.S. and Canadian companies that produce, refine and transport raw commodities, i.e., materials that are extracted from the ground. Select such companies from the 2017 Barron’s 500 list, but exclude any that issue bonds with an S&P rating lower than A- or stocks with an S&P rating lower than B+/M.
Execution: see Table.
Administration: The S&P Commodity Index has the following components and weightings:
Natural Gas (17.66%)
Unleaded Gas (12.16%)
Heating Oil (12.13%)
Crude Oil (11.41%)
Wheat (5.15%)
Live Cattle (4.87%)
Corn (4.48%)
Coffee (3.88%)
Soybeans (3.84%)
Sugar (3.80%)
Silver (3.67%)
Copper (3.39%)
Cotton (3.22%)
Soybean Oil (2.98%)
Cocoa (2.79%)
Soybean Meal (2.57%)
Lean Hogs (2.04%)
53.36% of the index represents petroleum products, 32.71% represents row crops, 7.06% represents industrial metals, and 6.91% represents live animals. Ground has to be mined, drilled, or planted & harvested with the help of heavy equipment to yield raw commodities. Those have to be transported by barge, rail, truck, or pipeline before being processed for market.
We find 8 companies that warrant inclusion in this week’s Table. Seven are obviously appropriate, but the presence of Berkshire Hathaway (BRK-B) needs some explanation (unless you already know it owns the Burlington Northern & Santa Fe railroad). Berkshire Hathaway is the largest shareholder of Phillips 66 (PSX), which has 13 oil refineries and supplies diesel for the largest marketing outlet of that fuel: Pilot Flying J Centers LLC. Berkshire Hathaway purchased 38.6% of that company’s stock on October 3, 2017, and plans to increase its stake in 2023 to 80%.
Bottom Line: Commodity futures haven’t been a good investment, given that their aggregate value is back to where it was 25 years ago, given that the most recent 20-year supercycle recently finished and another is just starting. Nonetheless, the companies that produce, process, and transport those commodities did well over those 25 years (see Column AB in Table). The problem is the volatility of their stocks (see Column M in the Table), and the extent to which their stocks get whacked when commodities become oversupplied relative to demand (see Column D in the Table). If you choose to own shares in these companies (aside from CNI, BRK-B and perhaps UNP), you’d be flat-out gambling.
Risk Rating: 7-9 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, ADM, CAT and XOM, and also own shares of CNI and BRK-B.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
The US economy is no longer capable of growing fast enough to balance the budget for even a single year, without introducing draconian measures. Nonetheless, it is worth noting that those can be effective given that Greece appears to have emerged from that process successfully. But the U.S. could not go through that process and still remain the “top dog” militarily. So, the trade-weighted value of the U.S. dollar will fall at some point, and we will no longer be able to afford imported goods and services. Before that happens, U.S. citizens will need to gradually move their retirement savings into commodity-related investments, as well as bonds and stocks issued in reserve currencies other than the U.S. dollar.
Mission: Use our Standard Spreadsheet to highlight large U.S. and Canadian companies that produce, refine and transport raw commodities, i.e., materials that are extracted from the ground. Select such companies from the 2017 Barron’s 500 list, but exclude any that issue bonds with an S&P rating lower than A- or stocks with an S&P rating lower than B+/M.
Execution: see Table.
Administration: The S&P Commodity Index has the following components and weightings:
Natural Gas (17.66%)
Unleaded Gas (12.16%)
Heating Oil (12.13%)
Crude Oil (11.41%)
Wheat (5.15%)
Live Cattle (4.87%)
Corn (4.48%)
Coffee (3.88%)
Soybeans (3.84%)
Sugar (3.80%)
Silver (3.67%)
Copper (3.39%)
Cotton (3.22%)
Soybean Oil (2.98%)
Cocoa (2.79%)
Soybean Meal (2.57%)
Lean Hogs (2.04%)
53.36% of the index represents petroleum products, 32.71% represents row crops, 7.06% represents industrial metals, and 6.91% represents live animals. Ground has to be mined, drilled, or planted & harvested with the help of heavy equipment to yield raw commodities. Those have to be transported by barge, rail, truck, or pipeline before being processed for market.
We find 8 companies that warrant inclusion in this week’s Table. Seven are obviously appropriate, but the presence of Berkshire Hathaway (BRK-B) needs some explanation (unless you already know it owns the Burlington Northern & Santa Fe railroad). Berkshire Hathaway is the largest shareholder of Phillips 66 (PSX), which has 13 oil refineries and supplies diesel for the largest marketing outlet of that fuel: Pilot Flying J Centers LLC. Berkshire Hathaway purchased 38.6% of that company’s stock on October 3, 2017, and plans to increase its stake in 2023 to 80%.
Bottom Line: Commodity futures haven’t been a good investment, given that their aggregate value is back to where it was 25 years ago, given that the most recent 20-year supercycle recently finished and another is just starting. Nonetheless, the companies that produce, process, and transport those commodities did well over those 25 years (see Column AB in Table). The problem is the volatility of their stocks (see Column M in the Table), and the extent to which their stocks get whacked when commodities become oversupplied relative to demand (see Column D in the Table). If you choose to own shares in these companies (aside from CNI, BRK-B and perhaps UNP), you’d be flat-out gambling.
Risk Rating: 7-9 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, ADM, CAT and XOM, and also own shares of CNI and BRK-B.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 1
Week 187 - Barron’s 500 List: Utilities With Good Credit
Situation: Utility stocks work a lot like bonds, since most utilities are ~60% capitalized with bonds backed by a state government. Being monopolies, both consumers and investors are protected by state and federal regulation. The Dow Jones Utility Average (DJUA) consists of 15 stocks that have been selected by a committee chaired by the managing editor of The Wall Street Journal. Since 1928, the DJUA has served as a technical indicator for stock-market health. This is due to the fact that stocks (particularly utilities) perform best in a low interest-rate environment. In the 72 yrs since the DJUA bottomed in 1942 (just before the Battle of Midway), it has risen at a rate of 5.7%/yr (without reinvestment of dividends) vs. 7.9%/yr for the S&P 500 Index without reinvestment of dividends, compared to 5.6%/yr for 10-yr Treasury Notes with reinvestment of interest payments.
Since January of '04, an exchange-traded fund that tracks the DJUA (IDU in the Table) has been available. With dividends reinvested, it has grown 2%/yr faster over the past 11 yrs than the lowest-cost S&P 500 Index fund with dividends reinvested (VFINX in the Table). And, it accomplished this feat with lower risk (see Column D and Column I in the Table). However, part of that performance is unsustainable because the Federal Reserve has kept overnight interest rates (for interbank loans) below 0.2% since November of '08. That policy is projected to end in 6 months and, once it does, utility stocks will gradually return to normal valuations relative to operating earnings. But utility stocks will always be somewhat like bonds in that they’ll represent “portfolio insurance” against stock market crashes.
For this week’s Table, we’ve examined all of the utility stocks in Barron’s 500 List of the largest companies by revenue that are listed on the New York or Toronto stock exchanges. The Barron’s 500 List is helpful because companies are ranked both by their combined scores on sales growth and cash-flow based Return On Invested Capital (ROIC). For the Table, we have excluded any companies with an S&P bond rating less than BBB+ or an S&P stock rating of less than B+/M, leaving us with 9 stocks. Six are dividend achievers (Col P in the Table) and 5 are in the DJUA (Col T in the Table). Four are on both lists (NEE, ED, SO, D). A good way to get started investing in utilities is to pick two of those 4 stocks, then use dollar-cost averaging to build a “utility position” that eventually amounts to 4% of your retirement portfolio. There is probably no better investment to have in a low interest-rate environment. In a market crash, they’ll serve you almost as well as a corporate bond fund like the Vanguard Intermediate-term Corporate Bond Index Fund (VFICX at Line 15 in the Table). And a crash can’t be that far off, given the inflation in financial assets since '08 when the Federal Reserve began its policy of Financial Repression. For further explanation of Financial Repression, see Week 76 and Week 79.
Caveat Emptor: Utility stocks are presently over-priced. In the Table, this is seen most clearly for the utilities involved in natural gas storage and distribution (SRE and D): see the metrics for P/E (Col J) and EV/EBITDA (Col K). When running the Buffett Buy Analysis (see Week 30) in Cols U through Y, we see that those same companies have lost much of their future value to investors (see Col Y) because of overvaluation (see Col J and Col K).
The utility industry is evolving. It has been my good fortune to serve on the Board of Directors of a private power company for the past 15 yrs that provides heat, electricity, and air conditioning to an urban institution. The changes have been remarkable, as we’ve gone from depending on a coal-fired power-plant that only employed natural gas for “peaking power” to a natural gas-fired cogeneration plant, supplemented by solar, wind, and hydroelectric power. This is the future, happening now.
Bottom Line: High-quality utility stocks are safe and effective investments to include in your retirement portfolio. As a group, the 9 listed in our Table have returned ~12%/yr since '03 while losing less than 20% during the 18-month Lehman Panic. The index fund that reflects the Dow Jones Utility Average (IDU) did almost as well, gaining ~10%/yr while losing 35% during the Lehman Panic. This record beats the lowest-cost S&P 500 Index fund (VFINX), which only gained ~8%/yr while losing over 46% during the Lehman Panic. The rewards from owning utility stocks outweigh the risks, even in times of financial crisis. The question is: How much longer will the current low interest-rate environment (that has been so beneficial to debt-laden utility companies) persist? I would say we’re closer to the end than the beginning 6 yrs ago. Once interest rates start rising, you’ll see prices hold up better in utilities that have adopted a low “carbon footprint.” Likely beneficiaries include Dominion Resources (D) because of its dominant position major in natural gas storage & distribution, and NextEra Energy (NEE) because of its dominant position in wind and solar power.
Risk Rating: 4
Full Disclosure: I dollar-average into NEE and also own shares of D.
NOTE: metrics in the Table are current as of the Sunday of publication; red highlights denote underperformance vs. our key benchmark (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Since January of '04, an exchange-traded fund that tracks the DJUA (IDU in the Table) has been available. With dividends reinvested, it has grown 2%/yr faster over the past 11 yrs than the lowest-cost S&P 500 Index fund with dividends reinvested (VFINX in the Table). And, it accomplished this feat with lower risk (see Column D and Column I in the Table). However, part of that performance is unsustainable because the Federal Reserve has kept overnight interest rates (for interbank loans) below 0.2% since November of '08. That policy is projected to end in 6 months and, once it does, utility stocks will gradually return to normal valuations relative to operating earnings. But utility stocks will always be somewhat like bonds in that they’ll represent “portfolio insurance” against stock market crashes.
For this week’s Table, we’ve examined all of the utility stocks in Barron’s 500 List of the largest companies by revenue that are listed on the New York or Toronto stock exchanges. The Barron’s 500 List is helpful because companies are ranked both by their combined scores on sales growth and cash-flow based Return On Invested Capital (ROIC). For the Table, we have excluded any companies with an S&P bond rating less than BBB+ or an S&P stock rating of less than B+/M, leaving us with 9 stocks. Six are dividend achievers (Col P in the Table) and 5 are in the DJUA (Col T in the Table). Four are on both lists (NEE, ED, SO, D). A good way to get started investing in utilities is to pick two of those 4 stocks, then use dollar-cost averaging to build a “utility position” that eventually amounts to 4% of your retirement portfolio. There is probably no better investment to have in a low interest-rate environment. In a market crash, they’ll serve you almost as well as a corporate bond fund like the Vanguard Intermediate-term Corporate Bond Index Fund (VFICX at Line 15 in the Table). And a crash can’t be that far off, given the inflation in financial assets since '08 when the Federal Reserve began its policy of Financial Repression. For further explanation of Financial Repression, see Week 76 and Week 79.
Caveat Emptor: Utility stocks are presently over-priced. In the Table, this is seen most clearly for the utilities involved in natural gas storage and distribution (SRE and D): see the metrics for P/E (Col J) and EV/EBITDA (Col K). When running the Buffett Buy Analysis (see Week 30) in Cols U through Y, we see that those same companies have lost much of their future value to investors (see Col Y) because of overvaluation (see Col J and Col K).
The utility industry is evolving. It has been my good fortune to serve on the Board of Directors of a private power company for the past 15 yrs that provides heat, electricity, and air conditioning to an urban institution. The changes have been remarkable, as we’ve gone from depending on a coal-fired power-plant that only employed natural gas for “peaking power” to a natural gas-fired cogeneration plant, supplemented by solar, wind, and hydroelectric power. This is the future, happening now.
Bottom Line: High-quality utility stocks are safe and effective investments to include in your retirement portfolio. As a group, the 9 listed in our Table have returned ~12%/yr since '03 while losing less than 20% during the 18-month Lehman Panic. The index fund that reflects the Dow Jones Utility Average (IDU) did almost as well, gaining ~10%/yr while losing 35% during the Lehman Panic. This record beats the lowest-cost S&P 500 Index fund (VFINX), which only gained ~8%/yr while losing over 46% during the Lehman Panic. The rewards from owning utility stocks outweigh the risks, even in times of financial crisis. The question is: How much longer will the current low interest-rate environment (that has been so beneficial to debt-laden utility companies) persist? I would say we’re closer to the end than the beginning 6 yrs ago. Once interest rates start rising, you’ll see prices hold up better in utilities that have adopted a low “carbon footprint.” Likely beneficiaries include Dominion Resources (D) because of its dominant position major in natural gas storage & distribution, and NextEra Energy (NEE) because of its dominant position in wind and solar power.
Risk Rating: 4
Full Disclosure: I dollar-average into NEE and also own shares of D.
NOTE: metrics in the Table are current as of the Sunday of publication; red highlights denote underperformance vs. our key benchmark (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 4
Week 35 - Electric utilities, railroads, and gas pipelines
Situation: Electric power-plants are the most essential node in the infrastructure of any nation’s economy. In most countries, coal and natural gas are the main “feed-stocks” for power-plants. Notable exceptions are France and Japan where nuclear power also plays a major role. In any given week, raw goods (coal, lumber, grain, etc.) account for most cargo being moved by railroad cars, with coal dominating. This results in the fortunes of many railroads being tied to coal; some (e.g. NSC) own extensive coal-producing properties. It’s not uncommon for coal-fired power-plants to also hook into natural gas pipelines to fuel gas burners that can be turned on quickly to provide “peaking power.” The use of natural gas to provide baseline electricity is growing, even though it costs more than coal. Some of the reasons for this migration are that natural gas requires a smaller & cleaner plant with fewer workers, emits 55% less carbon dioxide, and has no need for smokestack “scrubbers” that remove toxic pollutants. Natural gas has also become remarkably cheaper through improved technology--horizontal drilling combined with hydrofracking.
Taken together, these three industries (electric utilities, railroads for hauling coal, and pipelines that carry natural gas) form an economic triad that is characterized by interdependency and high fixed costs. Profitable operation is difficult to achieve because electricity prices are heavily regulated, and projects to build or modernize power-plants depend on the availability of cheap long-term loans. Over the years, governmental bodies have come forward to build a regime of subsidies, tax breaks, and debt guarantees that allow this triad to function. For investors, this should be good news because there is little likelihood of bankruptcy or even back-to-back losing years. This frees up cash, since the investor no longer has need of an off-setting position in risk-free bonds. However, investors do need to take more trouble to understand the economics. The payoff is a low risk:reward ratio.
Unfortunately for investors seeking company information, the financial press finds stories about these stocks to be either too boring or too technical to cover. The good news is that our ITR blog readers have already read a number of interesting things about one railroad and one utility, Norfolk Southern (NSC) and NextEra Energy (NEE), that shows each to be a potent and reliable money maker. Prior blogs (Week 10, Week 20 and Week 26) introduced issues related to production, transportation and marketing of commodities.
In the process of combing through data on utilities, railroads and gas pipeline companies, we’ve found two more companies that are on the verge of meeting current ITR requirements for inclusion on the Master List (Week 27): Wisconsin Energy (WEC) would be qualified but for having 9 yrs of dividend increases instead of the required 10. Plains All American (PAA), a gas pipeline company, has a BBB credit rating but the ITR requirement is a BBB+ rating. In addition, we find 6 other companies that have a “durable competitive advantage” on Buffett’s Buy Analysis (Week 30). This distinction makes these 6 worth tracking, in part because their growth over the next 10 yrs can be estimated with some degree of precision. The group includes 3 regulated electric utilities, which have projected growth rates of 1.6-5.7%/yr: Sempra Energy (SRE), Southern Company (SO), and NSTAR (NST). The other 3 companies are railroads, which have projected growth rates of 8.5-13.4%/yr: Union Pacific (UNP), CSX Railroad (CSX), and Canadian National (CNI).
With so much interdependence found between railroads, regulated electric utilities, and gas pipeline companies, one is reminded of a 3-legged stool. What would happen if the stool lost a leg? An article in the New York Times on 2/19/12 by Elisabeth Rosenthal compared projections for energy use by type in the US through 2035. Coal and natural gas use are approximately the same in terms of energy (BTUs consumed) at present but going forward natural gas use will grow 1.2%/yr vs. only 0.3%/yr for coal. By 2035, half again as much natural gas will be produced than coal. All other sources of energy (wind & solar power, oil for fuels, and nuclear power) together will not quite equal natural gas production. But 25-30% of energy use will still be coming from coal, even though wind & solar will have grown to provide 15-20% of power requirements. For power-plants, the takeaway is that coal use won’t change much but gas use will grow 50% by 2035.
Bottom Line: We will begin to separately track each of these 3 stable industries and file periodic reports for our readers. For now, the bottom line is that this economic triad of railroads, electric utilities and gas pipeline companies is going to grow in importance and the separate industries will become even more intertwined.
Taken together, these three industries (electric utilities, railroads for hauling coal, and pipelines that carry natural gas) form an economic triad that is characterized by interdependency and high fixed costs. Profitable operation is difficult to achieve because electricity prices are heavily regulated, and projects to build or modernize power-plants depend on the availability of cheap long-term loans. Over the years, governmental bodies have come forward to build a regime of subsidies, tax breaks, and debt guarantees that allow this triad to function. For investors, this should be good news because there is little likelihood of bankruptcy or even back-to-back losing years. This frees up cash, since the investor no longer has need of an off-setting position in risk-free bonds. However, investors do need to take more trouble to understand the economics. The payoff is a low risk:reward ratio.
Unfortunately for investors seeking company information, the financial press finds stories about these stocks to be either too boring or too technical to cover. The good news is that our ITR blog readers have already read a number of interesting things about one railroad and one utility, Norfolk Southern (NSC) and NextEra Energy (NEE), that shows each to be a potent and reliable money maker. Prior blogs (Week 10, Week 20 and Week 26) introduced issues related to production, transportation and marketing of commodities.
In the process of combing through data on utilities, railroads and gas pipeline companies, we’ve found two more companies that are on the verge of meeting current ITR requirements for inclusion on the Master List (Week 27): Wisconsin Energy (WEC) would be qualified but for having 9 yrs of dividend increases instead of the required 10. Plains All American (PAA), a gas pipeline company, has a BBB credit rating but the ITR requirement is a BBB+ rating. In addition, we find 6 other companies that have a “durable competitive advantage” on Buffett’s Buy Analysis (Week 30). This distinction makes these 6 worth tracking, in part because their growth over the next 10 yrs can be estimated with some degree of precision. The group includes 3 regulated electric utilities, which have projected growth rates of 1.6-5.7%/yr: Sempra Energy (SRE), Southern Company (SO), and NSTAR (NST). The other 3 companies are railroads, which have projected growth rates of 8.5-13.4%/yr: Union Pacific (UNP), CSX Railroad (CSX), and Canadian National (CNI).
With so much interdependence found between railroads, regulated electric utilities, and gas pipeline companies, one is reminded of a 3-legged stool. What would happen if the stool lost a leg? An article in the New York Times on 2/19/12 by Elisabeth Rosenthal compared projections for energy use by type in the US through 2035. Coal and natural gas use are approximately the same in terms of energy (BTUs consumed) at present but going forward natural gas use will grow 1.2%/yr vs. only 0.3%/yr for coal. By 2035, half again as much natural gas will be produced than coal. All other sources of energy (wind & solar power, oil for fuels, and nuclear power) together will not quite equal natural gas production. But 25-30% of energy use will still be coming from coal, even though wind & solar will have grown to provide 15-20% of power requirements. For power-plants, the takeaway is that coal use won’t change much but gas use will grow 50% by 2035.
Bottom Line: We will begin to separately track each of these 3 stable industries and file periodic reports for our readers. For now, the bottom line is that this economic triad of railroads, electric utilities and gas pipeline companies is going to grow in importance and the separate industries will become even more intertwined.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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