JakilaTheHun (99.93)

The Huney's Investment Ideas for January '09

January 05, 2009 – Comments (5) | RELATED TICKERS: TKC , DBA , RJA

The Huney's Investment Ideas for January '09

As we enter into a new year, it's time to re-examine the best investments out in the market right now.  Last month, steel, dry-bulk, agriculture, gold, and silver miners all seemed to offer screaming buys to me.  I bought in heavily for my fantasy portfolio on Facebook's Kaching and gave the thumbs-up to numerous stocks here on Motley Fool's CAPS, but unfortunately was not able to take advantage as much I would have liked to in real life, with the exception of getting in on Titanium Metals (TIE) at $7.00. 

Now that stocks in all the aforementioned industries have experienced a significant run-up, they look considerably less appealing.  But while there is nothing out there that seems like an obvious screaming buy to me any more, there are still a lot of good investments out there.  

The Case for Commodities

I'm in agreement with Jim Rogers on the fundamentals of commodities.  There are a lot of dissenting voices out there who think that demand destruction will continue and commodity prices will continue to go down.  However, it's important at the actual fundamentals of most of these commodities.  For a significant chunk of metals and other commodities, the production costs are now lower than the spot market prices.  That sort of situation never lasts too long as no one is willing to continue producing for a loss.  Hence, supply goes down and prices go back up.

There's also a few more interesting dynamics out there --- many people were ultra-bullish on commodities back in the summer of '08, but vast demand destruction resulting from the worldwide recession destroyed prices.  Yet, the difficult deleveraging process that we are undergoing right now actually makes commodities much more appealing from my perspective.  For one, the current players in many of commodity industries are lowering production and secondly, there's less capital out there for new entrants to enter the market.  The likely end result of these dual dynamics is that commodity prices will go through the roof once there is any sort of demand recovery. 

To make things even more appealing, we are seeing the United States and several other major world players throwing a lot of money at this economic crisis.  Here in the US, I would be surprised if the end result is not double-digit inflation at some point in the future.  Commodities provide real value that will help protect against inflation.  I'd much rather have my money in commodities than in the US Dollars, bonds, or fixed return investments.  Keep in mind, that commodities are traditionally considered a more "high-risk" investment than the other investment vehicles I mentioned, but in all honesty, I would be more afraid to hold those supposedly "safe" investments right now than commodities. 

General Commodity ETFs and ETNs

You can buy into the stocks of companies that produce commodities, you can buy into the commodities themselves, or if you want a simpler and easier investment, you can buy into commodity ETFs and ETNs.  As there has been a run-up in commodity stock prices over the past month and I believe ETFs and ETNs are simpler investment vehicles for the average person, I'm advocating that approach right now. 

Personally, I'm considering buying into the Commodity Double Long (DYY) ETN soon.  This is a levered fund and potentially can produce higher returns than a non-levered ETN, so that means higher risk and potentially higher reward.  I don't necessarily recommend this for most people, but if you want to take a bigger chance, it's an option.

However, if you're more risk-averse but want to make a play on commodities all the same, there are lots of options out there for you.  A few to consider:

DB Commodity Long ETN (DPU)
PowerShares Commodity Index ETF (DBC)
iPath DowJones-AIG Commodity Index ETN (DJP)

Agriculture

The commodity indexes will include agricultural commodities, but if you're looking to go solely with agriculture, there are also a lot options:

Rogers Internat'l Commodity Agriculture ETN (RJA)
Power Shares DB Agriculture ETF (DBA)
E-TRACS UBS Bloomberg CMCI Agriculture Index ETN (UAG)
iPath Dow Jones AIG-Agriculture ETN (JJA)

Also, if you wanted to invest in particular areas of agriculture, there is an iPath Grains ETN (JJG) and an iPath Livestock ETN (COW) to consider.

There are some individual companies I would consider, but I believe the upside is less pronounced than it used to be.  Syngenta (SYT), I believe, has considerable growth prospects and still seems reasonable to me under $40.  Agrium (AGU), Intrepid Potash (IPI), and Mosaic (MOS) are other decent ag bets, but I like all three significantly less than I did a month ago now as all have experienced gains of over 40% from their lows.  There still might be some decent returns left in them, but they would look considerably more attractive if they were to drop another 10-20% again. 

Gold and Silver

Last month, I thought all the gold and silver miners were good buys.  However, my own discounted cash flow analysis of most of these companies now shows most of these miners to be only slightly undervalued at this point in time.  I think Goldcorp (GG) might be fairly valued at $35, Barrick Gold (ABX) at around $40, and Silver Wheaton (SLW) looks like it should trade in the $7-12 range.  Those estimates might be low-balling it or maybe they're about right, but either way, from my perspective, they don't appear to be all that significantly undervalued any more.  Of course, this does not necessarily mean that the stocks won't overshoot those values for a period of time, so they still can turn out to be decent investments.

Yamana Gold (AUY) is the only one of the bunch that I can find that might still be "significantly undervalued".  I set a target for it at $12, but maybe I'm just being overly optimistic on it.  We'll see.  One way or another, I think buying into physical gold and silver, or for simplicity's sake, buying into gold and silver ETFs and ETNs might be a better bet. 

I do not foresee gold prices upwards of $2,000 per ounce like some analysts are predicting.  Nor do I think gold is where you want to be if you're looking to make a huge return in the market.  Gold is a safe-haven and a store of value.  It's a guard against runaway inflation and can help protect your current wealth.  Sometimes, it will even allow you to grow your wealth if you buy in at the right moment. 

I bought a very small clip in the DB Gold Double Long (DGP), which is one way to actually try to play gold for a significant return.  Of course, the leverage means that this is not a "safe haven" investment with minimal downside, too.  If you're looking for a more conservative gold play, there are some good ETNs:

streetTRACKS Gold Shares ETF (GLD)
iShares COMEX Gold Trust ETF (IAU)
E-TRACS UBS Bloomberg CMCI Gold Total Return ETN (UBG)
E-TRACS UBS Bloomberg CMCI Silver Index ETN (USV)

Even if I'm not as aggressive on gold as others, I see it as much safer than the US Dollar and treasury bonds right now and would not be surprised if it soared over $1,200/ounce.  You might ask if I believe this, why not buy into gold miners still?  The primary reason is that while gold miners will make better revenues, if gold really spikes up that high, it's probably because inflation is driving it.  Hence, production costs for miners will also rise.  The gold miners still might not be a bad bet, but I see them as more risky and not having a return desirable enough to entice me any more. 

 It's also worth noting that silver appears to be more undervalued than gold right now. Of the companies I've mentioned, Silver Wheaton (SLW) might be the best value.  I don't have it atop my list of priorities, but I think it still could have decent upside. 

Industrial Metals

I think industrial metals actually offer some of the best returns right now for the long-term investor.  I'm particularly high on palladium.  It has been beaten down thoroughly and many of the miners have cut or outright ceased production as costs of production exceed the prices on the spot market by a significant degree.  Unfortunately, there are no ETF or ETN plays on palladium for American investors that I am aware of. 

Platinum might not be a bad bet.  I'm not as high on it as I am palladium, but buying into the E-TRACS UBS Long Platinum ETN (PTM) is an option.  However, I'm not a particular advocate of using ETFs and ETNs with most industrial metals.  If you can't buy the commodities outright, I think buying into the miners poses better value opportunities.

As mentioned earlier, I bought into Titanium Metals (TIE) last month and I still think it provides significant value under $10.  It traded up near the $25 range back in March '08 and I think would probably be more fairly valued at least in the $12-15 range.  Insiders have been buying in over the past few months, which is a good sign. 

There's probably some more value here, but unfortunately, I'm short of ideas at the moment.  So that brings me to ...

Turkcell

Commodities look good right now, but if you can find great growth companies right now, that might be even better.  Turkcell Iletisim Hizmetleri A.S. (TKC) seems like a great candidate to me.  Book value for TKC is only $6.75, but they have historically had very strong cash flows. In FY '07, they brought in $2.45 per share in Cash Flows from Operations [CFOs] and $1.57 per share in Free Cash Flows [FCFs]. Both are increases from FY '06 when they brought in $2.11 in CFOs and $1.23 in FCFs. I ran a quickie DCF on this assuming a poor FY '08, about $1.70 in FCFs for FY '09 and then a 7% growth rate through 2012 and a 3% growth rate through thereafter. Using a 10% cost of capital, I still come up with a value in the $27-30 range. That would seem to be playing it rather conservatively with Turkcell.

Analyst projections for FY '09 earnings range from $1.68 per share to $3.02 per share, so even going by the low-end figure, that gives TKC a forward P/E of about 8.6. Dividend yield (according to Business Week) is right at 4%. Debt-to-value is relatively low around 30%.

Turkcell has great growth prospects and low leverage to take advantage in this type of environment. Mobile phones are not considered a *luxury item* any more in the developed world so while worldwide recession might put a temporary dent into their growth, I don't see it as a huge suppressor. TKC has great growth prospects not only in Turkey but in Eastern Europe and Central Asia. I also look at Turkey as a country that could emerge from the current economic crisis in a stronger-than-expected position, so I like this as a long-term play on the Turkish economy.

All in all, I think there is considerable upside here and this appears to be a bargain under $15 to me. I don't know if this is a buy-and-hold-forever candidate, but it might at least be a buy-and-hold-for-five-to-ten-years candidate.  It's also a great way to diversify your holdings and invest outside the US (and China, too).   I will probably be adding this to my portfolio in the near future. 

Geothermal Power

The other thing I like right now is geothermal power.  Solar and wind power have gotten most of the attention from the media, but geothermal may very well be the best alternative energy source.  Unlike solar and wind, it can be harvested continuously and requires no energy storage.  It also has the added benefit of not taking up much space, whereas, that ends up being more problematic for wind.  With recent advancements in technology, particularly from United Technologies (UTX) pure cycle technologies, geothermal is starting to look very viable, as well.

I did a write-up on Raser Techonologies (RZ) two months ago and I feel even better about Raser now than I did then.  This company is being underestimated by investors and even though this is a "high-risk" play, I think it's a particularly good one.  If you're willing to take the gamble, Raser seems like a value under $5 to me. 

If you want to go with a geothermal play that is perceived by most investors to be "safer", you might also try Ormat (ORA) which has dipped down enough during the stock market crash to make it look somewhat appealing again.  I feel like Raser has much greater potential and might be more advanced in their approach to geothermal, but Ormat might not be such a bad bet either. 

The End Summary

Even if the buying opportunities aren't as appealing right now as they were in December, there's still a lot of good investments one might considering buying on the US stock exchanges.  Personally, I will probably buy into Turkcell, Raser, and the Commodity Double Long (DYY) soon.  I think those who are afraid of jumping back into equities to be in a position of "safety" might soon find out that other "more conservative" investment vehicles might be more scary right now.  With rampant government spending to combat the current crisis, inflation has potential to sour and make bonds, CDs, and the US Dollar look like very ugly investments.  Commodities can provide a hedge and good growth companies may very well earn some significant returns right now.  


Disclosures:  Long on TIE and DGP.  I am considering buying into TKC, RZ, and DYY in the near-term.