Issue 2
06/22/04
"Boring" Companies Make For "Perfect" Stocks
Dear Friends,
After the first issue of Investing With Mom was published, just 10 days ago, a friend of mine sent me an email asking if I could show her how to get started with her first investment account. Of course I said that I would love to, but I told her I would rather give everyone my thoughts through the newsletter, simply because I believe that even if you already have multiple investment accounts, this is still information you should know. It can never hurt to find a company that can save you money on your investments, especially if you're starting out small.
Low Entry Barriers:
One aspect of business that everyone should consider is what is known as the cost of entering a market. Entry barriers for many businesses have dropped dramatically over the last decade or so thanks to the internet. The brokerage that I currently use, www.buyandhold.com, is in my opinion the best at lowering the entry barriers for beginning and small investors. Having had an account with Buy and Hold for over 4 years now, I can attest to their reliability, extreme low cost, lack of usual brokerage house conflicts, low entry barriers, easy maintenance and ability to find the best prices for my orders. First of all, I can count on one hand the number of times I've had problems with my account that forced me to contact customer service. The couple of times it has happened however, the problem was solved within a few hours at the most. Secondly, when I say extreme low cost, I'm talking about the fact that Buy and Hold only charges $2.99 for stock orders placed during their trading windows, no matter how many shares you are trading! Let me repeat that, if you place what they refer to as a window trade, you only have to pay $2.99 for the order, whether you are trading $20 or $20,000 worth of stock. If however, you are an impatient son of a gun, you may alsol place a market order for a very reasonable $14.99, which is still less than E-trade! A third aspect of Buy and Hold is that I don't have to deal with a broker who is constantly trying to sell me on his latest smoking hot stock picks. You may want a little hand holding, I do not however, wish to pay someone to second guess me. I get enough of that just thinking through each of my recommendations before publication! Fourth, with regards to the low entry barriers, Buy and Hold allows you to initially fund your account with less than $100 and you may send additional funds anytime you wish, in any amount you wish. I regularly go online and send automatic transfers for $20, $30 or $50 at no cost to me, other than the time it takes to go online and make the transfer. I have only found one other online brokerage that comes even close to Buy and Hold in that regard. Fifth, I have found Buy and Hold to be a very easy account to maintain, simply because their website is very easy to navigate once you have logged in. They have posted online any information I usually might need with regards to my account, whether it is tax info or transaction data, and it is all quickly accessible and easy to use. Sixth and last, I'm not entirely certain as to the system they use for purchasing stock within their window trades, but I have found one thing to be true. Invariably Buy and Hold, has managed to find me the best price for my transactions within each of the three daily windows. Although I'm not necessarily worried about the lowest possible entry point for my stock purchases, because of my longer term holding period, it is nice to know that somebody is trying to make sure that I still get as close to the best possible entry and exit price on each of my trades. Now, if I was a short term swing trader, this would not be the brokerage for me, but rather Buy and Hold is an excellent brokerage for medium to long term investing, whether through your IRA or not. I hope that helps anyone who may be worried that without $2,000 to $10,000 they weren't sure they could open a brokerage account and successfully invest for the long term. Buy and Hold does charge a monthly account fee, but in return they give you at least 2 window trades per month at no cost. Anyone who plans on making at least 6 trades per year should probably look into opening a Buy and Hold account, because that's how many trades you would make in most brokerage accounts and still pay more than the 12 monthly fees that Buy and Hold would charge for an entire year.
"Boring" Companies Make For "Perfect" Stocks:
Call me crazy, greedy or indecisive, but whatever you do read what I have to say about the 2 "perfect" stocks profiled below. Everybody else thinks these 2 companies are risky, and by everybody I'm referring to the mainstream financial press. They're all still scared because of Shell's recent revelations regarding overstated reserves and so Wall St. is going to miss out on some monster profits. Many of you may have heard the name Martin Weiss before. He's famous for having created one of the first, if not only, independent ratings firm. His ratings are valuable because he's not supposed to be as biased as all of the analysts who work on Wall St. However, when I recently received his latest promotional publication aimed at individual investors, like you and I, he was talking about the safest oil and gas stocks to protect us from the coming rise in interest rates. Sounded reasonable to me until I saw his list of 25 stocks and realized that he'd missed the 2 best, safest and most "perfect" stocks I know of. I couldn't believe it; Weiss had included such behemoths as ConocoPhillips and ExxonMobil, but had excluded 2 of the top 5 largest natural gas producers in North America. Not only are they big time natural gas producers, these 2 companies are growing like gangbusters. In the first issue of Investing With Mom, I put targets on both companies that exceeded 2 years, not this time. I believe that we'll only have to wait about 12 months on the 2 stocks I'm about to detail, before they reach our targets for growth.
Insider Buying:
The first company owns over 15,000 actively producing oil and gas wells and has the rights to over 3 trillion cubic feet of natural gas. All of which makes Chesapeake Energy (CHK - NYSE) a top 5 independent natural gas producer in the U.S., better yet the company spent $700 million on exploration over the last year which placed it first among U.S. drillers. Chesapeake is growing so fast that Wall St.'s analysts have been upwardly revising their earnings estimates all spring. However on August 1st, when Chesapeake announces their 2nd quarter results, I'm going to predict that they will give us an upside surprise. How can I be so confident? Well let's take a look at some facts. First of all, energy prices are rising year round now. No longer is natural gas a cold winter play, only making investors money when the U.S. is experiencing super cold winters. It's so much in demand that last month energy prices set a new record high. In fact natural gas is going to stay above $5 for the foreseeable future, or at least until a new batch of refineries get put in place - 15 to 20 years from now! If you don't believe this first fact, ask yourself one question, "What do I want producing my electricity, nuclear power, coal, or clean burning natural gas?" And don't tell me that we can build any more hydro dams or use wind turbines in the near term, either. Secondly, Chesapeake's production has been exploding over the last year. The company ended 2003 with numbers that would make anybody drool. Revenues in the fourth quarter were up 77% from 2002's fourth quarter, production for the entire year was up 50% over 2002, new reserves were being found at a rate of 450%, thus replacing whatever they were pumping out, 5 years worth of production had been located for exploration and drilling, and finally 2003 was the 14th year of consecutive production growth. 14 consecutive years at an average increase of 28.1% annually, that is an increase in Chesapeake's production of 32 times for every barrel being produced 14 years ago. All of this is great, but the third and final fact is, in my opinion, by far the best indicator pointing to a tremendous upcoming earnings surprise and will only be followed by a great 12 months for investors. Although insiders bought millions of shares in Chesapeake throughout late 2002 and 2003, Chairman Aubrey McClendon and President Tom Ward have purchased over $5.5 million dollars apiece this year alone! In fact, all of these 2 gentlemen's purchases this year have come while Chesapeake's stock has been above $13.50/share. It's one thing for the 2 of them to be buying millions of shares in 2002 and 2003 while the stock was still below $10/share, but quite a bit more bullish for Chesapeake since they've bought more at even higher prices. Just between the 2 of them, they own over 21 million shares of Chesapeake's stock, which is now worth over $300 million dollars! My recommendation is to buy below $15/share with a goal of $25/share by the 4th of July, 2005. If by some miracle, Chesapeake should fall below $13.50/share before August 1st, buy more! We'll set our stop loss at just $12/share, but I can't see us ever seeing that price again, unless the stock splits. One last note, if you buy before July 1st, you will receive an additional bonus, this quarter's dividend.
More Cheap Land:
The second "boring" company controls more than 25 million acres, most of which was given to the company by the Canadian government, over 100 year ago. Wow almost sounds like another undervalued land company, except that this land makes Encana (ECA - NYSE) the largest independent natural gas producer in North America, in fact it's even larger than ExxonMobil. Now this might be a problem if Encana overstated their reserves, ala Shell, but instead Encana has had their reserves checked by outside auditors and seismic data. Another aspect of the enormous land holdings Encana enjoys is that on approx. 5 million acres they pay absolutely no royalties and they're the only natural gas explorer/producer in North America with that advantage. Because Encana enjoys a 20% discount on the competition, they effectively pay less than 16% of revenues in royalties, instead of the U.S. industry average 20%. This has translated into an average operating cost per unit of only $1.17, versus the recent $5/unit of natural gas Encana, and the rest of the industry, has been enjoying on the open market. Thus Encana generates a 327% initial profit margin, which has enabled the company to join Chesapeake in raising their dividends already this year. As we noted with Chesapeake, the key to long term sustained growth is predicated upon a high rate of growth in the replacement of existing reserves that are being pumped out of the ground. Encana is definitely achieving that through multiple sources. They just completed an acquisition of Tom Brown, which added over 12% to Encana's natural gas reserves, in addition to upping their exploration budget for the remainder of the year, from $750 million dollars to $1.6 billion dollars! Now that's what I call a commitment to long term growth, especially since $700 million of the increase will be used right here in North America. Additionally, last week Encana stepped forward with new guidance for Wall St. to chew on, effectively increasing all of Wall St.'s growth estimates for this and next year. However, the final surprise while researching Encana came when I did the math for their price to earnings ratio, which I discovered was one of the lowest P/E ratios in the industry at just under 9, for the trailing 12 months. The industry average is over 15 and even ExxonMobil's P/E ratio is over 14, which tells me that Encana's stock has plenty of room to grow. My recommendation would be to buy under $44/share, with a 12 month goal of $60/share. We'll set the initial trailing stop at $37/share, just to be safe, but I really don't expect to have to use it. Finally, both of these companies pay a small dividend and while that is a nice bonus, I fully expect the growth of the stocks to far outweigh the dividends.
Housekeeping:
I hope you all had a chance to purchase some stock in Antigenics when I recommended it last Monday. It's gone up every day since then and although it's too early to tell, that may end up being the near term low. While it won't be reflected in the official portfolio as having been purchased at such a low price, all of you had an excellent opportunity to generate even higher returns than the newsletter will.
Finally, because of the Fed Open Market Meeting on June 30th, there is a very good possibility that the next edition of the newsletter will be a little different than these first two editions. There really is only one company in our current portfolio that is super sensitive to interest rates and that is Annaly Mortgage, so I'll be most likely giving you an analysis of why we're keeping or dropping it next time around. I would also like to answer any questions you might have, so please feel free to ask me your questions and I will do my best to either answer them.
Yours for good investments,
Andy Prior
