There was a lot of interest in the “Top Ten Forever Stocks” that Paul Tracy was pitching last year, partly because people love the idea of a “buy and hold forever” pick that will perform for them just like their grandmother’s 100 shares of IBM from 1962 that bought her a nice condo in Florida last year … and partly because, well, as we can see from perusing just about any group of investing articles, people are suckers for any article that has numbers in the title (check out Seeking Alpha, for example, every other article is “four picks for the Bakken,” “top five internet infrastructure ideas,” “seven dividend dynamos to consider,” etc. etc.)
And Tracy has repurposed and revised that list a bit to call it the “Top Ten Stocks for 2012”, with a strong tease that it includes a stock Buffett recently bought that is the “biggest ‘no brainer’ investment for 2012” … so I thought we’d take a look and see whether this list of their teased “top for 2012” picks is similar to the “top forever stocks,” and what new picks they might be pitching for this particular year.
Ready? No, it’s OK, I’ll wait. OK? Great.
I’ll blow the lead here right in the beginning: the one they’re touting as “Buffett’s ‘No-Brainer’
Investment for 2012” is eventually disclosed if you sit through their marketing presentation — that one is Intel (INTC). And so far it’s sure been a no brainer for this year, it’s up about $2 per share so far in the first month of 2012 and it’s in that sweet spot of megacap/growing dividend that investors seem to be lapping up in recent months. I also own shares of INTC and am quite happy with them, and Intel was also on Tracy’s “forever stock” list — but it’s almost certainly not a Warren Buffett buy.
Berkshire Hathaway did disclose a position in Intel in the third quarter last year, but it’s too small a position to be something that Warren himself bought — Warren did apparently personally choose jump in and buy IBM, a $10 billion investment Berkshire made last year, since he’s said he’s focused on the big acquisitions and Berkshire’s large holdings of a few favorite equities, but the Intel buy was less than $200 million and therefore was almost certainly made by Todd Combs without Warren’s input (he manages about $3 billion and doesn’t have to ask Buffett’s permission).
Not that there’s anything wrong with a Todd Combs pick — his additions to the Berkshire portfolio did very well last year (like Mastercard and Dollar General).
So that’s the one that they reveal as part of their tease for the special report — much as they “revealed” Google (GOOG) and Brookfield Infrastructure Properties (BIP) in their tease of “forever” stocks last year.
And yes, they do reveal a second one in this iteration, too — a pick that wasn’t on their “forever” list last year, Sandridge Mississippian Trust (SDT), a royalty trust that Sandridge used (along with another one, Sandridge Permian Trust (PER)) as part of a restructuring they’ve been working on over the last couple years, cleaning up an overleveraged balance sheet and moving away from natural gas and toward oil as much as they can (Sandridge was founded by the co-founder of Chesapeake and started off, much like CHK, borrowing lots of money and buying natural gas assets in the mid-2000s). All of these royalty trusts are interesting, and Sandridge is also launching another trust shortly that will have similar terms and assets and be tied to another portion of their Mississippi holdings — you can see the basic rundown of the three trusts in this Motley Fool article if you’re interested. All three of t these trusts have honking big yields, not sure what the depletion rate is or what their expected life will be, and I haven’t looked into the trust details.
But what are the “top secret” picks that they won’t reveal?
“Top 10 Stock #3 owns oil pipelines and terminals across the United States. That sounds like a “boring” business, but this company just saw its quarterly profit rise to a new record… and 67% above one year ago….
“That’s great news for its investors, because this company returns every penny it can to shareholders. Since going public in 2001, stock #3 has raised its dividends 205%… and now pays $3.20 per share in dividends every year. Meanwhile, over the past five years, the shares have delivered total returns of 129%.”
This one wasn’t on that original “hold forever” list, but it must be Magellan Midstream Partners (MMP), a master limited partnership (MLP) that did have an indicated distribution of $3.20/year until they raised it again just a few days ago (they’ve actually raised the distribution almost every single quarter of their existence, with the exception of the four or five quarters following the financial crisis, when they kept it flat).
Like most big MLPs, MMP has been on a tear lately (almost all of the large pipeline operators trade in perfect sympathy with each other almost all the time — unless one of them has an accident or an acquisition or similar surprise) and now yields about 5% with the shares just under $68, so they’re pretty much average for the “big diversified MLP” segment. Their major assets are in a big product pipeline system covering a big swath of the central US, from Texas up to the Dakotas, but they also own ammonia pipelines and a number of land and marine terminals, and they’ve been pretty flexible in the past (switching over pipes from crude oil to refined products and vice versa as needed, for example).
MMP seems to have much higher earnings reported than some of the other large pipeline operators, so it might be that more of the distribution is taxable, but I haven’t looked into that at all — most MLPs distribute a lot of “return of capital” since the actual taxable earnings, after they account for massive depreciation charges on their long-lived assets, are almost always far lower than the amount of cash they have available to distribute to unitholders, but I was a little surprised to see that MMP had actual accounting earnings for 2011 that more than covered their distribution. There might be anomalous reasons for that, it’s just something that caught my eye on a quick glance. FYI, though this one wasn’t on the StreetAuthority “hold forever” list last Summer, the ETN that tracks a basket of similar MLPs was — that’s the JPMorgan Alerian MLP Index ETN (AMJ).
“Top 10 Stock #4 is one of Brazil’s largest electricity generators… but you don’t have to go to Brazil to buy the shares. They trade right here in the U.S.
I think of this stock as the “safe” way to play Brazil. The country is seeing massive growth… and that can lead to volatility. But by investing in one of the nation’s biggest electric providers, we have a way to participate in the upside of a growing country without the swings seen in many emerging market investments. Of course, the fact that the stock pays a dividend yield of 9.0% only adds to this company’s appeal.”
I don’t know where he’s looking to find a 9% yield in Brazilian electric utilities — the one he teased last time around, CPFL Energia (CPL) has a trailing yield of just under 6%, and the other big ones are similar (EBR and CIG). The only one I’m aware of that currently has a yield near 10% is AES Tiete (AESYY on the pink sheets), a subsidiary of one of the big utilities that’s traded separately and owns 20 hydroelectric plants in Sao Paolo. According to Yahoo Finance’s numbers (I’d double check those, they sometimes have trouble with currency conversion for pink sheets listings of foreign stocks) the trailing yield is 9.5%. So not bad, but that’s about all I know about that one … and given the limited clues provided, we’ll have to call it a guess.
“Top 10 Stock #5 gives you a stake in dozens of infrastructure monopolies throughout the world.
“It owns electric grids in Chile. It holds railroads in Australia… ports all over Europe… coal facilities in Australia… toll roads in South America… and timberland in the United States and Canada.
“In total, 78% of the partnership’s revenues are under contracts or are regulated. Those revenues are practically guaranteed. Right now the stock pays $0.35 per unit each quarter. That dividend has increased 27% in less than one year and gives the units a yield of 5.5%.”
This is one of the “freebies” from their “forever” list last Summer — Brookfield Infrastructure Partners (BIP), which got creamed in the financial crisis because of their big debt burden but which seems to have become an investor favorite again since then and has seen a nice, steady climb. Still carries about as much debt as equity, which seems reasonable considering their long-lived assets around the world and the predictability of their revenue stream, and now yields a bit under 5% … oh, and it’s up 40-50% from when it was teased last year, so if you don’t like chasing stocks you might be frustrated by this one.
“Top 10 Stock #6 is a fund whose job is simple — invest in the most stable utility stocks on the earth and pay investors a fat dividend yield.
“It owns telecoms in New Zealand, electric companies in Brazil, and energy businesses in Wisconsin.
“It’s returned 10% per year since its inception in 2004… and it has boosted its dividend 28.9% along the way. In total, the fund has paid more than 90 consecutive dividends and currently yields 6.0%.
“But don’t expect to have heard of this one… it trades only about 70,000 shares a day — about what Apple (Nasdaq: AAPL) trades in two minutes.”
This is a repeat from the “forever” list, too — the Reaves Utility Income Fund (UTG), which recently got a bit of a boost from being touted by Bill Gross as a pick in the annual Barron’s Roundtable. It’s a closed-end fund that uses leverage to buy up utilities and utility-like companies (like telecoms) and pay a good yield. Current yield is about 5.5% thanks to the bump up in the share price.
“Top 10 Stock #7 is a tech powerhouse, but in recent years investors have given it the cold shoulder. I don’t think that will last much longer…
“The company has amassed an enormous pile of cash from rising revenues. At last count, this company held nearly $45 billion in cash on its books. That amounts to $8.25 per share in cash… and the stock trades for less than $20.
“But that’s not all. To attract investors the company initiated its first-ever dividend in 2011. And while that payment is modest right now, the amount of cash this company holds suggests these payments could rise quickly.”
That’s a new one for this year’s list — though the Thinkolator sez it’s almost certainly a stock you know: Cisco (CSCO)
Yes, they have almost $45 billion in cash (though they have $16 billion in debt, too — still a big net cash hoard of about $28 billion for a company with a market cap of right around $100 billion). And yes, they started a dividend last year and started to face some margin erosion and competition worries, which is why my own shareholding in CSCO was short-lived (CSCO did fine after I sold it, of course, though not as well as the stock I bought with that money, AAPL). Definitely in the same neighborhood as Intel, Microsoft, and the like — a tech dinosaur that’s still dominant, but trades very cheaply because there’s some fear of that dominance eroding. It’s probably worth noting that even in a fast-changing business like technology, investor fear of lost market share probably happens a lot faster than actual loss of market share. I happen to like both MSFT and INTC better than CSCO, but there are certainly plenty of reasons to like Cisco.
“Top 10 Stock #8 owns energy pipelines in nearly 20 states. You simply don’t find many investments with the mixture of high yield and growth seen by this company.
“Not only does it pay a yield of 5% and has never cut its dividend — going all the way back to 1994 — but it is also expanding rapidly to take advantage of the boom in shale gas in the United States. In total, it plans to spend $3.3 billion for expansion projects by 2015 (about 30% of its current market cap).
“That’s one reason why the company recently announced that its net income in 2012 should be between $740-800 million… roughly 20% higher than for 2011.”
The Thinkolator doesn’t need to churn for long to tell us that this one is OneOk Partners (OKS), another MLP — one that has a bit more “growth” to it than most, and a not coincidental lower-than-average yield of just over 4%. This is a favorite of lots of folks, so you’ll see plenty about OneOK (and their general partner, OKE) if you want to research it further. Also one of the larger pipeline MLPs, and just increased earnings guidance and the current distribution about two weeks ago.
We’re nearing the end — can’t give up now!
“Top 10 Stock #9 makes one of the basic building blocks for feeding the world — fertilizer. Record-high food prices show no signs of abating… and that is sending demand for this company’s product through the roof. In the first half of 2011, revenues rose nearly 50% over the same period the year before, while net income nearly doubled. And the company is preparing for more growth — it is adding another plant to increase production capacity 50%.
“Best of all, this company is barely known by investors. It just went public in mid-2011. And thanks to its profitable business model, it is already showering investors with enormous dividends. Management is committed to distributing $1.92 per share over the 12 months ending March 31, 2012. That gives the units a yield of 8.0%.”
This one takes even less time in the Thinkolator to get an answer spinning out the other end — here we’re looking at CVR Partners (UAN), which I think I’ve written about a couple times. This is a fertilizer-making MLP that was spun out of an oil refiner (CVR Energy — CVI). And yes, during their IPO presentations they committed to hit $1.92 in distributions in their first full year — at this point they’re on pace to do better than that, but we’ll see. $1.92 in distributions would give them a yield of about 6.4% currently, though annualizing the last distribution (that brings a guessed-at forthcoming total of $2.35) does put the potential yield at 8%. This MLP has also run up dramatically since late December.
And one more? Can you spare the time?
“Top 10 Stock #10 is one of the world’s most important oil companies… but I doubt many investors have ever heard of it before. You may not realize it, but Brazil has made several major oil discoveries over the past few years. And as Brazil’s resident oil company, this business has first shot at those fields.
“How big is the opportunity? Reports from The Economist state the success rate of wells in these new finds is 87% — compared to 25% for the industry as a whole. Meanwhile, estimates are that the fields this company will access have 50 billion barrels of oil — a little less than everything in the North Sea. Best of all, this oil is off the coast of just one country… and this single company will be the driving force in exploring and developing these oil rich fields.”
Well, this could hardly be anyone other than Brazil’s state oil giant, Petrobras (PBR). Brazil certainly has their massive offshore deepwater discoveries to catapult them into an OPEC-like future, but PBR has also been discounted pretty heavily by investors because of the strong hand of the government — they definitely get advantages from being government controlled (I think the government stake is still just over 50%, haven’t checked), but they also get treated like a cash cow at times … and they’re clearly facing challenges in getting their production numbers up. I’ve owned Petrobras in the past, but that was many years ago when they were a cheap high-yield oil stock and Brazil was just starting to rebuild its reputation among investors in 2004 or 2005 — before the really dramatic discovery of the Tupi field in the offshore sub-salt. PBR shares have recovered nicely in recent months, though thanks to some of those overriding concerns and to their huge secondary fundraising offering last year they’re well off their recent highs (and down 50% from their pre-financial-crisis highs).
I don’t know what to think of PBR these days, they’ve got huge potential oil production from their offshore discoveries and the stock is pretty cheap on a price/earnings basis, but they also have a strong controlling hand from the government and plenty of challenges as they get those huge discoveries online and producing in the decades to come. Your guess is at least as good as mine — which is good, since it’s your money on the line.
So there you have it — the ten “forever stocks” (some are funds, actually) from late last Summer were GOOG, BIP, PM, MA, AMJ, MKL, UTG, DEM, INTC and CPL, or at least, that’s the best list we could derive from their clues. For this year’s “best of 2012” picks they’ve kept only BIP, UTG, INTC and maybe CPL from that “forever” list and added a few individual MLPs (OKS, UAN and MMP), an oil trust (SDT), another old tech stock (CSCO), and a foreign oil company (PBR). There’s a pretty overwhelming emphasis on pass-through yields and utility-like yields on this list, which is probably indicative of the nervousness that a lot of folks feel about the market — and, no doubt, of the growing need for yield among retirees … who are, you won’t be surprised to hear, the target customers of most investment newsletters.
So what do you think? I can tell you that I personally own Google, Markel, and Intel from these lists, so I’m a bit more weighted to the “forever” list than the “2012” list, but I have been tempted by a couple of those MLPs listed before, I did dally with Cisco and perhaps give up too early on that one, and I can’t argue much with the overall focus on dividend income for stability in a year that many people are nervous about, despite the strong start. If you’ve got an opinion, feel free to shout it out with a comment below.
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