Air Canada Should’ve Been Buffett’s #1 Pick – Not America’s “Big 4”

This post Air Canada Should’ve Been Buffett’s #1 Pick – Not America’s “Big 4” appeared first on Daily Reckoning.

Last summer on June 28th, I wrote to you and identified Air Canada (ACDVF) as a tremendously undervalued stock.

Since then the rest of the market has caught onto the Air Canada story as the share price has subsequently risen more than 50 percent.

I’m thrilled with how this has played out for us…

But I don’t think that the Air Canada story is done.

This stock is still BY FAR the best value in the airline sector, and today I want to crunch the numbers to show you why.

But first, a quick reminder why we were looking at airlines in the first place.

Warren Buffett is Incredibly Bullish on Airlines

Over the past several years, Warren Buffett has invested billions of dollars into the four main U.S. airline operators.

As of the last regulatory filing, Warren Buffett’s company Berkshire Hathaway owns the following:

  • 65.5 million shares of Delta Airlines (DAL) worth $3.3 billion
  • 54.8 million shares of Southwest Airlines (LUV) worth $2.5 billion
  • 21.9 million shares of United Continental (UAL) worth $1.8 billion
  • 43.7 million shares of American Airlines (AAL) worth $1.4 billion

Combined, that is a $9.0 billion investment which even for Warren Buffett is enough money to show he is extremely bullish on the sector.

The interesting thing about Buffett moving into airlines is that for decades he hated the sector as an investment class with a passion. He once even called the industry a “death trap” for investors.1

So what changed to make Buffett warm up to airlines?

The answer is competition. Or more accurately, the lack of competition.

Buffett started investing in airlines in 2016 after U.S. Airways merged with American Airlines. The consummation of that merger marked the end of a decade-long period of constant airline consolidation which changed the competitive landscape of the industry.

Instead of 20 plus airlines competing relentlessly for passengers, by 2016 the industry had been reduced to mainly the Big 4. Out went an era of discount pricing and relentless competition and in came an era of sensible pricing and widening profit margins.

This industry is now what is called an oligopoly, folks. And while it isn’t great for customers, it is fantastic for airline profits.

Mr. Buffett is Still Missing the Best Airline Bargain

When I wrote last June about airlines, I noted that Buffett should have been looking north of the border at Air Canada if he really wanted to own an airline with some upside.

Since then, I have not been proven wrong with Air Canada’s share price vastly outperforming all of Buffett’s four airline holdings.

Air Canada chart

My opinion is that today it still isn’t too late for Buffett to get invested in Air Canada. The stock still has plenty of room to run.

Buffett has invested in the four major U.S. airlines because the industry is now an oligopoly. In Canada there is even less competition with the market being essentially a duopoly consisting of just Air Canada (55 percent market share) and its main competitor WestJet (37 percent market share).

Further, Air Canada shares are still very inexpensively valued. Today, the major U.S. airlines still trade at twice the valuation that Air Canada trades at relative to EBITDA (earnings before interest, taxes, depreciation and amortization).

That means that relative to the U.S. carriers, Air Canada has both half the competition (only one main competitor) and half the valuation!

When it comes to those two factors, smaller is definitely better.

Additionally, I believe there is a significant catalyst coming that will continue to push Air Canada’s share price higher…

Air Canada’s Cash Flow is About to Soar

With the company now wrapping up a major period of capital investment in new planes, cash outflows are about to decrease significantly which means that the free cash flow the business generates is going to increase.

Capital Allocation Strategy

Source: Air Canada Corporate Presentation

Over the next three years, Air Canada’s management believes that the company will generate $4.0 to $4.5 billion in free cash flow. That is cash flow that is available after paying all of the bills and making all capital expenditures.

If the company were to use all of that free cash flow to repurchase shares, it could retire half of the shares Air Canada has outstanding in just three years.

That’s great news for the share price!

Bottom line: Warren Buffett is bullish on airlines for good reason — the profitability of the industry has seriously improved. However, the best way to play the action is north of the border — where Air Canada operates with less competition, a cheaper valuation, and with a cash flow catalyst just over the horizon.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 Buffett Decries Airline Investing Even Though at Worst He Broke Even, Forbes

The post Air Canada Should’ve Been Buffett’s #1 Pick – Not America’s “Big 4” appeared first on Daily Reckoning.

The U.S. Oil Story Nobody is Telling

This post The U.S. Oil Story Nobody is Telling appeared first on Daily Reckoning.

Everyone knows that American shale oil production is booming.

The mainstream media has been all over the story.

They should be. After all, what the entrepreneurial U.S. oil and gas industry has done to free oil long-trapped in shale rocks has been incredible.

But…

What not so many people know is that the shale producers are pumping the WRONG KIND of oil. U.S. refineries are desperately short of a different kind of oil than what the shale producers are delivering.

This is the untold story of the oil market — one that we can take advantage of as investors.

U.S. Shale Oil is Light — U.S. Refineries were Built to Process Heavy

Turn the clock back 15 years and you would see that shale oil production was non-existent. At that time (and for decades prior), everyone believed that U.S. oil production was in terminal decline.

We knew that there was lots of oil trapped in shale rocks, but it was uneconomical to produce.

As a result, U.S. Gulf Coast refineries were built to process the only oil that they expected would be available to them — heavy oil imported from Canada, Venezuela and the Middle East.

Heavy oil is a dense type of crude that doesn’t flow easily — picture molasses. Heavy oil also contains impurities like carbon and waxes and therefore is more expensive to refine into finished products.

Because it is more expensive to refine, it is less valuable. Heavy oil usually sells at a significant discount to a light oil blend like West Texas Intermediate (WTI), which is the oil price that is commonly referred to in the financial media.

The shale oil revolution created a surge in production, but more specifically a surge in light oil production.

This is not the type of oil that most of the multi-billion dollar Gulf Coast refineries were built to process.

This lack of light oil refining capacity on the Gulf Coast is why we are seeing American oil exports explode higher. We can’t refine all of the light oil being produced from shale here in America, so we have to send it abroad where there is still refining capacity for it.

Don’t let these exploding oil exports make you think that we have too much oil here in the United States.

In fact, the U.S. is still a big net importer of oil.

We are only exporting light oil specifically because we don’t have enough refining capacity to process this specific type of oil.

We are still importing the heavy oil that much of our refinery complex was built to process. And currently these refineries are having a hard time getting enough of that heavy crude.

Collapsing Venezuelan production, a lack of oil pipelines out of Canada, and production cuts by Saudi Arabia have put a big dent in the supply of heavy oil.

With heavy oil demand from our refineries strong and supplies of heavy oil tight, the usual pricing result has arrived.

Heavy oil prices are exceptionally strong.

How to Play the Heavy Oil Trade: Cash Gushing Canadian Producers

We have been following this heavy oil trade for months here at The Daily Edge. In December we predicted a big rebound for Canadian heavy oil prices. That rebound has transpired.

Last month we noted how Warren Buffett also pounced on the trade.

Now, here we are today and the rest of the market is still very much behind on this opportunity.

Here’s how we continue to stay ahead of the market and exploit this opportunity:

Baytex Energy (BTE) is a dirt cheap Canadian heavy oil producer. When I say dirt cheap I really mean it.

With current oil prices, Baytex is going to generate roughly $300 million of free cash flow in 2019.

When I say free cash flow I’m talking about cash flow in excess of all spending necessary to run the business. Cash that can be used to repay debt, pay dividends, or invest in growth.

At the current share price, the stock market is valuing the entire business as being worth just $1.3 billion. That means that Baytex is currently trading an astounding free cash flow yield of 23%. ($300 million / $1.3 billion)

Realistically, Baytex shares could double from here and still not be considered expensive.

Eventually the market is going to catch on the great pricing Baytex is receiving for its heavy oil and this dirt cheap valuation is going to get corrected.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

The post The U.S. Oil Story Nobody is Telling appeared first on Daily Reckoning.

5 Reasons to Buy Franklin Resources BEFORE the Cycle Turns

This post 5 Reasons to Buy Franklin Resources BEFORE the Cycle Turns appeared first on Daily Reckoning.

For more than a decade, investors have pumped cash into index funds and other passive investment vehicles, much to the dismay of active managers.

The dollar amounts involved are staggering.

As a result, the share prices of publicly traded active asset managers have struggled.

But what we all need to remember is that the popularity of passive and active investments is very cyclical. And this cycle is currently very, very long in the tooth.

That is why I believe right now is the time for us to buy these active asset managers BEFORE the cycle turns back in their favor. And I’ve got the perfect stock in mind…

Background — The Rise of the Passive Investment Bubble

Since 2009, the percentage of cash invested in passive investment vehicles has soared, going from representing 25 percent of the market to 50 percent.

All of this market share growth for passive investments has come at the expense of active managers.

rise of passive investments

This is not the first time that passive investing has experienced a huge surge in popularity.

The last time that we witnessed it was during the technology bubble in the late 1990s, when dollars flooded into index funds and ETFs that were dominated by soaring (and very risky) technology stocks — think of these risky stocks like the “FANGs” of their day.

We all know how that ended… the tech bubble burst and the cycle turned hard. The result being that investors took their money out of risky passive investments and into value stocks to get far away from the “FANG stocks” of their day.

This caused value stocks to massively outperform the market and the businesses of active asset managers to explode soon after (in a good way!).

And you know what they say: History never repeats, but it often rhymes.

I believe the turn back to value stocks is coming soon. And it is going to be very reminiscent of what we experienced at the turn of the century.

Which makes now the perfect time to start buying shares of this specific active manager…

Buy Franklin Resources (BEN) Before the Cycle Turns

Franklin Resources (BEN) is a value focused active asset manager which means the company is a perfect stock to buy now, before the cycle turns back to value.

There are several reasons that I think Franklin Resources specifically is the right active value asset manager to buy today.

First – Franklin Resources has a balance sheet to die for. The company currently has $6.5 billion in cash sitting on its balance sheet and zero debt.

Second – The shares of Franklin Resources are dirt cheap.

The current market capitalization (share price multiplied by the number of shares outstanding) of the company is $17.1 billion. If I subtract the $6.5 billion in cash that the company has, this means that the market is currently valuing the entire business as being worth $10.6 billion.

With normalized net income of roughly $1.7 billion in each of the past three years, this means that Franklin Resources trades at just 6.2 times its $10.6 billion enterprise value to net income. That’s dirt cheap.

Third – This business is generating a lot of excess cash flow and is returning a large amount of it to shareholders. The current dividend yield for Franklin Resources is 3.1 percent and the company has repurchased $3.5 billion worth of shares over the past three years.

And it is doing this during a period of time when its active value focused style is out of favor.  When the cycle turns, the cash being generated will only go up.

Fourth – Forty percent of Franklin Resources shares are still owned by the Johnson family which founded the company in 1947. Greg Johnson, the son of the original founder, is still CEO and Chairman of the business.

This is music to a value investor’s ears as this means that insiders are fully aligned with shareholders and are in this for the long-term.

Fifth – A competitor, Oppenheimer Funds, was recently sold for a price that valued the company at 2.4% of total assets under management. Despite being a very similar business, Franklin Resources trades for just 1.5% of total assets under management, or only 60 percent of what the Oppenheimer deal suggests it should.

Put these all together and Franklin Resources combines a cheap valuation, incredible balance sheet, aligned management team, a large dividend, and significant share repurchases…

And all of this is BEFORE the huge uplift in business that will come when the cycle turns back to value.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

The post 5 Reasons to Buy Franklin Resources BEFORE the Cycle Turns appeared first on Daily Reckoning.

This Stock is Unfathomably Cheap

This post This Stock is Unfathomably Cheap appeared first on Daily Reckoning.

Brighthouse Financial (BHF) isn’t just a cheap stock. It is an unfathomably cheap stock.

With a share price currently bouncing are $35, the insurance company is currently trading at 0.29 times book value per share.

How cheap is that?

Similar insurance companies are currently trading for 0.80 times book value.

Brighthouse chart

In order for Brighthouse to trade at their competition’s multiple, the company’s share price would need to nearly TRIPLE from $35 per share to $96 per share…

The reason for Brighthouse Financial’s absurdly cheap valuation is twofold…

First, Brighthouse’s “bread and butter” insurance business isn’t very interesting.

After all, the company primarily sells life insurance and annuities to U.S. households… YAWN.

That doesn’t exactly draw in a lot of investor interest.

Second, Brighthouse was born in the summer of 2017 when U.S. insurance giant MetLife spun-off its retail subsidiary into a separate publicly traded company.

The reason for doing the spin-off was regulatory in nature. By shedding Brighthouse, the new and smaller MetLife no longer met the size of what the government defines as “systemically important.”

That was a good thing for MetLife since it means lower compliance and reporting costs going forward.

After the spin-off, shares of Brighthouse did what shares of spun-off companies often do, they decreased in price and they have yet to recover.

Yet it’s important to note that the company is not in any sort of financial distress.

S&P, Moody’s, Fitch, and A.M. Best all have the company rated as being in fine financial shape — which points to a huge silver lining in this pessimistic valuation…

You Can’t Change The Valuation — So Exploit It!

You might be surprised to hear me say it, but the one thing that Brighthouse shareholders should say to the stock market for this pessimistic valuation is… THANK YOU!

The reason why is because the Brighthouse Board of Directors has taken this incredibly cheap valuation and turned it into an opportunity to be exploited.

Because Brighthouse Financial is in solid financial shape, the Board of Directors is able to deploy excess capital to repurchase shares of BHF in the open market at this rock bottom valuation.

And I’m not talking about a small number of shares…

The current plan that Brighthouse detailed in its corporation presentation shows the intention to repurchase $1.5 billion of its own shares by 2021. If this happens, it is going have a major positive impact on the intrinsic value per share for remaining shareholders.

At the current valuation, a repurchase of $1.5 billion of shares would allow Brighthouse to shrink its share count by an incredible 40 percent!

Now Allow Me to Crunch a Few Numbers for You…

Assuming today’s market capitalization of $4.1 billion, a 40 percent reduction in Brighthouse’s share count from 116 million shares to 70 million shares would result in a share price of $58.57 — a big improvement from today’s $35 share price.

Now remember, that $4.1 billion market cap is valuing Brighthouse at just 0.29 times book value.

Just imagine what would happen if $1.5 billion of shares are repurchased AND the stock market valuation were to also move up to a more reasonable 0.80 times book value!

At 0.80 times book value, Brighthouse Financial would trade at $11.1 billion. And if the share repurchase plan were to reduce the share count to 70 million, that would put Brighthouse Financial’s share price at $158 per share.

Yes please!

Clearly, the best thing that could happen to Brighthouse shareholders is for the market to keep this pessimistic valuation going as long as possible so that the Board of Directors can repurchase shares hand over fist.

The stock market has served Brighthouse Financial shareholders a lemon with this crazy low valuation. The Board of Directors of this company has a chance to turn that lemon into some very sweet lemonade.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

The post This Stock is Unfathomably Cheap appeared first on Daily Reckoning.

Congratulations on the Quick Profits! Here’s What’s Coming Next

This post Congratulations on the Quick Profits! Here’s What’s Coming Next appeared first on Daily Reckoning.

Well that didn’t take long!

Just two weeks ago I wrote to you saying I believed Oaktree Capital Group (OAK) presented a great buying opportunity as a “hedge” against future stock market volatility.

My plan was that Oaktree — with its near 7 percent dividend yield — would be a stock that could be held for the long term. Instead, just one week later Oaktree announced that it was being acquired at a healthy premium to the current share price.

I guess this is goodbye to our portfolio hedge and hello to a very quick capital gain!

These are first world problems, folks…

Brookfield Asset Management (BAM) is the company that is acquiring Oaktree. The purchase price is a 15 percent premium to where the stock traded when I wrote about the business.

Oaktree shareholders have the option to take the $49 offer in cash or in shares of Brookfield. Oaktree has actually been trading slightly above the $49 offer price subsequent to the announcement, so shareholders who prefer cash can sell now and lock in this slight premium.

If cash is your preferred option, then congratulations on the quick stock market win!

If you are interested in maybe sticking around and becoming a Brookfield shareholder, I can tell you what kind of company you will be getting…

Brookfield Asset Management – A World Class Hard Asset Investor

My original thesis behind owning Oaktree was that as a distressed asset investor, the Oaktree business is countercyclical and thereby thrives when the economy and stock market suffer.

That is what would have made Oaktree a useful “hedge” against turbulent times for your portfolio.

All is not lost on that front, however.

I believe that if you decide to accept Brookfield shares instead of cash in this transaction, you will still be very much an owner of a company that is a good portfolio “hedge” against turbulent times.

This transaction involves combining Oaktree’s $120 billion of assets under management (AUM) with Brookfield’s $350 billion of AUM. That means that the countercyclical Oaktree business is still one-third of the business post-transaction.

More importantly though, I believe that Brookfield post-transaction will be a superb company to own for the long-term through all economic cycles.

This is not a combination of two lesser asset managers trying to become something bigger. This is a combination of two asset managers who are the best in the world at what each of them do…

While Oaktree is focused mostly on distressed credit opportunities, Brookfield specializes in the management of “hard” assets. By hard assets, I mean real estate (office, retail, multi-family), infrastructure (toll roads, ports, railways), and renewable energy (hydro, wind, solar).

Like any asset manager, Brookfield receives a fee for investing capital on behalf of its clients. Where a typical mutual fund manager would invest that capital into stocks, Brookfield invests in and operates the hard asset classes I mentioned above.

And by the way, Brookfield invests that capital very well, having generating an annualized 19 percent rate of return since the late nineties. That performance crushes the S&P 500’s 7 percent over that time and U.S. Treasuries’ 4 percent return.

The driving force behind those superior investment returns is Brookfield’s CEO Bruce Flatt who has infused this company with a contrarian investment mindset. Flatt loves to go against the grain and can usually be found buying assets that are decidedly out of favor.

No wonder then that he has often been referred to as Canada’s Warren Buffett.

Since Flatt took over Brookfield as CEO in 2004, the company’s share price has widely outperformed the S&P 500.

Now, with the Oaktree business as part of the company I expect those outsized returns to continue for years to come.

You can sell Oaktree today and pocket a nice short term profit. Or you can take Brookfield shares and do very well for years to come. I think we win either way!

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

The post Congratulations on the Quick Profits! Here’s What’s Coming Next appeared first on Daily Reckoning.

You Can Now Buy Blue-Chip Stocks at a 27% Discount!

This post You Can Now Buy Blue-Chip Stocks at a 27% Discount! appeared first on Daily Reckoning.

Jody Chudley

Today I’m going to show you how to get 27% off a basket of blue chip stocks.

There is no catch here.

You pay only 73 cents on the dollar. Everyone else pays the full buck.

It’s a deal that sounds too good to be true… I know.

But it isn’t.

This Opportunity is a No-Brainer Bargain

The basket of blue chip companies that I’m referring to consists of exactly ten stocks.

These are the companies that are currently owned by Pershing Square Holdings (PSHZF), a publicly traded investment company.

Pershing Square Holdings has no operations. It just owns stocks.

If you own Pershing Square Holdings, you own the stocks that it owns — nothing more, nothing less.

Today, you can buy Pershing Square Holdings in the stock market for around $16.34 per share. Meanwhile, the value of the ten stocks that Pershing Square owns equates to $22.40 per share.

You can see that net asset value right here.

That means today, you can buy $22.40 worth of publicly traded stocks for $16.34 per share. That is 27% off the price that this basket of stocks is trading for in the stock market right now.

It’s as simple as that.

The ten stocks that Pershing Square owns are fine companies, too. The financial highlights are captured below.

  • Pershing’s ten stocks are more profitable than the average S&P 500 company (22% EBIT1 margins vs. 15% for the S&P 500)
  • Pershing’s ten stocks are growing faster than the average S&P 500 company (14% EBIT growth per year vs. 8% EBIT growth for the S&P 500)
  • Pershing’s ten stocks are growing on a per share basis even faster (18% earnings per share growth per year vs. 8% earnings per share growth for the S&P 500)

So not only are you buying a basket of stocks at a 27% discount, you are also buying a basket of stocks that is comprised of very strong companies.

Tell Me The Names of the Stocks in this Basket Already!

These ten companies — which combined have fatter profit margins and are growing faster than the S&P 500 — are depicted below. You probably know most of these world class companies.

Pershing square holdings

As a group, these ten stocks perfectly align with Pershing Square’s investment philosophy — to invest in conservatively financed, non-cyclical, and economically-resilient businesses that tend to outperform in volatile market environments.

This has generated a cumulative return of 606.6% for PSHZF shareholders since 2004 vs. just 236.5% for the S&P 500.

This is a portfolio of stocks that I would be happy to own at their current trading prices. But at a 27% discount to the market’s current trading prices, I believe this is a rare opportunity that combines the potential for significant reward with very little downside risk.

And If You Aren’t Convinced Yet…

There are also three cherries on top of this opportunity that make it even better:

Cherry on Top #1: Pershing Square Holdings has instituted a quarterly dividend of $0.10 per share, which means that the stock yields almost 2.5%. I believe this dividend is not only enjoyable by itself, but it will also start to attract income investors to the stock which will do good things for its trading price.

Cherry on Top #2: The Pershing Square investment team owns a significant percentage of Pershing Square Holdings shares, and are therefore fully aligned with shareholders. Never underestimate the power of having incentives aligned.

Cherry on Top #3: Pershing Square Holdings has been using excess cash to repurchase shares at this big discount to net asset value. Last year, $300 million of shares were repurchased at a discount which is very accretive on a per share basis for remaining shareholders.

You can look long and hard for stock market bargains. Here is one that is hiding in plain sight just waiting to become a part of your portfolio.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 EBIT = Earnings before interest and taxes which is a proxy for operating cash flow less amortization

The post You Can Now Buy Blue-Chip Stocks at a 27% Discount! appeared first on Daily Reckoning.

[INSIDE] A Stock that Goes Up During Good Times and Bad

This post [INSIDE] A Stock that Goes Up During Good Times and Bad appeared first on Daily Reckoning.

Today my objective is simple…

I want to show you why packing up your portfolio and getting out of the stock market during scary stretches is a really, really bad idea.

As you’ll see, time in the market is the key, not timing the market.

However… I realize this is easier said than done.

Therefore, in addition I’ll also be giving you a top quality stock that will position your portfolio to profit in both a rising AND falling stock market.

This will make following through on today’s objective a whole lot easier.

So let’s get to it!

Over Time the Stock Market Does One Thing… Goes Up

The last quarter of 2018 was nothing short of a horror show.

In just the last three months of the year, the S&P 500 dropped a whopping 14%. For comparison, out of the 370 quarters since 1926, there have been only 20 that were worse than Q4 2018.

Even more shocking was the 9.2% decline posted in just the month of December. That ranks as the second worst December on record.1

Without a doubt this was an uneasy time to be in the market.

But just look at how the carnage that was Q4 2018 stands out in a broader view of the S&P 500:

S&P 500 - Historical

There is no question that the fourth quarter of 2018 was terrible, but on that long-term chart it looks like a blip on the radar, a drop in the bucket, a speck on the screen!

Over time the stock market does one thing. It goes up and up and up.

Don’t ever forget that.

Being invested in stocks over the long term is a tremendous way to generate wealth. Even the worst stock market crashes in history are just a temporary annoyance on the stock market’s long-term journey higher.

The single biggest mistake an investor can make is panicking and getting out. So don’t do it.

Sticking to Your Guns During a Market Panic is Hard… But This Will Help

A quick look at that long-term S&P 500 chart is all it takes to convince an investor that staying in the market is the way to go.

But having been through a few really scary market collapses myself, I can tell you that sticking to that long-term plan during a true market panic is much easier said than done.

It is terrifying to watch your net worth melt away on a daily basis.

The “flight or fight” response that is hardwired into our DNA is virtually impossible to fight during such times.

That is why having companies in your portfolio that actually benefit from financial market distress can be so helpful. Holding these securities allows you to remain calm because you know that you own businesses that are profiting specifically because the market is plunging or the economy is reeling.

Oaktree Capital Group (OAK) is one of such companies.

Founded in 1995, Oaktree Capital Group is a widely respected investment firm with nearly unparalleled expertise in the credit market. Under the leadership of legendary investor Howard Marks, the firm is viewed as being perhaps the best distressed asset investment shop in the business.

With $119 billion in assets under management, the Oaktree investment approach is simple: the firm waits until the market is in distress and then swoops in to pick up incredible bargains.

It is no surprise then that when the overall stock market tanks, Oaktree’s share price outperforms. The late 2018 market swoon was a perfect example of this when Oaktree’s trading price didn’t move at all while the S&P 500 fell by a double digits percentage.

Oaktree vs S&P 500

During tough times investors know to look to Oaktree’s stability. The worse the financial markets get, the better it is for Oaktree’s distressed investing approach.

Structured as a partnership, Oaktree pays out almost all of its profits as a dividend each quarter, which as of most recently amounts to a juicy 6.78% yield.

Just this dividend yield alone makes Oaktree a terrific addition to a diversified portfolio. And the comfort that an investment like this provides during market turmoil makes it even better.

As you can see, the stock market rewards investors who stick around for the long-term. And reducing portfolio volatility with companies like Oaktree can help make sure you’re one of the investors who does exactly that.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 The 2nd Worst December Is Only Half The Story

The post [INSIDE] A Stock that Goes Up During Good Times and Bad appeared first on Daily Reckoning.

[INSIDE] A Stock that Goes Up During Good Times and Bad

This post [INSIDE] A Stock that Goes Up During Good Times and Bad appeared first on Daily Reckoning.

Today my objective is simple…

I want to show you why packing up your portfolio and getting out of the stock market during scary stretches is a really, really bad idea.

As you’ll see, time in the market is the key, not timing the market.

However… I realize this is easier said than done.

Therefore, in addition I’ll also be giving you a top quality stock that will position your portfolio to profit in both a rising AND falling stock market.

This will make following through on today’s objective a whole lot easier.

So let’s get to it!

Over Time the Stock Market Does One Thing… Goes Up

The last quarter of 2018 was nothing short of a horror show.

In just the last three months of the year, the S&P 500 dropped a whopping 14%. For comparison, out of the 370 quarters since 1926, there have been only 20 that were worse than Q4 2018.

Even more shocking was the 9.2% decline posted in just the month of December. That ranks as the second worst December on record.1

Without a doubt this was an uneasy time to be in the market.

But just look at how the carnage that was Q4 2018 stands out in a broader view of the S&P 500:

S&P 500 - Historical

There is no question that the fourth quarter of 2018 was terrible, but on that long-term chart it looks like a blip on the radar, a drop in the bucket, a speck on the screen!

Over time the stock market does one thing. It goes up and up and up.

Don’t ever forget that.

Being invested in stocks over the long term is a tremendous way to generate wealth. Even the worst stock market crashes in history are just a temporary annoyance on the stock market’s long-term journey higher.

The single biggest mistake an investor can make is panicking and getting out. So don’t do it.

Sticking to Your Guns During a Market Panic is Hard… But This Will Help

A quick look at that long-term S&P 500 chart is all it takes to convince an investor that staying in the market is the way to go.

But having been through a few really scary market collapses myself, I can tell you that sticking to that long-term plan during a true market panic is much easier said than done.

It is terrifying to watch your net worth melt away on a daily basis.

The “flight or fight” response that is hardwired into our DNA is virtually impossible to fight during such times.

That is why having companies in your portfolio that actually benefit from financial market distress can be so helpful. Holding these securities allows you to remain calm because you know that you own businesses that are profiting specifically because the market is plunging or the economy is reeling.

Oaktree Capital Group (OAK) is one of such companies.

Founded in 1995, Oaktree Capital Group is a widely respected investment firm with nearly unparalleled expertise in the credit market. Under the leadership of legendary investor Howard Marks, the firm is viewed as being perhaps the best distressed asset investment shop in the business.

With $119 billion in assets under management, the Oaktree investment approach is simple: the firm waits until the market is in distress and then swoops in to pick up incredible bargains.

It is no surprise then that when the overall stock market tanks, Oaktree’s share price outperforms. The late 2018 market swoon was a perfect example of this when Oaktree’s trading price didn’t move at all while the S&P 500 fell by a double digits percentage.

Oaktree vs S&P 500

During tough times investors know to look to Oaktree’s stability. The worse the financial markets get, the better it is for Oaktree’s distressed investing approach.

Structured as a partnership, Oaktree pays out almost all of its profits as a dividend each quarter, which as of most recently amounts to a juicy 6.78% yield.

Just this dividend yield alone makes Oaktree a terrific addition to a diversified portfolio. And the comfort that an investment like this provides during market turmoil makes it even better.

As you can see, the stock market rewards investors who stick around for the long-term. And reducing portfolio volatility with companies like Oaktree can help make sure you’re one of the investors who does exactly that.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 The 2nd Worst December Is Only Half The Story

The post [INSIDE] A Stock that Goes Up During Good Times and Bad appeared first on Daily Reckoning.

Bill Gates is 100% Correct About Climate Change…

This post Bill Gates is 100% Correct About Climate Change… appeared first on Daily Reckoning.

Today I bring to you an interesting story of two billionaires…

Both of whom have terrific intentions for helping the human race combat global warming.

What you’ll find interesting about these two men is that despite their good intentions, both have very different views on how to solve the problem.

However, after some thorough research myself, I’ve uncovered that only one of these men’s views actually makes sense. And as informed investors, we have the ability to (continue) profiting as these two men fight to save our planet…

In This Corner — Billionaire #1 Jeremy Grantham

Maybe you have heard of Jeremy Grantham. Maybe you haven’t.

What you need to know about this billionaire is that he is one of the best macro-level investors of the past half century.

Grantham is especially prescient about sounding the alarm bells on dangerous financial market bubbles before they pop. Investors listening to Grantham would have avoided the crash in 1987, the Dot.com crash in 2000 as well as the real estate and stock market crashes of 2008.

His track record is one that proves his opinions should be considered carefully.

Today, Grantham is ringing the alarm bell again. This time Grantham doesn’t see a bubble in the financial markets, he sees a bubble in the number of human beings on this planet.

Grantham believes that planet Earth will soon have an unsustainable number of mouths to feed.1

World population throughout history

Grantham’s view is based on his belief that global warming is going to cause serious food shortages.

According to Grantham, rising sea levels are going to flood key rice growing farmland in several enormously populated river areas. That hit to global food supply — combined with a rapidly growing population in those same areas — will be catastrophic.

Grantham’s investment response to this was to divest anything that he owns tied to the oil and gas industry. His belief is that the transition towards renewables is going to happen with shocking speed in the coming years due to the growing seriousness of global warming.

For some perspective on Grantham’s conviction level, consider the fact that he is donating 98 percent of his net worth to save the Earth from the consequences of climate change.

In The Other Corner — Billionaire #2 Bill Gates

You know Bill Gates. I know Bill Gates. Everybody knows Bill Gates.

When you have a net worth of almost $100 billion, your name gets out there!

Like Jeremy Grantham, Bill Gates believes that climate change is a problem.

And like Grantham, Bill Gates is trying to help stop climate change through a $1 billion investment fund that is seeking solutions.

Unlike Grantham, however, Gates doesn’t believe that the oil and gas industry is going away anytime soon.

In fact, Gates believes that the energy provided from oil and gas is going to continue to be quite important. Gates views intermittent renewable energy sources like wind and solar as not even close to being a realistic solution.

According to Gates, the problem with these renewable energy sources is that they simply aren’t reliable. When the sun isn’t shining and the wind isn’t blowing there isn’t any power. Because they provide intermittent power, these sources of energy require storage and according to Gates, current battery storage capability for them is “woefully deficient.”

To be a real replacement for oil and gas, Gates believes that renewables need a miracle.

Gates is Right… And He’s Got the Stats to Back It Up

Bill Gates desperately wants the world to wake up and realize that finding renewable energy is just part of the equation.

That’s because as he astutely points out, greenhouse gas emissions actually come from several sources:

  • Electric Power Generation – 25 percent
  • Agriculture/Cattle – 24 percent
  • Manufacturing – 21 percent
  • Transportation – 14 percent
  • Buildings/Air Conditioning/Refrigerators – 6 percent
  • Other – 10 percent3

These numbers are revealing.

If the oil and gas industry is a target because of their greenhouse gas emissions, then everyone that eats hamburgers should also be a target because the methane gas released from cattle contributes as much greenhouse gas as all electric power generators.

But we can’t stop there. Other targets should include everyone who uses anything manufactured (steel, plastic, cement, etc.), runs an air conditioner, or takes a vacation.

If you are buying a Tesla to save the environment, you should also be eating vegan and living in a tent. That is a bit dramatic, but you get my point.

Your takeaway today is that no matter what you think of climate change, what you should know is that the Gates view is much more realistic.

We are miles away from not needing the power provided by oil and gas and therefore the drillers, refiners and pipeline companies whose stocks have performed so well this year should still serve a valuable service well into the future.

Further, the people pointing fingers over climate change — like Jeremy Grantham — need to start directing those fingers in many more directions than just energy producers if they really want to make a difference.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 Investing Prophet Jeremy Grantham Takes Aim at Climate Change

2 https://www.gatesnotes.com/Energy/My-plan-for-fighting-climate-change

The post Bill Gates is 100% Correct About Climate Change… appeared first on Daily Reckoning.

Warren Buffett Bets Big as Canada Abandons Capitalism

This post Warren Buffett Bets Big as Canada Abandons Capitalism appeared first on Daily Reckoning.

In a shocking turn of events, the Canadian Province of Alberta abandoned free market capitalism in December of 2018.

This was a story we were on top of as events unfolded.

Following the lead of dictators and oppressive regimes around the world, Alberta announced the enactment of mandatory production cuts for large oil producers operating in the province.

Keep in mind that Alberta is the Canadian equivalent to Texas. Cowboy hats and pickup trucks are everywhere. And Albertans don’t like the government sticking its nose in their business.

The most conservative of all people can be found in the Alberta oil patch. These folks are true entrepreneurs and detest government intervention.

As you might expect, the response to these government mandated production cuts in the Alberta oil patch were overwhelmingly… positive.

Wait, what?

Desperate Times Call for Desperate Measures

Prior to the Alberta Government’s oil patch intervention, Canadian Heavy Oil was selling for $50 per barrel less than West Texas Intermediate, the benchmark American oil blend.

Canadian producers were getting not much more than $10 per barrel for their crude. The industry was losing billions and billions of dollars and the Alberta Government was too because of lower royalty fees that were assessed on production revenue.

The reason for the pricing difference was simple:

Alberta’s oil is landlocked. Being landlocked means that the province needs to ship its oil through pipelines that run through other provinces and American states.

As you are likely aware, these days getting major pipelines built has been virtually impossible. The political left and environmental groups keep putting up roadblock after roadblock.

With all pipelines out of Alberta already full and the resulting glut of oil only forecasted to get worse, prices in the region plummeted.

That’s when the Alberta Government took action to deal with the problem.

With the benefit of hindsight, it looks like a great decision.

Immediately after the production cuts were announced, Canadian Heavy Oil prices went on a tear, now having tripled since December.

It has truly been a spectacular reaction by the market.

suncor's dividend

As I said, we were on top of this story back in early December, the moment after the production cuts were announced. I pegged Alberta producer Canadian Natural Resources (CNQ) as a way to profit from the opportunity we saw in improving Canadian heavy oil pricing.

I still like Canadian Natural shares today.

Interestingly, it turns out that I wasn’t the only one who saw a rebound in Canadian oil pricing as an opportunity in December.

Last week a certain “Oracle of Omaha” revealed that he had opened up a big new position in another Alberta oil producer during the fourth quarter of 2018…

Warren Buffett Bought Suncor and You Can Too!

During the fourth quarter of 2018, Warren Buffett’s conglomerate Berkshire Hathaway purchased more than $300 million in shares of integrated Canadian oil producer Suncor Energy Inc. (SU).

You don’t have to look any further than the chart below to understand what the appeal of Suncor is for Buffett.

suncor's dividend

Today, an investor can lock in a 3.9 percent yield by buying shares of Suncor. That yield is nice, but think of what that yield might turn into five years from now.

That’s because Suncor does an incredible job of growing that dividend.

In 2002, Suncor’s quarterly dividend was $0.01 per share. Today that quarterly dividend is $0.316 per share — a 31.6 times increase!

Just from 2010 until now, Suncor’s dividend has quadrupled. And guess what folks… oil prices are lower today than they were in 2010!

That kind of dividend growth with oil prices falling is amazing and speaks to the quality of Suncor’s assets.

This company is a cash flowing monster. Exactly the kind of free cash flow machine that Warren Buffett loves to own.

The big reason Suncor is able to return so much money to investors lies in the fact that Suncor’s existing base of oil reserves is already large enough to last for the next 36 years. That means that this company already has all of the oil it needs so it doesn’t need spend money and resources on finding more.

Complimenting Suncor’s massive reserve base is the fact that the company’s production has a miniscule decline rate of just 1 percent per year.1 That means that not only does the company not need to spend money finding oil, it also doesn’t need to spend much money offsetting year on year production declines.

For context, consider that a typical shale oil producer battles annual decline rates of more than 30 percent. That means that a shale producer must drill enough wells to replace 30 percent of production every year just to keep production flat!

These are expenses that Suncor — with its 1 percent decline rate — doesn’t have. So instead of spending that cash, Suncor can return that cash to shareholders.

With a rapidly growing 3.9% dividend yield, a 36-year reserve life and a 1 percent production decline rate, I believe Suncor is perfect addition to any diversified portfolio.

Just like Mr. Buffett!

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com

1 Suncor Energy Inc. Investor Relations

The post Warren Buffett Bets Big as Canada Abandons Capitalism appeared first on Daily Reckoning.