On Friday, I was about to write that it appears the continuing bad news makes me want to just go sit in the sidelines and wait for better days. The housing down turn is turning into a 4 year odyssey of pain for homeowners. Gas prices are causing SUV owners to trade in for Vespas. The recession that has been forecast by many actually appears to be arriving.
Every time the stock market makes a modest gain, it gives it up and then some over the next few sessions. Stocks I believe are good values lose 50% of that value. Finally, the floods in Iowa strike close to home both personally and in regards to some of my investment choices. So by market close on Friday I was ready to pack it in for a few months.
Then I started thinking about some the the stocks that have been so disappointing and realized that opportunities like we have now do not come along very often. Many stocks are priced like their entire sector or industry is going out of business.
First, off many energy companies are going to do very, very well in this environment. My exposure is probably a little light here, but some of the stocks in my Income Portfolio should do very well over the next couple of years. Take a look at Penn West Energy Trust (PWE), Inergy (NRGY) and Atlas Pipeline (APL) for growing earnings and dividends. On the growth side, Headwaters (HW) is rolling out technologies to clean waste coal and process oil sludge into extra energy sources.
The market is also acting like every airline will go bankrupt due to high fuel prices. A well run profitable, fuel efficient airline like Copa Holdings (CPA) should pick up market share and continue to be profitable. My big loser so far is the aircraft leasing company, Aircastle, Ltd. (AYR). The stock price has been cut in half on the fears that some of its leasing customers will be turning in aircraft. One is US Airways (LCC), which has indicated it will return some leased aircraft, however, it has not been disclosed who those aircraft are leased from.
At this time AYR stock is trading at 4.5 times last years earnings and is yielding 11% on a dividend that is 55% of net income and 35% of free cash flow. Global air travel would have to have a severe meltdown to make Aircastle worth any less than it is today.
Then in financials you have a company like City Bank (OTC:CTBK) of Linnwood, WA. This is a bank with 30+ years of growing profits, is conservatively managed and is in a part of the country that has not been hit badly in the real estate down turn. There is almost no news besides quarterly earnings reports on this stock, yet it has fallen from the low $20s to $12. When was the last time you saw a quality company with a PE of 4 and a yield of 5%, just because of its industry?
I see stocks growing earnings and getting their share prices hammered because the market believes the numerous problems mentioned above will affect all companies the same. At this time it looks to me like we may not see stocks at these bargain prices for a long time.
Note: I have long positions in AYR, CTBK, PWE, NRGY and HW.