At the end of last year, I sent stock picks to a few close friends. Almost all of the stocks I picked (DD, DIS, AAPL, DNKN, IBB, COST) were up sharply by the end of January. I think Costco was the only loser, down 0.23% on the month. But I felt like an idiot, because I failed to capitalize properly on my own picks! I spent most of January trying to move money out of the market ahead of downturns, and failed to keep a significant percentage invested on upturns. In other words, I held too much cash; not enough invested.
I'm still learning.
I thought I'd share my notes with you, though, for what they're worth.
Going forward, the big story to watch (for me, at least) between now and summer is the price of oil. Stocks have been hurt whenever oil goes below $50. But we can just about bet on oil going up between now and summer; the question is how much, how soon. (I'm not one of those who thinks we're going to re-test January lows. The closer we get to spring, the less likely that is.)
So far, the oil downturn has been explainable as a supply-driven event, but there is (I'm sure) also a demand component, which has been a bit stealthy. By late May, we should be able to see how much demand reduction there's been (due to crappy economies in the U.S. and Europe). I'd expect to see oil reach $70 by July, ordinarily, but if demand is softer than we think, it could have a lot of trouble getting there, with many false runups along the way. The $60 level is crucial, because wind, shale/sands, and deep-water rigs are not economical with oil under $60. I'm sure our Saudi "friends" would love to see oil stay below $55 forever, to stall investment in non-Saudi-sourced energy. However, the Saudis' power to manipulate the markets is not infinite, and any manipulations will ultimately be short-lived, so $60 oil is not a question of if, but when.
The strong of stomach will want to consider BP and HAL as oil goes up. The latter, currently $44.60/share, should hit $50 by spring, barring something weird happening, but this is a weird market, and HAL is a volatile stock, so beware. The ride could get bumpy.
If you're an aggressive investor, don't wait until spring to begin laying in a few oil-related positions. The time to act is now, or on any pullback in oil. You snooze? You lose.
Kellogg's (K) took a bit of a beating a few days ago and is now on sale at $63-and-change (down from $66.30 on 11 Feb). It will go up. You can probably make 4% on your money here in two months, not even counting the stock's $0.49 quarterly dividend. What's not to like about Kellogg? Significant international exposure. What's to like? Low oil prices. (That, and the fact that the company has just done a reset on expectations, gotten the bad news out of the way, etc.)
|Kellogg Company got dinged on 12 Feb 2015. Buying opportunity.|
What does the price of oil have to do with corn flakes? Plenty.
You might already know that the corn in a $2.20 box of Corn Flakes costs Kellogg about 14 cents. Processing the corn into flakes costs 26 cents (15% of the wholesale price); add about eight more cents (4.5%) for freight and 12 cents (7%) for packaging. Labor is six cents (3.5%). Advertising and marketing make up 30% of the total cost, with the remainder accounted for by general and administrative (G&A) costs, warehousing, profits, CEO compensation, and other "overhead."
Processing, packaging, and freight (all energy-intensive) account for about 27% of Kellogg's costs. (Raw materials also reflect energy prices, but that's not so important in the overall scheme of things; low oil might save Kellogg a penny or two on the corn in the box of flakes.) If Kellogg can shave a couple percentage points off its processing, packaging, and freight, it translates to big bucks, because the company typically grosses $14.5 billion in sales per year. (Wouldn't you like to have 1% of that?) Bottom line, I think oil will stay low enough long enough to give K some margin-expansion leeway while it figures out how to get skyrocketing overhead under control.
Enough said about Kellogg. What else is worth buying here?
Well, I'm a big believer in biotech, but I'm not smart enough to pick individual stocks in this tricky industry, so I like IBB, the biotech index fund. It finished up 26.8% last year, up 24% in the last six months, and it's up 7.6% YTD. Buy it on any pullback and expect to hold onto it for, say, six months. I like it right here at $326-and-change (17 Feb 2015).
MSFT is still fairly inexpensive and has a good shot at getting back to the high 40s later this year. You could make 10% in a year, or 3% in two months; or it could stay flat, although somehow I doubt it will. I don't think it will revisit $40 any time soon. (If it does, buy even more of it.) Pick up a little bit now, I say, while it's still under $44.
For diversification purposes, you might want to own some defense stocks. Lots of good stuff to choose from here, but based on the great-looking six-month and one-year charts, I have to go with Northrop Grumman (NOC).
|Northrop Grumman (blue) vs. the Dow (red), six month chart.|
Right now, aerospace/defense is a much safer war/disaster hedge than gold, IMHO, so you should definitely own a few shares of one of the big bomb-droppers (RTN, LMT, NOC, or something in that vein). Forget gold, I say. If you have to own a metal, make it aluminum (AA is primed to break out, though I wouldn't buy just yet).
So those are my picks, for now: NOC, IBB, MSFT, K, BP, and for the strong of stomach, HAL. Let's see how they do in a few weeks or months.
Now back to our regular programming.
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