So what’s been happening since I last wrote to you, dear Irregulars? I’ve got a couple teaser picks to reveal for you in a moment, but first there are a few thoughts to get off the ol’ Gumshoe chest.
We’ve seen a nice recovery from the healthcare REITs, which are still quite reasonably priced (DOC, OHI, VTR and MPW are the ones I’ve bought into personally) — the one that remains relatively more depressed is Medical Properties Trust (MPW), but even that has come back a bit as management continues to follow through on what investors expected. They said they’d clear up their balance sheet worries by getting more permanent capital, and probably by selling some assets — so far they’ve done the easier and faster part of that, with their oversubscribed $500 million bond offering, and I expect they’ll follow through with the rest and that the high dividend (nearly 8% now) will remain fine and well-covered even if it’s not likely to be raised in the next few quarters.
And in the REIT space, you might remember that though I was buying DOC, OHI and VTR personally at the time, my “Idea of the Month” two weeks ago was Crown Castle (CCI)… and I hadn’t bought it, partly because I was hoping for a more depressed price. Haven’t gotten it yet, the stock is up 5% or so since I wrote that piece as the tide has lifted all REITs. It’s been a good few weeks for REITs in general, as interest rate expectations stay low and investors flock to some semblance of dividend-paying stability.
As has been pretty clear over the last few months, I’m a little nervous. I continue to have a large cash position, and the investments that appeal to me are the relatively conservative and less-cyclical companies who have strong and consistent earnings power and, in many cases, have high and sustainable dividend yields. I’m expecting a lot of my return over the next year or two to come from dividends, since it seems a bit aggressive to assume that we’ll see more valuation expansion in the broad market and earnings growth is probably not going to be super high.
What does that mean? Just that the rise in the S&P 500 over the past five years or so has come as much from an increasing PE ratio (investors are willing to pay more for each dollar of earnings) as it has from actual increasing earnings at the underlying companies in the index. It’s not just that major US companies are doing well and growing earnings per share, though they have been to some degree (partly by borrowing money at super-low rates to buy back shares), it’s also that investors have been willing to pay more for those earnings.
My guess, and it is solely a guess, is that we’re not going to see the broad market PE ratio go back to well above 25-30 like it did in the pre-crash bubbles of 2001 and 2007. It could, since interest rates remain so oppressively low that there isn’t anywhere else to put your money if you need it to grow, but I think there’s more risk in expecting that kind of continued inflation of valuation ratios, and I suspect that in a vitriolic election year the risk appetite of investors will generally be low… which means that valuations won’t go to new highs.
Things have normalized a bit with the recent dip in the market, and the broad market may well see earnings stay stagnant due to low oil prices, but that’s all guessing — I just think we’re in a slightly riskier world right now, stocks aren’t particularly cheap, and I find solace in decent valuations, understanding the stability of specific companies and their earnings power as best I can, and trying to find companies where cash earnings and dividends should provide some bulwark against market volatility.
Whether that works or not, I dunno. I’ve been wrong about broad market expectations before, to be sure, sometimes extremely wrong. That’s just how I’m thinking, and that’s why these kinds of “boring” investments are more likely to catch my eye these days. I’m not alone in that, though it seems I’m less afraid of some REITs than a lot of investors are — you can clearly see the investor worry in the fact that utility stocks, bastions of solidity in the minds of investors, are within a whisper of their all-time highs (as measured by the Utilities Select SPDR ETF (XLU)).
This is a big weekend coming up for individual investors too, by the way, so clear some space on your calendar — Warren Buffett’s annual letter to Berkshire Hathaway (BRK-B) shareholders will come out tomorrow here, and that’s always an excellent read. If you’re new to investing, read the past 20 years of Berkshire letters (they’re easy to read, have no fear) and you’ll get a really good basic education in Buffett’s value-inspired and patient philosophy.
Berkshire has done worse than the market over the past year, and made one huge acquisition (Precision Castparts) and they’ve also seen some of their biggest capital investments coincide with severe weakness in those divisions (like the BNSF railroad, which sucked up a lot of money last year but also may be seeing lower demand with commodity prices weaker), so it should be an interesting letter. I’ll be in Omaha again this year at the Annual meeting in a couple months, too, and that’s fun and interesting, but I learn a lot more from Warren’s letters than I have from being at the Berkshire meeting.
I’d find it easy to buy more Berkshire if it drops down to near 1.25X book value again (and did nibble a bit last Fall near that level, though the book value may well be lower when they report tomorrow), but I don’t expect Buffett to beat the market until the market goes through a long weak patch again — the best opportunities for big, value-generating investments at Berkshire only really come when they’re one of the few opportunistic buyers in the market, which usually means things are ugly. BRK-B shares have performed roughly as well as the market over the past 5 years, the most recent period of big outperformance for Berkshire came in the 2006-2009 period when Buffett didn’t panic and set the stage for some great investments… but Berkshire does certainly fall sharply sometimes, and in my experience those times have created buying opportunities. I’m skeptical that we’ll see Berkshire take a huge fall, since Buffett has been more interested in buying back shares of late and has drawn a line in the sand at 1.2X book value, underneath which the assets are pretty clearly undervalued, to trigger those possible buybacks… but we’ll see, maybe he’ll talk more about possible buybacks tomorrow as well.
But how about the wacky little investments that continue to clog our inboxes? I’ve got a couple “bonus” teaser picks for you that readers have been asking about… let’s jump right on that:
Andy Obermueller over at Game Changing Stocks is touting a bunch of energy storage stocks that he thinks will benefit from the huge push toward better batteries and other storage technology, spurred by the well-publicized Gigafactory that Elon Musk’s Tesla is building to create enough lithium battery supply for their future cars and for other applications… like the Tesla Powerwall home battery that they’re selling (just as sleek and shiny as the cars, naturally).
This appears to be right in the teaser wheelhouse of “hot stuff” now — so many newsletters are touting the resurgence of solar, and storage has a huge role to play in the future of solar energy, so I expect we’ll keep seeing these solar/storage ideas pitched in the months to come (yes, even with low oil prices).
I’ll spare you all the “power storage will be huuuuge” stuff, which we will stipulate (storage and efficiency are the two keys to reducing reliance on coal and gas for electricity), and move on to the specific ideas:
“Stock #1: 1,000% Gain from “The Google of Energy Storage”
“My first pick is perfect for conservative investors.
“It’s ‘The Google of Energy Storage’ and offers an incredible opportunity: the chance to make 1,000% gains by investing in a well-established industry leader.
“It’s the global leader for industrial applications. It already has facilities in 20 countries, and customers in 120.
“Given its breadth, it would be essentially impossible for the energy storage market to take off without this company soaring with it. After all, with a 23% market share, it already dominates the market.
“As I said, the U.S. energy storage market alone is set to soar 1,100% over the next four years. This company is the perfect way to capture that growth. If it does nothing more than rise with the tide, it could deliver quadruple-digit returns.