This is the first of a continuing stream of articles about how to invest in the resurgence of the American energy and manufacturing sectors. Most of you know that fracking and related drilling and extraction techniques have led to an energy boom. The growing excitement around this boom in the energy patch is masking another reality -- the quiet, and irresistible increase in manufacturing activity in the U.S.
This resurgence in U.S. manufacturing is not just due to an increase in demand; it is due to falling energy prices, falling feedstock prices, and the flexibility and quality of the American workforce. And the U.S. is in the very beginnings of this resurgence -- while most on Wall Street worry about tomorrow, and some worry about the next one to three years, this shift in costs based on a change in energy production is a once-in-a-century phenomenon. It's a secular change that is the biggest game changer in the world economy since the admission of China into the World Trade Organization.
The question for investors is: "Where do I start?"
I asked myself the same question and visited four factories in 2011 -- these visits are the core of Made in America: Inside Stories of Success -- and what I saw first hand has led to insight into several publicly held companies (the book is not an investment book). There is nothing like seeing things firsthand. I spent several hours with a UAW guide at the General Motors (GM) pickup truck plant in Flint, at the time GM stock was $20 (it is now $37). What I saw prompted me to write and tell investors to buy it.
I went on a group tour at the Airstream plant, the iconic brand and product line that is part of Thor Industries (THOR), the world's largest RV maker. Thor was $22 at the time, it is now $54. I wrote about Thor, too. And both stocks still have plenty of room to run.
That was then, so what is now? Think of this energy and workforce-based resurgence as a pyramid:
- Layer One: Hydrocarbon-based exploration and extraction
- Layer Two: Hydrocarbon-based transportation and processing
- Layer Three: Hydrocarbon-based products -- refiners and semi-finished materials producers, e.g. ethylene, plastics
- Layer Four: Large energy users, large semi-finished material users -- including transportation and transportation equipment companies specializing in natural gas conversion technologies and systems
- Layer Five: Specialty product manufacturers using hydrocarbon intensive semi-finished inputs
Sounds boring -- but it isn't. It will be a lot of fun, sort of like watching dominoes fall -- except in this case, the dominoes are rising. I will explore the opportunities in these layers in the coming weeks. What are the best short-term opportunities? Those companies with products that intersect with the a) the growing availability of credit and the nascent economic recovery, b) the current energy boom, and c) secular changes in consumer demand.
Today I will start with two obvious winners: General Motors and Ford (F), both having reported excellent earnings this week. The success of these companies, overanalyzed and misunderstood, is based on simple math. What is that math? Take low interest rates for consumers, even for those with very low credit scores, combine easy money with the average age of a car and the cost of fueling and maintaining that 10-year-old car, and you have monthly payments and annual costs that make economic sense. This is borne out by low loan default rates -- they are below historical default rates, even those before the Great Recession.
Ford or GM, you ask? Both are worth an investment.
Ford has a weaker balance sheet than GM -- it did not go through bankruptcy. Ford is slightly ahead of GM in rolling out new models of very profitable pickup trucks -- but GM will have caught up before year-end. GM and Ford are both struggling in Europe, and GM is also a bit behind Ford in fixing problems there. GM is much stronger in China, although their growing market share does not translate into serious profits and probably never will -- it is, after all, China.
What about the stocks? Ford has broken out, is still below post-crash highs, and I think the stock is good for $22 in a year, perhaps two. GM has broken free of the $33 price point where Uncle Sam bought his shares -- or obtained his shares -- as part of the bankruptcy and TARP bailout. I believe the stock is good for $46 in a year or two. If you buy them, consider selling calls as these stocks have no meaningful dividends. And if you sell calls every month, you can generate a 12%-15% annual yield.