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I am a IT Professional with a bachelors degree in Computer Science. I am not some multimillionaire (although I hope to be one day) I am an average everyday working person who decided to step out on his own and I want to encourage others to do the same. My investment profile closely resembles... More
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  • Buy Oil Companies Now!

    Oil Companies: Why buy now?

    After the record drop we have witnessed in oil prices over the last couple months, one might view oil companies as a bad investment. I would instead say that this is a perfect opportunity to buy into these large companies at very affordable values. In this article I will outline a few of the high points that I feel people should consider when looking at owning oil producing companies. However not all oil companies are of equal value when searching for investments in this sector. I specifically am interested in the large-cap oil conglomerate companies such as Conoco-Phillips(NYSE:COP), Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). I would like to highlight a few of the capabilities of these large companies to take advantage of lower oil prices.

    • Capex spending is flexible for these large entities.

    Large oil companies like the ones mentioned above have large capex spending budgets that take profits and re-invest in new sources of crude. If a market is oversupplied suppliers will simply reduce exploratory spending until it once again become profitable to do so.

    - COP has project a capex 20% lower in 2015 than was spent in 2014

    - XOM announced a planned 6% reduction to its capex budget from 2015-2017

    - CVX has not formally announced any capex reductions but has hinted at reduced spending

    These companies can grow and shrink capex budgets on an annual basis and can cushion company balance sheets against less profitable oil markets.

    Summary: Capex budgets can be cut to keep companies profitable.

    • Smaller oil companies will become ripe takeover targets.

    Large oil corporations like the ones mentioned above have very large cash on hand balances. Smaller companies do not have the luxury of keeping a lot of cash on hand because in order to compete with larger companies they sink all the profits back into the company to continually increase production. Lower oil prices will hurt smaller oil companies so much that many of them will look to potentially be bought out by these larger companies. This will do two things for these larger companies; One it will remove competition from the market and two it will help these larger oil companies by allowing them to expand known reserves and production without having to invest additional capex money to do so. This is how larger oil companies will continue to increase output while lower capex spending.

    - XOM currently has an estimated $4.96 Billion dollars in cash on hand.

    - COP currently has an estimated $5.78 Billion dollars in cash on hand.

    - CVX currently has an estimated $14.49 Billion dollars in cash on hand.

    This money could be used to snatch up some of their smaller competitors who are unable to deal with lower oil prices and will look to sell to the highest bidder.

    Summary: Lower oil prices will lead to industry consolidation.

    • Shale oil wells decline faster than normal oil wells and will lead to a quick reduction in shale oil production over the next 1-3 years as drilling rigs are reduced.

    It is a proven fact that shale oil wells production decline significantly in the first years after drilling some by as much as 75% in the first year after drilling. The only way that companies can keep production growing is by drilling more wells. As drilling decreases and fewer wells continue to come online it is reasonable to expect decreased levels of crude oil production.

    (click to enlarge)

    As you can see from the graph above there has been a very rapid drop in oil drilling rigs over the last month. This will lead to a decline in new wells being drilled in 2015 which should by the end of the year lead to a supply tightening in the crude market with the expected production decreases from existing shale wells.

    Graph

    This graph shown from this yahoo article here shows the increase in US oil production over the last several years led by the increase from shale oil exploration. The US has increase oil output by over 50% over the last 4 years. When you consider the decrease in active drilling rigs and the quick production decline of shale wells we should expect some tightening of the US supply market over the next 1-3 years. This tightening will lead increased support for prices.

    Summary: A decrease in drilling activity will lead a tighter oil market.

    • The US economy is starting to stabilize and growth potential is right around the corner.

    The US economy is finally on firmer footing. As we have witnessed the last two quarters average hourly wages has increased and employment has continued to grow. As more people are working and driving to and from work this will create additional demand for oil based fuel products which should provide additional price pressure over the next 1-3 years.

    (click to enlarge)

    As you can see in the graph above auto sales accelerated in 2014 with light duty trucks outselling cars through December of last year. This is important because Light duty trucks tend to burn fuel at a faster rate than their car equivalents. Almost all care sale figures are higher on an annual basis. More cars will equal more fuel being burned as well.

    Summary: A growing US economy will lead to increasing consumption of oil based products.

    Based on the facts and data that I have presented above I believe that now is a perfect time to buy into larger oil based conglomerates such as COP, XOM and CVX. These companies have the financial power to endure the lower priced oil market and even have the opportunity to benefit from it. Consumption will continue to grow and supply will not continue to grow at the pace we have seen over the last 3-4 years due to decreased exploration and well drilling activity. Industry consolidation will enable these larger companies to swoop in and buyout some of their smaller competitors who are more sensitive to oil price swings. I believe that oil per barrel will eventually stabilize around the $60-$65 price mark since shale production has proven profitable at those levels. Shale oil production will become the swing production for the next several years. All that being said now is a really good time to buy into oil!

    Tags: COP, CVX, XOM, long-ideas
    Jan 14 9:41 AM | Link | Comment!
  • 5 Dividend Paying Pharmaceutical Companies To Profit From An Aging Population

    Introduction:

    As an income investor I am always looking for new and emerging markets and trends within developed countries that could potentially shift and or increase demand levels for certain market segments. I believe that the pharmaceutical industry is set to benefit from shifting market segments over the coming years. This shift may even signal a long term bull market for the entire pharmaceutical segment. Now that markets have started to rebound and the economy has leveled off many older workers are once again focusing on retirement. The retirement aging workers has the potential to cause significant waves in the market over the next 10 years as they shift from working into retirement. We are starting to see the emergence of this market as we speak and it would be wise for investors to get in on the ground floor of this economic shift.

    Aging Population:

    The great recession caused many people to postpone retirement and prolong working because of the deflation of their assets and holdings. Now that the market has rebounded from lows experienced during that tumultuous time many baby boomers are starting to focus on this finish line we like to call retirement. We hear all the time about the aging American population. As you can see in the below graphic based on data taken from the 2000 US Census the largest portion of the population by far is the segment aged 35-44. Since this data was based on 2000 census data if we adjust the age range based on the 13 years since this data was collected, that would shift this portion of our population to the 48-57 age range. This puts the oldest portion of this segment of the American population a mere 8 years from retirement. Some may even be considering early retirement as a possibility. This generation of Americans will drive shifts in the markets over the coming years as they start to retire. One of these segments will obviously be the pharmaceutical industry to which these people will look for medicine and treatments for whatever ailments they may encounter during their golden years.

    (click to enlarge)

    This segment of the economy will see increased demand for its product offerings over the next 10 years. I believe that investors should look for a bull market to emerge for the pharmaceutical segment of the economy within the next couple years with no apparent slowing for quite some time. I believe there is significant money to be made based on this future market demand.

    Johnson & Johnson (NYSE:JNJ)

    JNJ is more than just a pharmaceutical company. JNJ has a large consumer goods producing segment focusing on personal hygiene as well. JNJ is positioned to profit from any bull market that may emerge for pharmaceutical companies, but should the market fail to emerge with the strength that I believe it will JNJ's consumer goods segment shelters this stocks from complete exposure to the pharmaceutical market.

     20082009201020112012
    Revenue63.75B61.9B61.64B65.04B67.28B
    Net Income12.95B12.27B13.33B9.697B10.85B
    EPS$4.62$4.45$4.85$3.54$3.94

    JNJ missed the entire rebound rally after the great recession hit. It was not until early this year that it began to make any moves higher. It rallied with the broader market and appears to be slightly overbought at current levels. If earnings data does not significantly improve over the next year I would wait for a pullback to open a new position or increase holdings in this stock.

    (click to enlarge)

    JNJ has nice exposure to the pharmaceutical and medical device market that it should benefit from any bull trends that may emerge, but its diversity also affords investors a level of sheltered protection should this market fail to emerge.

    Merck & Co (NYSE:MRK)

    MRK acquired Schering-Plough in 2009 and although its saw its revenue increase significantly after the acquisition net income has been inversely affected as a result of the acquisition. Net income has significantly fallen since 2009.

     20082009201020112012
    Revenue23.85B27.43B45.91B48.13B47.35B
    Net Income7.81B12.9B861M6.26B6.17B
    EPS$3.66$5.67$0.28$2.04$2.03

    MRK like JNJ missed the post great recession rebound that saw the broader market add more than 100% in value. MRK has started to rebound recently starting in mid 2012, but it has much farther to run. MRK is currently overbought based upon year-end earnings projections.

    (click to enlarge)

    Although MRK's acquisition in 2009 nearly doubled revenue it has been a dragging factor as to why MRK has not seen significant share price growth over the last 3 years. If the demand growth in pharmaceuticals from the aging American population does manifest itself and MRK can figure out how to truly profit from its 2009 acquisition, MRK looks well positioned to profit from this market shift.

    Pfizer Inc (NYSE:PFE)

    PFE saw significant revenue increases after its acquisition of Wyeth in 2009. Although revenue increased by almost 35% after this acquisition, PFE has really struggled to make acquisition a profitable one as far as net income is concerned. As you can see in the two years following the acquisition net income is flat across those years.

     20082009201020112012
    Revenue48.3B50.01B67.06B67.43B58.99B
    Net Income8.03B8.62B8.18B8.7B9.49B
    EPS$1.19$1.23$1.03$1.11$1.32

    PFE like most pharmaceutical companies struggled to rebound after the great recession. It has made a recent charge though starting in early 2012 and has been on quite the rolls since. It may be overbought slightly but with its latest correction is in a buying range.

    (click to enlarge)

    Although PFE's acquisition has struggled to contribute towards the company's bottom line increasing market share is never a bad strategy. If the bull market for pharmaceutical emerges like I expect it too PFE is well positioned to profit.

    Bristol-Myers Squibb Co (NYSE:BMY)

    BMY has been a rather interesting study over the last few years. Its fundamentals are constantly in a state of flux but yet the stock price keeps climbing higher. As you can see revenue and net income has been relatively flat over the last 5 years.

     20082009201020112012
    Revenue20.6B18.81B19.48B21.24B17.62B
    Net Income3.16B3.22B3.09B3.7B1.96B
    EPS$1.65$1.72$1.80$2.18$1.17

    Even though revenues have been relatively flat the share price for BMY has increase almost 135% over the last 5 years. This has placed BMY into the sell range. It you own BMY I would recommend taking a portion of your profits off of the table because this trend cannot continue.

    (click to enlarge)

    Although BMY will profit from an increase in pharmaceutical demand should it arise based on current levels and fundamentals it appears to be significantly overbought. This will mute any future gains arising from the aging of America's workforce. I expect BMY to lag the broader pharmaceutical industry over the coming years should current trends hold.

    Eli Lilly & Co (NYSE:LLY)

    LLY is an interesting play on this potential increasing demand in this industry. LLY is a pharmaceutical company that operates in two segments, human based and animal based divisions. How many retired people do you see with pets? It has long been proven that pets improve the mood of their owners and also are a source of entertainment. LLY in my view is for those people who want to double down on any potential bull market.

     20082009201020112012
    Revenue20.38B21.84B23.08B24.29B22.6B
    Net Income(2.07B)4.33B5.07B4.35B4.09B
    EPS($1.89)$3.94$4.58$3.90$3.67

    If you believe as I do that the aging American workforce will increase the demand for pharmaceutical products, than you may also believe that companion animal pharmaceuticals may be set for an increase in demand as well. This is based on the assumption that a portion of the retirement age population will have and own pets for which they will also purchase medication as they age. LLY is a strong buy at current valuations.

    (click to enlarge)

    LLY has seen its stock price hold steady for the most part since the great recession ended. Since the middle of 2012 it has seen nice growth in its share price. I believe that LLY is positioned better than most pharmaceuticals to profit from an increase in demand for its products, not only from humans but also their companion animals as well.

    Summary:

    America's aging population will cause a significant market demand shifts over the coming years. As the largest segment of our population retire and downsize I expect certain markets like housing will see prices depressed due to the flood of houses being made available by retiring couples. However, the pharmaceutical industry is one that I feel, if positioned well, will profit greatly from this aging group. Please comment in the section below and let me know if and how you are planning to profit from America's aging population.

    Disclosure: I am long JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jun 11 10:16 AM | Link | Comment!
  • 4 Stocks Generating Solid Monthly Income

    Introduction:

    Everyone knows that over the last 4 years the Federal Reserve has taken it upon themselves to try to fix the economy of the United States as best as they can. This has meant a period of time with significantly depressed interest rates which has really hurt income centric investors forcing them to use some of their capital to meet certain expenses. This has further eroded their income since they have had to reduce the amount of principal they have invested. For this reason I would like to highlight 4 alternative investments that when held even in small amounts can ease the burden for income investors. These investments would have even increased the amount of an investors total principal over the last 4 years as well.

    Investments:

    For this discussion I will assume that a $10,000 investment was made 4 years ago. I will calculate the total income paid back to investors as well as the new total principal of the below investments.

    Realty Income Corp (NYSE:O)

    Realty Income Corp is a real estate investment trust company that engages in long term net lease agreements. They are required by law to pay out at least 90% of investment derived income.

    Four years ago during the week of April, 6th 2009, O was trading at $22.02 a share and was yielding 7.7% on its dividend payments. If an income investors would have bought $10,000 worth of O at that point in time they would have bought 454 shares of O which would have been paying them a monthly sum of $64.46. Now let us fast forward to today. This same investment, assuming no money was added and that all dividend payments had been taken in cash, would be currently paying $82.17 monthly. That is a 27% increase over the original monthly payments. The total dividend payments of the last 4 years would have amounted to $3,207. This investment would also currently be worth $20,929 based on today's current price of $46.10. The principal has more than doubled over the last 4 years.

    (click to enlarge)

    PowerShares Preferred Stock ETF (NYSEARCA:PGX)

    PGX is an ETF that invests in the preferred shares of various corporations. These preferred shares although they do not offer large price growth do take precedence in dividend payments above that of common stock. Most of the time the dividend payment rate is higher than of its company stock as well and is locked in at a certain rate for a period of time.

    Four years ago during the week of April, 6th 2009, PGX was trading at $10.37 a share and was yielding 13.5% on its dividend payments. If an income investors would have bought $10,000 worth of PGX at that point in time they would have bought 964 shares of PGX which would have been paying them a monthly sum of $112.78. Now let us fast forward to today. This same investment, assuming no money was added and that all dividend payments had been taken in cash, would be currently paying $75.19 monthly. That is a 33% decrease when compared to the original monthly payments. This is a result of the long term depressed interest rate market which has allowed companies to continue issuing preferred shares at lower and lower interest rates. Although we have seen a monthly decline in income, the total dividend payments of the last 4 years would have amounted to $4,979. This investment would also currently be worth $14,353 based on today's current price of $14.89. The principal has increase significantly over the last 4 years more than compensating for the lost yield of the original investment.

    (click to enlarge)

    iShares iBoxx High Yield Corporate Bond (NYSEARCA:HYG)

    HYG is an ETF containing high yield bonds from various companies. More and more people have been flocking to high yield debt over the last 4 years which has been driving down the interest rates of this type of debt.

    Four years ago during the week of April, 6th 2009, HYG was trading at $72.30 a share and was yielding 13.3% on its dividend payments. If an income investors would have bought $10,000 worth of HYG at that point in time they would have bought 138 shares of HYG which would have been paying them a monthly sum of $111.22. Now let us fast forward to today. This same investment, assuming no money was added and that all dividend payments had been taken in cash, would be currently paying $67.34 monthly. That is a 39% decrease when compared to the original monthly payments. This is a result of the long term depressed interest rate market which has allowed companies to continue issuing high yield bonds at lower and lower interest rates. Although we have seen a monthly decline in income, the total dividend payments of the last 4 years would have amounted to $3,958. This investment would also currently be worth $12,970 based on today's current price of $93.99. The principal has increase significantly over the last 4 years compensating for the decreased yield of the original investment.

    (click to enlarge)

    Main Street Capital (NYSE:MAIN)

    MAIN is a business development company. They provide financing operations to small and middle market companies. These companies are often too large for community banks to loan to but not large enough for larger banks to care about. They are required by law to pay out at least 90% of investment derived income.

    Four years ago during the week of April, 6th 2009, MAIN was trading at $10.74 a share and was yielding 13.9% on its dividend payments. If an income investors would have bought $10,000 worth of MAIN at that point in time they would have bought 931 shares of O which would have been paying them a monthly sum of $116.37. Now let us fast forward to today. This same investment, assuming no money was added and that all dividend payments had been taken in cash, would be currently paying $144.30 monthly. That is a 24% increase over the original monthly payments. The total dividend payments of the last 4 years would have amounted to $6,260. This investment would also currently be worth $28,898 based on today's current price of $31.04. The principal has almost tripled over the last 4 years.

    (click to enlarge)

    Portfolio Summary:

    If all four of these investments were bought on the same day 4 years ago they would have paid $404.83 monthly. These same investments today would be paying $369.00. This is a total monthly decrease in payments of 8.8%. Although the monthly payments have decrease slightly over time the total dividend payments for the last 4 years amount to $18,404. This averages out to $4,601 dollars annually from dividend payments alone. If compared to the total original investment of $40,000 across all 4 investments this would have an annualized dividend yield of 11.5%. This is quite impressive for income seekers when you consider the current interest rates of both fixed income government bonds and bank certificates of deposit (COD) accounts. The portfolio has not only yielded 11.5% annually in dividend payments but is now worth $77,150. This is 92% increase in portfolio value. This is an average annual gain of 23% for these investments which amounts to $9,287 dollars a year in gains. In total this portfolio would have yielded 13888 annually over the last 4 years an average annual return of 34%.

    Summary:

    As you can see although our monthly income has fallen by a small amount the 4 year returns for these investments are very impressive especially for income seeking investors. Although this portfolio would have been successful over the last 4 years I do believe that PGX and HYG may be hitting their upward limit in share price. I would wait for a correction before potentially buying into these investments. Please comment in the section below and let me know what other alternatives to traditional fixed income you have been investing in.

    Disclosure: I am long HYG, MAIN, O, PGX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Apr 08 4:36 PM | Link | Comment!
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