Revamping Or Starting A Portfolio Now

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Includes: AMZN, CAT, DO, ESV, EXAS, GOOG, IWM, LMT, NE, NTR, PG, QQQ, RIG, SPWR, SPY, SQM, SWIR, T, TWX, UNH
by: Kirk Spano

Summary

Look at the big secular trends and embrace them - the future is coming fast.

Old economy, high capital, no moat is a catastrophe waiting to happen - sell your grandpa's stocks.

Find high ceiling stocks within strong secular sectors, build a position, be patient.

Members of Margin of Safety Investing discussed this earlier in the week and received several other stock ideas.

MoSI

I get a common question from new members to my investment letters: what should I do right now to get started? So, here are some answers:

Embrace The Changing World

The economy has been changing dramatically since the early 1980s. Technology has been on an upward bending curve to change the world.

Virtually all of the labor angst in the world has been tech driven, not immigrant or foreigner (decent '80s band) induced. As citizens we need to understand that.

We all need to behave in ways that accept the "era of change" reality. That means how we live our lives, how we secure our family's standard of living and how we vote. The voting is pretty important by the way because the funnel of wealth creation is continuing to tighten up and flow to fewer and fewer people. That's not a problem of capitalism; it's a problem of ideology and fiscal policy.

As investors, we have to try our best to understand where technology is going. What will it impact? What is it pushed to address? What industries will tech disrupt next? What problems will it fix? What problems will it create?

Once we wrap our minds around this changing, and improving if we let it happen without stupidly tariffing, deporting and attacking it, world, then we can put ourselves in front of massive wealth creating opportunities.

The biggest secular trend is how technology is changing everything in virtually every industry. There are many other trends and subtrends:

  • The "smart everything world."
    • IoT
    • Blockchain
    • Edge computing
    • AI
    • VR
    • AR
    • Quantum computing
    • Smart cars
    • Smart homes
    • Smart buildings
    • Smart healthcare
    • Smart government (ha, I know)
  • Climate change and climate change policy
    • Alternative energy and smart grid
  • Massive government debts (think of the impact on inflation and the increasing likelihood of helicopter money whenever the next financial crisis hits)

Start in that bullet point list to find great ideas.

Sell Grandpa's Stocks

Raising capital to invest in the changing world is the first step for most investors. Selling old economy stocks that are capital intensive, have little to no pricing power and no real growth (or are outright shrinking) is a priority for revamping a portfolio. Get rid of dogs and princes about to turn back into frogs.

I'm not saying sell everything. Some companies might appear "old economy" but are not. We have to be aware. For example, a company like Lockheed Martin (LMT) is extremely new economy in addition to being part of the military industrial complex.

While we might feel like the military-industrial complex Ike warned us about is old economy, we keep making war new and improved with new technology and "interesting" geopolitical policy. So what is Lockheed? I'd argue a tech company with applications to multiple industries.

If I can buy Lockheed cheap, I will. Right now, Lockheed is priced to perfection. The next 5-10 year's growth is priced in. I don't want it now.

If I owned Lockheed, I'd be incrementally selling into price strength with the idea that I would buy it back later on a correlated market correction that makes everything cheap.

When big corrections occur, buying a dozen super high-quality stocks is what to do. Lockheed is super high quality; it's just very much priced like it. The same approach can be applied to a lot of priced-for-perfection quality companies.

The companies you want to sell and never own again are stocks that won't have secular growth "forever" (for our purposes, most or all of the rest of our lifetimes).

I recently traded Procter & Gamble (PG) profitably, but I don't want it in my portfolio long-term. For us to take "equity risk," basically the risk that any stock can lose half of its value quickly, our rule is that we have to believe there is a near certain chance the total return of the stock is a double in the two to seven year time frame, and has a chance to triple. P&G doesn't have that. So, we can trade it a bit since at the bottom of its trading range it has lower risk than most S&P 500 (NYSEARCA:SPY) stocks, but we don't really want to hold it.

Certain oil service companies focused in deepwater drilling are on the get-out-of-my-portfolio list too. The era of change will be largely marked by a move away from fossil fuels the next few decades.

The most expensive, long cycle oil is in the deepwater. Fewer and fewer of those projects will be done into the 2020s. The capital intensive nature of these projects, long paybacks and the CERTAINTY that we have already entered the "beginning of the end of the oil age" make most offshore drillers extremely dangerous to hold.

There is a trade right now in Transocean (RIG) with many people taking the long side. Other value-trap companies finding investors in the offshore space are Ensco (ESV), Diamond Offshore (DO) and Noble Corp. (NE).

These companies are still high debt even after industry consolidation. They are extremely capital intensive in an era where money is getting more expensive. Most importantly, the secular trend is against them so there is no rescue coming. See the oil rig day rates at IHS Markit to prove it.

Read this and believe it: Deep Water Drillers Are Doomed Even If Oil Prices Surge. Then, if you own offshore drillers, sell them. Sell Transocean, sell Ensco, sell Diamond Offshore, sell Noble Corp.

Oil vs OSD

There's more to sell. Caterpillar (CAT) is priced for perfection despite that coal is going away - maybe slowly for now, but it will eventually be suddenly. Lithium, infrastructure, agriculture and other segments will not offset the eventual death of coal mining.

Show me where Cat's growth is:

CAT

Now, I'm not saying CAT can't be traded. It can. However, right now, CAT is a sell. What is likely to happen soon with CAT? See the chart above and think about it. Sell Caterpillar if you have it.

There are also a lot of folks who mistakenly pile into healthcare because they feel the aging of the population will drive those stocks higher. Maybe for a while they will be right, but not forever.

I think a massive bear market in healthcare stocks is coming. Why? Because another massive secular trend is going to offset healthcare spending growth - governments are running out of money to spend on healthcare entitlements and desperately need healthcare spending to tighten.

Take a look at UnitedHealth Group (UNH) since the Affordable Care Act (ObamaCare):

UNH

I'm not just bearish on UnitedHealth over the next several years, but there is a host of pharma companies that will be dead money for years as well. For-profit hospital chains could also be in the cross hairs of politicians looking for solution and political points. Healthcare stocks aren't cracked up to be in the future what they have been the past decade.

There's more of course; that's just the tip of the iceberg. Apply the "Core 4 Investing" principles when thinking about stocks by asking:

  • What is the secular trend?
  • What is the impact of governments and central banks?
  • What are the real defensible fundamentals of the company?
  • What are the price trends of the stock?

From there you can find plenty to sell. Here's a hint: 80% of the stock market (in my opinion) is a sell or ignore.

How To Find High Ceiling Stocks

Big companies have small moves, small companies have big moves. - Peter Lynch

While there is plenty of money to be made in position trading certain large stocks like Amazon (AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), there is more money to be made in small companies that could grow 500-1,000% over the next decade. We can find those stocks by considering what we outlined above.

That doesn't mean being any more speculative than investing in S&P 500 companies. But expanding your search into the Russell 2000 (IWM) is vital if you want to earn a long-term, double-digit return.

IWM QQQ SPY

The longer the time frame, the more "proof" is offered that we must have a significant allocation to "smaller" companies. It also appears that we could be entering a period when small caps will outperform larger stocks, after a period where the Invesco QQQ (QQQ) dominated.

10 year 3mo

We will see how things shake out at the asset class level, but having at least a quarter to half of a portfolio in sub-$5 billion dollar market cap companies is pretty important to add juice to returns.

Companies in that $500 million to $5 billion space are big enough to be researched, but there is little research to be found on Wall Street. That's why the crowd sourced impact of Seeking Alpha is so important.

Here we can find companies like Sierra Wireless (SWIR), which I've had written about and discussed in interviews with other media. While this IoT company is no sure thing, there doesn't appear to be any more risk with it than with dozens of bigger companies in the space. In addition, the company is undervalued for its revenues even as those revenues are likely to rise in coming years. Why such a disparity? It's not the company; it's a lack of research and investors who confused about what risk management means.

Sierra Wireless is a buy right now because it has strong growth prospects based upon secular trends, a strong position in the space and limited downsize based upon price trends. Notice the sideways trend ahead of catalysts I have identified elsewhere:

SWIR

Timely Picks

Buy AT&T (T): Time Warner (TWX) deal solidifies the company's role in content delivery as well as content. The idea that debt will be a problem misidentifies the impact the debt will have when cash flows are taken into account. The cross-marketing opportunities just expanded dramatically for AT&T.

Buy Nutrien (NTR): Food is a big deal. Nutrien is one of the most important fertilizer companies in the world. Potash capex has plummeted in recent years. With capital getting tighter, Nutrien's leading position comes with an even stronger moat. The billions just dropped to the bottom line divesting assets, including SQM (SQM), are impactful.

Buy SunPower (SPWR): I think this stock might be a ten-bagger. I am building a position in a similar way that I built for Exact Sciences' (EXAS) two massive runs the past five years. Solar, which I explored in the desert the past week, is going to be a category killer, i.e. it will kill coal.

Disclosure: I am/we are long SWIR, SPWR, NTR, T.

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.

Additional disclosure: I own a Registered Investment Advisor - bluemoundassetmanagement.com - however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.