Joseph L. Shaefer's  Instablog

Joseph L. Shaefer
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Chief Investment Officer, Stanford Wealth Management. Retired senior exec of Charles Schwab.  36 years active and reserve military service -- 6 in special operations, 30 in the intelligence community. Geopolitical analyst.  Author -- investment book Bringing Home the Gold.  Editor -- The... More
My company:
Stanford Wealth Management
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
  • Exxon May Be Wrong… 0 comments
    Dec 14, 2009 6:52 PM | about stocks: XOM, XTO, WPZ, EPE-RETIRED, BWP

     

     

    …as may I.  But when seeking securities that pay an exceptional dividend, one can either chase poorer quality firms that must pay a high dividend to keep their stock price up -- or one can have the courage, vision or luck to look beyond the current valley to find an entire sector of quality firms that are in temporary disfavor.  I choose the latter, and have been beating the drum for buying natural gas companies during what I consider a temporary glut of gas that has left this sector with little investor interest.  It’s nice to have a firm with the vision and long view of Exxon now agreeing.

     

    Of course, value investing can be a lonely business...  If you see value when others are distracted by shiny baubles elsewhere, be prepared to suffer the slings and arrows of outrageous fortune (or at least outraged momentum players and day traders).  Case in point:

     

    On September 6th I published “Natural Gas: America's Energy Salvation."  Most of the comments I received were favorable and from forward-looking readers.  Some, however, were convinced I was wrong and stated their opinions as if they were facts: “Gas won’t bottom at $2. The free fall will continue until it hits $1. National storage will be completely full imminently top out, and when it does, the producers will have to shut down completely. Since these guys are leveraged up the wazoo, this will trigger a string of bankruptcies, and the majors will fall like dominoes.”



    To the September 15 article “The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains” I received the less cocksure but equally skeptical, "Still don't see the growth potential."


    And in November’s “Ethanol vs. Natural Gas or Coal: Comparison Not Even Close,” some naysayers’ remarks included “Y'all think this is a great article? Then think again…” and “Tar Sands Oil and Coal are the worst energy sources known to man. Inefficient oil and dirty coal.”

     

    I cite these not to denigrate the honest opinions of those who disagree, but rather to point out that you want to buy precisely when many people disagree with you! I like to see cocksure opinion stated as fact, like "The market cannot go above 9000.  You can take that to the bank."

    If they disagree with your analysis, they aren’t buying, so you don’t have to chase a stock moving up in price. A difference of opinion is what makes ball games and stock markets fun to play.

     

    I will continue to buy when others don’t like a sector that I believe has undiscovered value and a near-term catalyst.  (And, no, I did not know that Exxon would provide that catalyst -- I simply saw that prices were reflecting a point where any of a half dozen catalysts, including a major player moving in, would likely move prices higher.)   I’d rather buy quality where the depressed price has raised the yield without the company actually having to increase the dividend than to buy companies who increase their dividends to unsustainable levels.

     

    So where do we stand today with our natural gas holdings?   Long term, there is vast potential remaining.  I don’t want to be completely out of this sector.  But with Exxon giving credibility to the entire natural gas sector, more and more people are finally coming around to what we’ve been saying all along: natural gas, "bottled and produced" in America and Canada, with lower transportation costs and in politically stable nations, will increasingly fire our electrical generating plants, provide warmth in winter and cooling in summer, and fill (at least our fleet) automobiles.

     

    I think the Exxon Halo Effect will create interest and buying in the natural gas explorers, producers and transporters – and we will therefore begin to take some profits.  In three months we are already up 42% in Williams Partners (NYSE:WPZ), 36% in Enterprise Group Holdings (NYSE:EPE) and 25% in Boardwalk Pipeline (NYSE:BWP).  If Exxon’s purchase of XTO sends these up another 10%, as I imagine it might, we’d have to consider selling some portion of our positions and nailing down those profits.

     

    Never forget, in the full flush of excitement that something you own is roaring ahead, why you bought it and what they do for a living.  These are pipeline companies, for heaven’s sake!  Steady, high-yielding, well-managed and dependable – but still just pipeline companies.  Gas comes through the pipeline, they make a profit.  Gas only flows 50% of the time, they only make 50% as much.

     

    Not one of them seeks or has found a cure for cancer; not one of them has found a way to redirect incoming meteors to strike Iran’s nuclear-enrichment facilities; not one of them has found a drug that will make bankers and brokers less greedy. 

     

    A market that has as its leadership pipeline firms and income alternatives is not exactly a rip-roaring bull market.  Where are the techs?  The industrials?  Health care?  Retail?    We know why we bought and what to expect.  Exxon’s purchase of XTO is a gift.  Assuming the skeptics and naysayers now decide to buy, the least we can do is offer some of our shares to them so they can join the party, too.  And when they tire of them because they bought late in the game, and the sector, or more likely the entire market, has a correction, we’ll be only too happy to take them back off their hands at lower prices.

     

    Author's Disclosure: We and/or clients for whom it is appropriate are long WPX, EPE, BWP and the other natural gas pipelines we’ve recommended in previous articles.  But we are preparing to sell some portion of our positions in them and place the money instead in some of those securities that are unchanged in price from a year ago, like those we mentioned in our article of December 11th.

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

    It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

    Stocks: XOM, XTO, WPZ, EPE-RETIRED, BWP
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