An update on my personal investment philosophy
May 25, 2008
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Around six months ago I posted a message in my blog that outlined my personal investment philosophy. Not only did I enjoy sharing my thoughts and ideas with everyone here in the great CAPS community, but it helped me as well. I am now back with an update. I am going to have to be fairly general in a lot of the things that I am bullish and bearish on because I want to remain nimble in the current market environment and TMF rules prevent me from trading specific stocks within ten days of mentioning them. Everything that I am trading in real life I currently have in my CAPS portfolio.
LONG PLAYS
I continue to be very bearish on the U.S. dollar and very bullish on "stuff" aka commodities, like grains, metals, and of course oil / natural gas. While many in the investment world, like Barron's, have continually doubted the global decoupling theory. I believe that it is very real. Perhaps not complete decoupling in that China and India will be completely immune from the current slowdown in the U.S., but they will remain enough so that their demand for natural resources will be insatiable. Throughout 2007 I concentrated my portfolio in companies that will benefit from these trends, most heavily in anything having to do with oil and natural gas which in addition to demand from emerging markets have the added bonus of mismanaged infrastructure in major producing countries, geopolitical risk, and a finite supply. Add the tailwind of a weakening U.S. dollar to this trend and this trade was a no brainer.
Having said this, the current mind blowing rally in the price of oil has exceeded even this bull's wildest expectations. I am not selling anything, but I am fairly hesitant to significantly add to any of my positions until a pullback happens...if it ever does. What I have been doing is concentrating my portfolio more in my favorite companies. As everyone can tell, from my constantly full 200 pick CAPS portfolio I like to buy a lot of companies. I have been selling some of my smaller E&P positions and buying more of my two favorite plays, neither of which are in the U.S.
As I mentioned, I continue to be bearish on the U.S. dollar. This theory has led me to purchase companies that are heavily involved in exporting goods. There has been a lot of weakness in some of these companies lately, but I believe that this trend will continue.
NEW: SHORT PLAYS
None of the things that I have mentioned should surprise anyone who has followed my blog. Well, here's the new twist to my real world portfolio...shorting. After taking a loooong vacation from shorting stocks in the real world I have begun to do so again. I decided to do so for two reasons. The first is that despite trying to be as positive as possible when writing articles for my blog, I have been having a much, much easier time to find stocks and industries to bash. I finally decided to cave in and said to myself, if some of my best investment ideas right now are shorts, why not play them for real.
I have started shorting small groups of stocks in two sectors. My largest short positions are in restaurant stocks. I have written on numerous occasions in the past that I think that this sector is headed for a world of pain. I have absolutely no doubt that this is the case...the only question is when. If the average person who receives a government stimulus check is as stupid as most believe and they waste it on going out to dinner and buying crap then it may delay the pain for this sector. Either way, it's coming. Here are the three main reasons why:
1) Outrageously high prices for gas and food are going to cause discretionary consumer spending to fall off a cliff.
2) Restaurants are already feeling the pain of higher prices for things like bread and vegetables, but they haven't seen anything yet. Significantly higher meat prices are right around the corner. Meat price inflation has lagged the inflation for other types of food because producers decided to rush their animals to slaughter. I was actually early on this trend, but it has been starting to get some press in the last couple of weeks. Here's an example: Pricier US chicken coming to a store near you.
3) The July increase in the minimum wage (and another one that is scheduled for a year from then) will increase labor costs at restaurants. The food services' industry is currently the largest U.S. employer of minimum wage earners.
So there you have it. Consumers will eat out less in an environment where ingredient and labor costs will be rising. It is a perfect storm that will hammer even the best-run companies. In shorting them for real, I have been looking for casual dining chains (not fast food) that have P/E ratios of 20 or higher. There's a fat chance of any of these companies being able to generate 20% earnings growth in the current environment. A concentration of stores in the areas of the country that are being hit the hardest right now, like California, Florida, or the Midwest doesn't hurt either.
The other area that I have started to short companies in is credit card companies. Credit card delinquencies are on the rise and consumers will continue to rack up massive credit card bills as they are no longer able to afford the basic necessities of life, like expensive food and gas. I have been looking for pure credit card plays that have actual exposure to the debt, not companies like Mastercard. The credit card companies are going to have to keep more of the credit card debt on their books in the past if they are unable to securitize it and there is going to be a dramatic increase in defaults as real wages significantly lag inflation and the unemployment rate rises. An exposure to auto loans as well as credit cards is a plus. I am trying to stay away from companies that have a large number of bank branches that will provide them with access to a cheap source of funds, but a small presence is fine.
MISSED OPPORTUNITIES
The only short play that I have written significantly about that I have yet to short in real life is Mexican airports. Man I really missed the boar on this one. Companies like OMAB and PAC have been getting crushed and I saw it coming from a mile away. Oh well. They probably have a lot more pain to come. The more traffic they have, the more money they make and traffic will continue to weaken at them as U.S. and Mexican consumers are hit with higher prices for food and gas (tortilla prices have risen so much that there are major protests in Mexico). Additionally, higher fuel prices are causing airlines to raise their ticket prices causing a double whammy...consumers have less disposable income to spend on a thing that is becoming increasingly expensive. It's getting so bad that several airlines could eventually go bankrupt. The low-cost Mexican carriers are at higher risk for this. Any of them going bankrupt would hurt the traffic levels at Mexican airports as well.
MEMORIAL DAY THOUGHTS
On this Memorial Day weekend it pains me to be so bearish about the American economy and where our terrible politicians are taking us. I have been doing activities that fill me with a tremendous sense of national pride like sitting in the stands of a Yankee game with my son, eating a hot dog and peanuts and going to parades. Unfortunately, there's no room for sentimental feelings in the cold world of investing. If the government is going to run our great nation into the ground I have an obligation to protect my family by hedging against it in my investments. I have done so by investing in oil companies, ag companies, and foreign companies. By no means to I believe that the U.S. is doomed, just that we are losing our place as the world's most dominant nation.
I always find summarizing my personal investment in writing pholosophy helpful. Hopefully some of you will find something here that helps you as well. I'd love to hear others' thoughts on my current philosophy and suggestions about companies within these sectors that would make good purchases or shorts.
Have a great Memorial Day weekend everyone!
Deej
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