Saut: It's Time to Reduce 'Stuff' Stocks, Buy High Yielders

Excerpt from Raymond James strategist Jeffrey Saut's latest essay:

...[H]igher interest rates have profound implications for various asset classes. And that, ladies and gentlemen, is another reason we have, after seven years of steadfast bullishness, recommended reducing/rebalancing stuff-stock positions (read: energy, timber, cement, etc.). While longer-term we remain bullish on “stuff,” with rising interest rates the “cost of carry” to own commodities increases. That linkage was potentially reflected in crude oil’s downside reversal during our travels. While we remain long-term energy bulls, if crude breaks below $120/bbl., professional money will view the recent parabolic price high of $135/bbl. as a near-term peak. As stated, despite these concerns we remain bullish on select energy companies.

Asset allocation, and sector selection, continue to be the drivers of overall portfolio performance. To this point, we remain under-weighted technology, consumer discretionary, and financials. While many pundits are screaming that financials are “cheap,” we just don’t see it that way. For previously stated reasons, we think the financial sector will remain under pressure for years; and would note, the KBW Bank Index [BKX] “tagged” a new five-year closing low last week. At its peak the financial sector contributed 31% of the S&P 500’s earnings.

For comparison, in the 1980 energy bubble, energy-related companies contributed 26% to earnings, while at the tech bubble’s peak tech accounted for 16% of earnings. With re-regulation of financial institutions coming, the result should be lower earnings with and attendant P/E multiple compression for the financials. On a market capitalization preference, mid-caps seem to have held up better during the recent stock market decline. And, we continue to invest accordingly. 

The call for this week:...[W]e are currently “out” of trading positions and focusing on investment positions, preferably ones with a yield. Previously mentioned names for your consideration include: 6.6%-yielding Alaska Communication (ALSK); 11%-yielding LINN Energy (LINE); Schering Plough’s 7.6%-yielding convertible preferred “B” shares (SGP+B), whose terms and details should be checked before purchase; and, 5.8%-yielding Embarq (EQ).

 

Comments

[truthinvesting]

Altria's 5.3% dividend is powerful here

[notsosmart]

no connection to wall st or fro. have been collecting great dividends from fro.check out div. history. seems like a well run co. & maybe scandanavians are still ethical.

[REBEL]

Sure is nice to see a plug for money in investors' accounts touted ! Instead of pie - in - the - sky promises put in investors' heads to justify investing in stocks with ZERO YIELDS! I'll take that 11% LINN yield until well after I retire. The fact that LINN is a huge owner of energy properties here in th US is icing on the cake.

[southshoreinvestor]

The credit dislocation has shaken investors, period. As such, many investments are on sale. In a sideways market yield is king.

Look at the US energy MLP's as they offer an attractive tax-deferred current yield with the all-important distribution growth that protects against inflation.

Closed-end funds holding MLP's are best for IRA's or for the K-1 averse. Look at FMO, which has avoided the use of auction rate securities that similar CEF's have had issue with recently.

Linn Energy has a stagnant 11% yield, as hedges limit upside while protecting the distribution. This is generally true for most MLP-E&P's. Nice double-bottom recently as the last of the PIPE shares have been dumped by CEF's/hedge funds getting margin calls. However, I wouldn't look for significant unit appreciation soon. They continue to monetize assets that are poor choices for the MLP structure and recycle the cash. Linn's only downside is that they give up the potential home run deep shale plays that XTO, etc., benefit from.

ALSK is an Alaskan telecom with wireless operations. AT&T bought into the Alaska market and thus ALSK's moat has narrowed. ALSK hasn't increased its dividend and thus is losing my interest.

Also, the BDC's such as American Capital (ACAS) will become attractive investments coming out of the credit/recession. ACAS has a 12-13% yield typical for the group now, and their yields will return to the 8% range in a year. The level 3 assets held by BDC's (since they invest in private companies) have been attacked by the shorts such as Einhorn, but then they are biased! The shorts attacked BDC's at least twice prior and their charts and dividend growth tell the real story. Even ALD, Einhorn's favorite target shrugs off the shorts after decades of being a public company.

Just a few thoughts.

*I am long the BDC ACAS, and LINE & many other MLP's.
**FMO is a potential holding for an elderly parent's portfolio and likely will replace ALSK as a holding.

[jjason]

A good article. Thanks Jeff. I will look at LINN. I too agree that BDC's like ALD, ACAS, MCGC, etc can be good investments. But some ( like MCGC ) may be a little too risky at this time for retirees.

Long ACAS, MCGC and TCLP, another MLP that I think is pretty stable and now yields about 7.5% .