How To Profit From Rising Commodity Prices

The summer driving season is almost upon us. Millions of Americans will take vacations and travel to their favorite summer destinations. As more Americans take to the road, gas prices are likely to increase. From Memorial Day to Labor Day is when oil prices normally see their biggest rise. So, how can you profit from the coming surge in oil prices?

1. Buy one of the major integrated oil companies.

Take your pick from Hess (HES), Exxon (XOM), Chevron (CVX), BP (BP), Royal Dutch Shell (RDS), ConocoPhillips (COP), and Total (TOT). Most of these companies are trading at just 7 and 8 times earnings. A rise in oil prices will be a big boost to these firms bottom lines. Oil investors will also reap some nice dividends from most of these companies.

2. Buy the oil service providers.

Oil service companies like Halliburton (HAL), Schlumberger (SLB), Transocean (RIG), and Baker Hughes (BHI) all stand to directly benefit from rising oil prices. Rig rental rates will rise with any increase in oil prices. Regulatory fears and analyst downgrades are making this sector start to look more attractive. Even if new regulations increase the costs of drilling, these costs will be passed along to the consumer.

3. Buy an oil ETF.

If you don’t feel like trying to guess which oil stocks will flourish, you can buy them all with an oil exchange traded fund. ETF’s like the Oil Services Holders (OIH), iShares Dow Jones US Energy (IYE), and the iShares Dow Jones US Oil & Gas Exploration (IEO) will provide you with exposure to the oil and gas sector. The OIH buys shares of oil service companies. The IYE will give you exposure to the major integrated oil companies and the IEO purchases oil exploration and production companies.

4. Buy a leveraged ETF.

Speculators looking for risk can buy shares of the ProShares Ultra Oil & Gas ETF (DIG) and the ProShares Ultra Crude Oil Fund (UCO). These ETF’s seek to double the daily performance of oil. These funds are suitable only for trading. Avoid risky ETN’s like DXO which are likely to be shut down by regulators.

Disclosure: I do own shares of BP. 

 

Photo by: Tedsblog

My Book Is Now Available For Sale!

 

My book is now available for sale. You can buy it directly through the Buylikebuffett website. Just click on the Buy My Book tab listed at the top of the page for more information. This is the cheapest way to buy the book. You can purchase my book for just $12.00 using your debit, credit or paypal account. There are no shipping and handling fees or sales taxes. The book will also be available on Amazon and Barnes & Noble in June. Thanks!

2 Great Companies With Significant Long Term Challenges

These 2 stocks are great investments for the short term but are facing significant challenges to remain competitive over a longer time period.

Gamestop (GME) is slightly undervalued at $22 dollars a share. Shares trade at just 8 times this year’s earnings and earnings are expected to grow 10% over the next 5 years. Gamestop has a healthy balance sheet with twice as much cash as long term debt and an excellent amount of free cash flow. The stock currently sells for just 1.3 times its $17 book value. Things are looking good at Gamestop. So, what’s the problem? It’s hard to envision Gamestop’s business model being successful 10 years from now. Will people still be running to Gamestop to buy video games in 2020?

Digital distribution is the future of video gaming. There is currently an industry wide debate about the future of console gaming as costs continue to rise. The need for gaming discs will significantly decrease as downloadable content becomes increasingly available. Gamestop offers many PC games via download now but the bulk of their business comes from in store video game sales. Gamestop derives a significant portion of its revenue from reselling used games. It will be interesting to see whether Game Stop changes it business model before the shift or ignores the problem and stands pat with its current business model ala Blockbuster.

Coinstar (CSTR) is currently reaping the rewards from the popularity of its Redbox kiosks. Coinstar, the parent company of Redbox, derives 75% of its revenue from Redbox. The stock is trading at $52 per share which is about 18 times earnings. While Redbox has been successful with its $1 DVD rentals, the future of the movie industry is for digital distribution. Major movie studios are fighting back against the low cost distribution model of Redbox. Studios are already discussing offering Video On Demand rentals that would be available before DVD releases. Early delivery of content would have a direct impact on Redbox’s sales.

The studios are not alone in their fight against Redbox. Not only are their Netflix’s streaming movies but Google TV is now getting into the video on demand business. Google and Netflix are working together to bring movies via digital delivery to your home television. There is also Apple TV to consider. Redbox can’t afford to underestimate what Steve Jobs and the execs at Apple are dreaming up at 1 Infinite Loop.

Disclosure: I do not own any shares in either company. 

 

Photo by: Andres Rueda

The Market is Presenting Growth & Income Opportunities

A Growth Play

As I wrote about in a previous post, Buffalo Wild Wings (BWLD) would be an attractive stock to buy in the mid 30’s. Buffalo Wild Wings is entering buy territory with shares of the chicken wing chain now selling at $35.87. Shares could potentially drop to the low 30’s because small caps get hit the hardest during market corrections. If so then it would be a great opportunity to buy a solid small cap franchise with a great balance sheet and good future growth prospects for 15 times next year’s earnings.

An Income Play

The pharmaceutical industry is home to some of the best income generators in the market. Dividends help improve investment returns especially during choppy markets like the one we are in now. Pfizer (PFE) has entered buy territory with shares trading at just $15. Pfizer is a buy purely for the dividend yield alone. The stock is currently paying a 72 cent dividend which equates to a 4.7% yield. The dividend will likely increase in the future as the current dividend payout is just 31% of next year’s earnings. This is relatively low compared to other pharmaceutical companies which have dividend payouts over 40%. Eli Lilly has a payout of 44% and GlaxoSmithKline 48%. Merck is currently paying out 39% and there are rumblings of a dividend increase. Pfizer is no longer the growth stock that it once was. As a mature cash cow, Pfizer will likely have to increase its dividend again to satisfy investors.

Although Pfizer trades at just 6.6 times 2011’s earnings, growth is expected to be anemic with the 5 year growth estimate barely above 2.5%. This is purely an income play. Investors looking for greater capital appreciation with dividend income should take a look at drug stocks Merck, Eli Lilly, and GlaxoSmithKline. These stocks are currently yielding 4.8%, 5.9%, and 5.6%. They do however trade at slightly higher multiples than Pfizer.

Is It Time To Buy Wells Fargo?

While there has been much discussion about the trading practices at Goldman Sachs (GS), Morgan Stanley (MS)JPMorgan Chase (JPM), and Citigroup (C), one of the nation’s largest banks has managed to stay out of the line of fire. That bank is Wells Fargo (WFC). Wells Fargo is the fourth largest bank in the United States with over $1 trillion dollars in assets. The bank is also a longtime Warren Buffett holding because of its great management team and efficient operating structure. Wells Fargo has recently come under pressure dropping roughly 10% over the past week to $28.71. Wells was punished by a Goldman Sachs downgrade of shares of the banking giant. Should you use the dip to buy shares of Wells Fargo?

First we need to determine how much Wells Fargo is worth? Revenue has been strong for the current year. Wells has earned over $99 billion over the past fiscal year. While this is clearly an outlier due to a favorable banking environment, it does bode well for future prospects. Wells historically has earned between $40 and $50 billion dollars over the past 5 years. It stands to figure that Wells could easily earn $45 to $50 billion dollars annually. That figure doesn’t even include the full impact of the Wachovia acquisition. Credit losses from home foreclosures and loan modifications appear to be subsiding. As one of the largest home mortgage service providers, Wells Fargo stands to benefit from any stabilization in housing prices.

Net income can conservatively be estimated at $20 billion dollars. Factor in a minimum of $20 billion dollars in net income divided by a 5.2 billion float and you get an EPS of $3.85. Shares are currently selling at just 7 times normal earnings. Shares are also cheap based on book value, trading at just 1.45 times book value. It would be futile to try and calculate debt to equity since banks hide many of their obligations off the balance sheet. Return on equity and return on assets have been unimpressive recently coming in at 9% and 1% respectively.  Over the past 5 years revenue has grown 24% and net income has risen almost 12%.

The economy may be recovering at a tepid pace but it is recovering nonetheless. The sooner that things return to normal, the sooner that financial companies will increase earnings and dividends will return. Since bank stocks should conservatively trade with a multiple of 10, a fair value for Wells Fargo is $38.50.

Disclosure: I do own shares of Wells Fargo.

 

Photo by: Ed Bierman

This Yield Is Just Right!

While the recent market drop has not been good news for holders of equities, it has created some incredible dividend yields for investors seeking income. All of these stocks on this list are yielding returns greater than 6%. They are all stable companies that have historically supported their dividends. These 5 stocks are currently paying out better dividends than most bonds.

1. BP (BP) has been pummeled and shares are just 50 cents above their 52 week low. Shares are so low that BP is now yielding 7.5%. This is enough to make me add shares to my current position despite all of the negative publicity.

2. Verizon (VZ) is now yielding a ridiculous 6.8% dividend as of the market close on Friday. This is just too tempting to pass up. Even if the stock is stagnant for the foreseeable future, where else are you going to find a 6.8% return on your money?

3. Altria (MO) is the ultimate guilty pleasure stock. The cigarette manufacturer is now paying investors 6.8% to hold its shares.

4. AT&T (T) is right behind Verizon with a generous 6.7% dividend yield. It appears that Verizon is not the only telecommunications company that is richly rewarding shareholders.

5.Total SA (TOT) looks like a buy. Shares have been unfairly punished despite a strong earning’s report this past month. The stock is trading at just 7 times 2011’s earning’s estimates and is paying out a hefty 6.6% dividend to shareholders. This is a great stock for investors that want oil and gas exposure without the risk of a BP.

Disclosure: I do own shares in BP.

The Biggest Rental Rip-offs

The best way to get a positive return on your money is by getting rid of expenses that eat up your money. One of the biggest cash eating expenses can be found in the rent-to-own industry. Companies like Rent-A-Center, Rentway, and Aaron’s Rents advertise that you can buy just about anything you need for a few dollars a week. It doesn’t even take credit to qualify. All you need is a job, a place to live, and references. This sounds too good to be true, doesn’t it? Well it is!

Renting To Own Will Leave You Flat Broke
Renting To Own – Since rent-to-own companies rent necessary household items (furniture, televisions, computers, washers, and dryers) to customers that unable to qualify for financing; they charge these companies exorbitantly high fees for the privilege of renting. Customers end up paying much more than the retail price of the item. This makes renting to own one of the biggest rip-offs going. $20 a week doesn’t seem like much until you realize the total cost you are paying. A $1,000 laptop will end up costing you over $3,000, just by paying $29.95 a week for 2 years. A $500 washing machine will end up costing you over $1,500 just by making a $15 monthly payment for 100 weeks. Companies like Rent-A-Center and Aaron’s Rents will have you paying three to four times the true cost of an item.

Renting To Own Is Just Another Form Of Predatory Lending
Renting to own is another form of predatory lenders. Just like with subprime loans, payday loans, and pawnshops lower income people are the ones being taken advantage of. Rental companies claim that they do not charge any interest but that is not true. By the time you add in insurance costs, contract fees, and the huge markup on goods, you will be paying an APR in the hundred’s. You just can’t win renting an item from a rent to own company. Companies like Rent A Center mark their products up at least 100%. So, even if you paid for your purchase in full on Day 1, you would lose money. Do you need more evidence that rent-to-own companies are predatory lenders? They have now gotten into the “financial services industry” as well. They now offer cash advances, check cashing, money orders, and prepaid debit cards. These are clear cut signs that these companies do not exist to help customers but to hurt customers.

Buyer beware! Your best bet is to stay away from rent-to-own companies.

 

Photo by: burningkarma

Deciphering CDO’s

Check out my Forbes article on Deciphering Collateralized Debt Obligations.

Eastern Company: A Benjamin Graham Play?

Today, I would like to take a look at a tiny industrial company known as The Eastern Company (EML). The Eastern Company is a Connecticut manufacturer of industrial hardware, security products, and metal products. This small manufacturer has been in business for over 150 years. Eastern Company is a microcap stock with a market share of just $80 million dollars. Shares have been beaten down since last summer, dropping 23.5%. The stock currently trades at just north of $13 per share.

EML has a good balance sheet for such a small firm. The company has $10.8 million in cash and just $4.8 million in debt. The company recently retired over $7 million dollars in debt over the past year. Eastern Company has a fantastic current ratio of 5.1 with $56 million in current assets and $11 million in current liabilities. The Eastern Company has a book value of $11.14 and currently trades at less than 1.2 times its current book value. The firm has generated $7.78 million in free cash flow over the past year.

You won’t hear much about EML in the news with just 1 analyst following the stock. The stock trades at 16 times next year’s earnings estimate of 82 cents per share. EPS is expected to grow at 15.5% and sales are expected to increase over 10%. Trends are improving at Eastern Company. All three business segments are seeing increased demand. Revenue has been trending upward over the past 6 months and profits have risen for the last 3 quarters. This is a positive sign for a company whose revenue had been declining from 2007 to 2009.

EML has continuously rewarded shareholders with a solid dividend payout. The current dividend yield is 2.6%. The payout has been remarkably consistent historically and the Eastern Company has no plans to cut its dividend. EML has paid 279 consecutive dividend payments. That’s incredible for such a small company!

Investors looking to add some risk to their portfolio may want to take a look at the Eastern Company. It’s important to remember that microcap stocks are subject to extreme volatility. With so few analysts following these tiny companies, their results are difficult to gauge and can dramatically surprise to the upside or downside.

New Forbes Post

Check out my Forbes article on 6 Hidden Government Revenue Streams.