THE TIME OF MAXIMUM PESSIMISM IS THE BEST TIME TO BUY
It’s been just been a bit more than a year ago,
So it’s obviously time for another update.
And, succinctly, what’s changed?
Regardless here’s my 2015 post-winter update (assuming that “global warming” doesn’t cause this winter’s unusual freezing temperatures to continue right through to next winter).
First off, a current historical landmark that professional traders are already factoring into their future market maneuvers:
World War III may soon be on the way (thanks to the likely nuclear "framework" which America’s president will soon sign -- uhm, well perhaps shakes hands on -- with Iran’s untrustworthy mullahs).
And ultimately it’s going to be unlike any previous wars in modern history:
For example, expect global military conflict – (1) between the Arab Sunni states (allied with Israel) against Iran; (2) between China and Japan (over disputed energy-rich islands); and (3) likely between Russia and NATO (over Vladimir Putin’s empire building on behalf of an expansionist Russia).
Also, we likely can expect currency “wars” – as most of the world’s nations attempt to devalue their currencies to combat the rising U.S. dollar (a fiscal phenomenon that has already begun today).
And would it be reckless, to forecast more foreign and homegrown terrorist attacks in Europe and North America? Myself, I think not.
And finally, why wouldn’t we expect more global destabilization, courtesy nuclear threats from North Korea and perhaps Iran -- assuming President Obama cements his “legacy” deal with Iran (which seems more and more likely with every new concession by desperate American negotiators … particularly John “By hook, or by crook, I’m Going To Win A Nobel Peace Prize & Then Become President” Kerry).
So how would I recommend that readers attempt to protect themselves against the volatile stock and bond markets that we can likely expect for at least another three years?
First I would continue to recommend “quality” investments in gold bullion, gold “Exchange-Traded Funds” (ETFs), and particularly precious-metals mining companies that (1) have no debt; (2) have lowered their extraction costs during the metals price implosion of the last several years; and (3) can pay a “sustainable” dividend (meaning capable of paying out any promised dividend during bad times, as well as during years of economic prosperity).
And in pursuing such a strategy, please don’t ignore silver, platinum and palladium producers, since these valued commodities (silver, platinum and palladium) have become scarcer and scarcer because of increased global demand (e.g., Swiss watch makers need silver for the “engines” of their electronic time pieces, and car manufactures are increasingly in need of platinum and/or palladium to manufacture environmentally-friendly catalyctic converters for their automobiles’ exhaust systems).
As in the past, I also suggest accumulating (on stock market dips) agriculture-related investments, including (1) farming conglomerates; (2) food processing companies; and (3) successful food makers and/or distributors (eg., a company like Kraft Foods).
And in that regard, don’t forget profitable companies in the business of finding, filtering and/or providing potable water (whose importance is now highlighted by the current California drought and L.A. water shortage).
And finally, for long-term investors who are willing to stick with their investments for at least three more years, I still recommend energy investments -- in profitable and cash-rich oil & natural gas explorers or producers (eg., Royal Dutch Shell).
LET’S GET ON WITH IT, ALREADY!
But of course, what you’ve probably been waiting for (after my long-winded introduction) is my equity and ETF recommendations for your current and future investment portfolios (of course, remembering that I am an all too fragile human, capable of making mistakes in my reading of current equity and bond markets).
So (drum roll please), let’s begin!
First, one brief bit of background information regarding the current global economy:
The recent rally in the U.S. dollar is one of the most vigorous in world history – driving down the profits of U.S.-based manufacturers who have to sell their goods abroad at discounted prices [because otherwise their exported products are too expensive in terms of foreign currencies which have been deliberately devalued (against the American dollar) by their governments & national banks].
So here are my equity and ETF recommendations to counter this trend: (1) the WisdomTree Australia & New Zealand Debt Fund ($AUNZ); (2) the Yorkville High Income MLP (Master Limited Partnership) exchange-traded fund ($YMLP), a U.S. domestic energy producer which doesn’t have to deal with export problems; and (3) Southwest Airlines (LUV), an American domestic carrier that draws less than 2% of its sales from overseas.
GOLD AND SILVER CAN BE DEFENSIVE ASSETS IN YOUR INVESTMENT PORTFOLIO
However, as I’ve mentioned several times on this blog, I believe that the ultimate protection against all kinds of economic & market volatility is adding some defensive holdings, in gold, to your investment portfolio.
And with regard to gold mining companies, here are my two top choices:
(1) Agnico-Eagle Mines Ltd (AEM), yielding 1.08%
Generally speaking, AEM looks like an attractive current purchase because of its steadily increasing production, its ability to extract precious-metals from its land holdings at a profitable price, and key operations in politically-stable (and generally corruption-free) jurisdictions in Europe & North America.
Agnico-Eagle reported record fourth-quarter gold production of 387,538 oz., with what analysts call “all-in sustaining costs” of $954 per oz. And that’s in comparison with 322,443 oz. production in the same period of 2013.
Revenue was up to $503 million, and net earnings were $16.6 million ($0.08 per share). Compare those impressive results with last year's revenue of $437 million, and (yikes!) a net loss of $780.3 million ($4.49 per share) after a $1 billion impairment write-down.
And as an added bonus, operating cash flow was up to $152.2 million -- up from $135.8 million year earlier -- due to higher gold production from the acquisition of the Malartic mine in Quebec through the company’s (once-questioned) takeover of Osisko Mining in 2014.
Other good news?
For the 2014 fiscal year, Agnico-Eagle produced a 30% increase in precious-metals production (1.429 million oz.) at a sustainable cost of $954 per oz. That was an impressive rise from 1.099 million oz. in 2013; and revenue was $1.896 billion compared to $1.638 billion in 2013.
And finally, thanks to the acquisition of Osisko Mining, reserves (potential production) were 20 million oz. at the end of 2014, versus 16.9 million oz. at year-end 2013.
And Agnico-Eagle sold its 9.7% holding in “Probe Mining” to Goldcorp Mining in January, and used the proceeds to reduce the company’s debt by $30 million.
(2) Franco-Nevada Corporation (FNV;FNV.CA), yielding 1.61%.
Franco-Nevada is a gold-focused royalty & streaming company (meaning that it’s derives a majority of its revenue from royalties it collects from mining companies to which it initially lends money until the mines actually become operationally profitable). Essentially, regardless of ups & downs in the price of gold, its costs are generally fixed and thus insulated from changes in precious-metal prices.
As a bonus, FNV also owns several oil, gas and platinum group metals assets.
For the full-year 2014, Franco-Nevada produced a record 293,415 gold equivalent ounces (22% higher than the previous year), $356.9 million in revenues, and approximately $137 million in net income (after expenses and maintenance costs have been subtracted from total revenue).
And even though Franco spent $930 million on 14 new projects, the company ended 2014 with $678 million in working capital and ZERO debt – although the company will soon need to fund $300-$350 million in connection with its metals stream agreement with “Cobre Panama”.
In summary, both of the preceding precious-metals recommendations are profitable on an operational basis, offer reasonable dividends, and should see price rises as physical demand for gold & silver continues to increase from China, India, and central banks all over the world.
THE ULTIMATE DEFENSIVE EQUITY INVESTMENT?
And now to a reliable and conservative equity investment that should protect your portfolio from volatility in the commodity markets (such as those for gold & silver):
And in this case, I’m referring to: BROOKFIELD RENEWABLE ENERGY PARTNERS LP (BEP;BEP.CA), yielding 5.1% .
BEP will release fourth-quarter results on Feb. 6th. However, this energy giant’s key future 'stats' have already been projected by management.
These savvy guys & gals have raised their forecast for annual distribution growth -- paying out annual dividends with a greater yield than today’s generous 5.1% -- to between 5 and 9 percent from their prior forecast of 3 percent to 5 percent.
Much of this growth will come from recent acquisitions and expansion projects that boosted the partnership’s electrical generation capacity by almost 15 percent last year.
For example, in November 2014, BEP purchased 488 megawatts (MW) of alternative generation capacity in Brazil: 163 MW of hydropower, 150 MW of wind power, and a 175-MW biomass facility.
And earlier in the year, the company acquired Safe Harbor, a 417-MW hydropower plant in Pennsylvania. Plus BEP management forecasts a 16 percent return on this investment, from project efficiencies – as well as this hydro plant’s operation in an increasingly capacity-constrained market.
Most import, thanks to a BBB credit rating -- and debt-to-capital ratio of 40 percent -- the partnership has “conservatively” financed its five-year spending plan of approximately CA$3 billion. And BEP aims to keep its dividend payout ratio between 60 and 70 percent of funds from operations, while banking about CA$100 million in free cash flow annually.
And BEP has “guaranteed” more than 80 percent of its projected cash flow -- via long-term contracts with its clients, contracts which usually include inflation-based escalators.
However, one cautionary note: the U.S. dollars’ recent strength, relative to the Canadian dollar, could be a problem in the near future. And that’s because the majority of revenues collected by Canadian-based Brookfield Renewable Energy Partners’ come from the United States. So the company’s earnings are significantly reduced after being converted from American to Canadian dollars [e.g., receiving only about 70 cents (CDN) for every one dollar (U.S.) taken in].
But this unfavorable exchange rate also provides American investors a chance to buy an otherwise low-risk, high-yield stock at what would once have been bargain-basement prices …with the most cautious action being to accumulate your shares over time, buying them each time the stock or energy markets dip.
HOW ABOUT SOME ENERGY RECOMMENDATIONS?
Speaking of energy, here’s an old “go-to” purchase of mine which I still heartily recommend right now:
VERMILLION ENERGY INC. ($VET), yielding 4.67%.
Vermilion is an energy producer that focuses on buying & then developing gas & oil properties in Western Canada, Europe and Australia.
According to management, their business model targets "annual organic production growth of approximately 5%."
Not to mention increasing dividends whenever possible.
Vermilion is primarily targeting its growth in production through the exploitation of conventional resource plays in Western Canada, including:
(1) Cardium light oil & (2) valuable liquids-rich natural gas (LNG); and
(3) the exploration & development of high impact natural gas opportunities in the Netherlands.
Not to mention Vermilion's 18.5% working interest in the Corrib gas field in Ireland.
And remember that any oil, which Vermillion is able to ship to Europe & then sell in European energy markets, benefits from BRENT crude-oil prices which traditionally have been significantly higher than North American (WTI) prices.
What also helps the Vermillion cause is the fact that Vermilion management & directors hold approximately 8% of the outstanding shares. Consequently, they have a self-serving incentive to increase the company's growth & dividends.
In my opinion, not a bad choice for a buying consideration, in what recently has been a depressing sea of red ink for energy stocks.
And of course, while you wait for what I myself think will be inevitable future capital gains, you can sleep at night – collecting your steady (and definitely sustainable) 4.67% dividend.
AN ENERGY GODZILLA?
And speaking of energy, how about considering purchasing shares in the “Godzilla” of energy companies, SHLUMBERGER LTD. (SLB), yielding 2.37%.
To be as succinct as possible, SLB is the biggest oil service company in the world; and yet it continues to increase market share – as well as generate impressive profits in spite of the head winds of declining oil prices.
And that’s primarily because Shlumberger Ltd continues to successfully develop products that save costs for customers, while also maximizing oil & natural gas recovery rates.
ENERGY EQUITY NOSTALGIA
And now here’s another “oldie but goodie” energy choice of mine: ENERPLUS (ERF), yielding 4.46%.
Along with Vermillion Energy Ltd. (and Baytex Energy Ltd. -- $BTE,CA ), this is another one of my recommended “must” choices for any energy investment portfolio.
And why ERF, at a time when the energy market is taking such a monumental “lickin’”?
Because Enerplus just keeps on tickin’, no matter what the imploding energy market throws at it.
For example, ERF’s response to sagging oil prices was to focus almost exclusively on its “bottom line” – rather than exploration and production (as in the past). Basically, management quickly began to look for ways to cut its expenses, and to spend its revenues more cautiously.
The result has been a 60% improvement in its capital efficiency since 2011. And management indicates that if the company can stay on this fiscal path, it’s likely that its per-barrel costs could fall below $17,000 by the fourth quarter 2015 (a commendable achievement).
And when and if the price of oil rebounds in the next while, expect the price of Enerplus’ shares to soar – not bad since you have already been collecting the company’s sustainable dividend of 4.46%
ADDING TO YOUR RESERVE CURRENCY
But once we’re on the subject of commodities, let’s switch back to pondering the nuances of the most enduring “reserve currency” in history – gold (and often silver too).
And in that regard, there’s no better a purchase today than SILVER STANDARD RESOURCES INC. ($SSO), currently not paying a dividend.
Most important, Silver Standard is one of the few silver miners which mines pure silver.
And that’s important because usually silver is extracted & refined from gold or zinc tailings.
But in this case, SSO’s extracted “pure” silver is the highest-quality silver available today – much in demand from today’s timepiece makers (e.g. Swiss high-end watches) and from car manufacturers (eg., catalyctic converters).
And Silver Standard executives are projecting that the company’s silver production will grow exponentially over the next several years – meaning increased future revenues and profits.
The Company’s properties are located in six countries in the Americas. But recently, Silver Standard has been most focused on operating and producing silver from its Pirquitas Mine in Mexico.
There’s currently no dividend yet from this stock; but there should be plenty of capital gains in the future.
And finally on the energy front, it may be time to raise the chant, “Let’s Go U.S.A.” and check out: X AMERICAN RESOURCES CORP ($REX), currently not paying a dividend.
This company produces and sells ethanol. And REX operates in two segments: (1) primarily alternative energy and (2) real estate.
The alternative energy division focuses on (a) the production of ethanol; (b) dried & modified distillers grains; and (3) non-food grade corn oil.
But why include AMERICAN RESOURCES CORP in your investment portfolio?
Well, for one thing, the company reported net profit of $20.3 million (last month) for the fiscal fourth-quarter 2014. And earnings per share increased 31% to $2.55, as compared to a miserly $1.95 one year ago.
During the company’s earning call (to stock analysts), Stuart Ross, Chairman/CEO also noted:
“We had no debt; and no debt again is something that will help us in the future, in terms of increasing or doing better than the rest of the industry.”
And as a bonus, REX has implemented a buyback program, with 497,582 shares remaining to be purchased.
CANADIAN REIT BONANZA
And now on to our final investment recommendations of the day:
Plummeting commodity prices have created business challenges for property owners in Canada’s oil patch. But with an average occupancy rate of 94.9 percent, the next three Canadian REITs (Real Estate Investment Trusts) should continue to be profitable and capable of paying their ample annual dividends for a long while.
A CAUTIONARY NOTE:
However, considering the recent decline of the Canadian dollar, versus its U.S. counterpart – as well as continued uncertainty regarding domestic and international interest rates – it might again be wise (if you’re interested in purchasing shares in the following three REITs) to accumulate your shares over time, buying (each time) on market dips.
And now, as page space for this update is running out, here are my three choices (drum roll, please!):
ARTIS REIT (AX-U.CA, OTC: ARESF), NORTHERN PROPERTY REIT (NPR-U.CA; OTC: NPRUF) and RIOCAN REIT (REI.CA; OTC: RIOCF).
Artis currently yields: 7.20%; Northern Property yields 6.67%; and RioCan yields 4.47% .
As far I’m concerned these are the “best of the best” of Canadian REITS, and all have prospered in the equity markets because of their ample and sustainable dividends, as well as their novel solutions for domestic and international housing needs.
In light of my fast-dwindling page space, I can only recommend that you “google” the names of any of the preceding three REITS for additional information about them.
Nuff said on this topic (for today anyway)!
[ If you have questions, on this one-year investment update, you can e-mail Murray Soupcoff at: firstname.lastname@example.org ]