S Blood In The Streets: Time To Dive In?

As I turn on my monitor for the first work day of 2016, it’s mostly red. After 2015, that’s really nothing new. Last year it seems, I couldn’t pick my nose much less stocks. Despite the seemingly sideways action of markets last year, the average stock was down something like 15%. I’m a bottoms up value guy and I can honestly say that I had one of my most lonely and frustrating years in recent memories (yes…we tend to block out trauma like 2008-First Half 2009). Every “good bargain” I found got progressively cheaper. Against the advice of veteran traders like UBS’ venerable Art Cashin, I “fought the tape”. And, subsequently, got my ass kicked. So will this year be different? All I know is that I don’t know. What I do know is that I’m still a bottoms up, value guy and there are still good deals out there that will reward the risk the patient are willing to take. Here are a couple themes I’ll be talking about going into the new year.

Energy= Only For the Brave

I got to the energy value buffet six months early only to have my rear end handed to me in a zip lock bag. The prices got better as the pain got worse. That being said, I still believe the killing fields of the energy sector is where trades of a lifetime lie. Think non- bank financials during the Global Financial Crisis market of 2008. But venturing out to no man’s land requires intestinal fortitude. For those interested but not quite bold enough, the layup names are big oilers like ConocoPhillps (COP), British Petroleum (BP), and Total (TOT). For bigger risk appetites and longer time horizons I like two and three year bonds from one of the market’s most reviled names: Chesapeake Energy (CHK), America’s second largest natural gas producer. The company’s paper in the two and three year bands currently trades around forty cents on the dollar and yields around 18% or more. Although the future looks bleak for CHK, the company just restructured $3.8 billion of unsecured debt to a longer maturity, secured, second lien issue. Decent asset sales are also in the pipeline which will further enhance liquidity.

Cheap, High Quality with Income

I’ve always believed in being properly compensated for investment risk through a combination of certain variables such as price metrics and dividends. Four, high quality names fit my criteria and have piqued my interest. Supermarket to the world, Archer Daniels Midland (ADM), networker for the Internet of things Cisco (CSCO), the world’s second largest drug maker GlaxoSmithKline (GSK) and battery behemoth Johnson Controls (JCI) make a compelling, value priced equity basket. Collectively, they trade with a forward PE of 13 times; a 23% discount to the S&P 500 on a PE basis, with a blended dividend yield of 3.8%, a 78% pick up over the index’s 2.1% yield. 2015 was flat with a lot of market weirdness in between. 2016 is stepping out on a weird left foot as well. But, the opportunity is out there. Like the old proverb says: “Fortune favors the bold.”

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Alexis Renault 6 years ago Member's comment

Great read, thank you.