As regular readers are aware, I (Porter) like the U.S. natural gas sector. It has serious growth and export potential.
Royalty trusts are corporations, typically involved in oil or gas production, that are required to distribute a high percentage of earnings to shareholders to avoid paying taxes on them. They are popular income investments... but lately, they have sold off heavily.
With very few exceptions, you don't really want to own natural gas royalty trusts until we're a little closer to that period of price takeoff. The sector will be dead money until then.
Two factors will affect the recovery in natural gas prices. First, demand is soaring because the price is low. As demand grows and grows, we'll eventually have to start drilling for gas again on its own, separate from oil. That could take another 18-24 months to happen.
The market's thirst for yield continues, thanks to the "Bernanke Asset Bubble"...
We've long believed Federal Reserve Chairman Ben Bernanke's easy-money policies (which resulted in record-low interest rates) would force investors to stretch for yield, buying riskier assets like stocks and lower-quality bonds...
Retirement Millionaire holding SPDR Barclays High-Yield Bond Fund (JNK) hit a new multiyear high yesterday. Dr. David "Doc" Eifrig originally recommended the exchange-traded fund in August 2009. The economy was emerging from the financial crisis. And high-yield bonds offered an attractive, long-term opportunity. As Doc wrote...
Over the last 20 years or so, the average high-yield bond has paid about 500 basis points (5%) more income than similar Treasury bonds... The panic in the fall of 2008 pushed the "spread" – the difference between Treasury yields and high-yield bond yields – up to nearly 2,000 basis points. In other words, high-yield bonds paid almost 20% more than Treasurys.
When yields go up, bond prices go down. In the fall of 2008, the prices of these high-yield bonds plummeted. The credit-market panic meant companies were unable to issue new debt. (Who can afford to borrow money at 20% interest rates?) Big bond owners, like pension funds and institutional investors, were worried they'd soon be holding an empty bag, so they dumped their bonds into the market. The massive wave of selling pushed prices even lower.
Today, the credit markets are nearly thawed. The spread has come down to more reasonable levels around 10%. But that's still well above the average 5%... so we have an opportunity to invest our money for the long term.
Retirement Millionaire readers who took Doc's advice are sitting on 60% gains in less than three years.
Another one of Doc's top recommendations, drugstore chain CVS Caremark (CVS), hit an all-time high today...
CVS is the No. 1 prescription-medicine provider in the U.S. It employs 280,000 people nationwide and is the largest employer of pharmacists and nurse practitioners. Around 75% of the U.S. population lives within a few miles of a CVS store.
That proximity will translate into huge profits as Baby Boomers approach retirement... By 2030, one-fifth of the population will be age 65 or older. Naturally, older people need more prescription drugs than younger folks. And more than 30 million people will gain Medicare coverage by 2014, which means even more prescriptions will be written.
And the company just announced blockbuster earnings... Net income rose 23% to $956 million. Gross margins in the first quarter widened from 16.6% to 18.1%. And CVS beat revenue estimates by $600 million.
Doc recommended CVS in June 2011. In addition to the boon from an aging population, Doc also liked the company's convenience and low cost...
The pharmacy benefits management business (PBM) of Caremark is growing as employers and government look for ways to get cheaper drugs (generics) and manage the prescription and drug costs more efficiently.
Customers are looking for the same thing. Patients want convenient access to inexpensive drugs. Unique to CVS is Caremark's ability to offer 90-day supplies of drugs at mail-order prices. CVS can mail them or provide them for pick up at its stores. It calls this service Maintenance Choice. Competitors Walgreens and Wal-Mart currently cannot provide this convenience. And if the U.S. Postal Service cuts back on Saturday and Friday deliveries (as has been proposed), this feature will become more valuable.
Retirement Millionaire readers are up 62% on Doc's advice.
Doc's readers have also made nearly 40% buying municipal "muni" bonds...
Municipal bonds represent promises from local and state governments to pay back money they borrow. In exchange for the borrowed money, they pay the bondholder interest every six months. They pay the principal back at the date of maturity. And holders of muni bonds receive income exempt from federal income tax and, in many cases, state and local taxes.
Doc recommended "munis" in the April 2011 Retirement Millionaire. Months earlier, financial analyst Meredith Whitney – best-known for her bearish call on banking giant Citi in October 2007 – made a bearish call on municipal bonds. Whitney said we'd see 50-100 "significant" defaults that would add up to "hundreds of billions of dollars."
The muni market cratered. But as always, Doc looked at the facts. From his April issue:
Over the past 58 years, municipals traded at a lower interest rate than Treasurys almost 90% of the time. But for the last couple years, the spread has inverted and averaged a negative 120 basis points (-1.20%).
People believe the risk of default to municipal bonds is much higher than it's ever been. More than during the Korean War, Vietnam, the 1987 Crash, the S&L crisis, or the tech bubble of 2000...
In the past two months, the fear has been so rampant, California bonds are more expensive than Mexican bonds.
Doc was proven the winner in this battle... And Fox Business recently asked him to appear on its program to discuss his bullish stance on municipal bonds. You can see the interview for free by clicking here.
Russian President Vladimir Putin denies missing the shale boom in gas. But Gazprom's earnings tell a different story…
Gazprom is Russia's $95 billion state-run gas-export conglomerate. It just reported a 9.5% drop in profits last year. Net income dropped from 1.3 trillion rubles in 2011 to 1.18 trillion rubles ($38 billion at today's exchange rate) in 2012. According to Bloomberg, that's the first decline in more than a decade.
Gazprom supplies around a quarter of Europe's natural gas. Europe reduced demand from Gazprom by about 3.6% last year. Adding to Gazprom's woes, gas sales in Russia also fell off and operating expenses jumped 18%, further affecting earnings.
Still, when asked about Gazprom on a televised phone call last week, Putin responded, "I don't think we've overslept anything… Whether Gazprom slept through the shale revolution or not, it's a difficult question. There is no answer to it yet."
For years, Gazprom enjoyed a near-monopoly on supplying European gas needs. Putin used it as a political tool. Any sort of threat to its market share seemed nonexistent.
However, that's starting to change. Gas-thirsty countries in Europe and Asia are starting to gain access to new supply options. Freezing natural gas – turning it into liquefied natural gas (LNG) – enables gas-rich countries like Algeria, Qatar, and Australia to ship.
And that has allowed nations like Germany, Italy, France, and Poland newfound leverage to renegotiate their Gazprom contracts last year. The Russians can no longer hold Europe to ransom with higher prices.
The company played down the new price agreements, saying the reductions were reasonable. Maybe so... but it looks like they're showing up in the end-of-year results.
As we said in the November 14 Digest, Putin told Gazprom to pay more attention to the shale gas boom in the United States. We believed Putin was starting to realize Russia's European monopoly wasn't safe after all.
So far, the U.S. has not been able to use its glut of natural gas to supply Europe and Asia. We can't export it the way Australia and Qatar can because we don't have the LNG facilities in place. The Department of Energy (DOE) has only approved one license for export so far. That went to Cheniere Energy, a Stansberry's Investment Advisory recommendation. Cheniere is building export terminals and expects to start exporting in late 2015. But several other companies are waiting for DOE approval.
Another Investment Advisory portfolio holding, Dominion Resources, has signed deals with India's state-owned company GAIL and Japanese trading firm Sumitomo to use its proposed $3.5 billion plant in Cove Point, Maryland. The companies say the plant could be operational by 2017. Both companies will be able to export 2.3 million tons of LNG per year.
Subscribers who followed Porter's recommendations of Cheniere and Dominion are up 94% in 10 months and 36% in two years, respectively.
New 52-week highs (as of 4/30/13): Advent Claymore Corporate Securities & Income Fund (AVK), WisdomTree Japan Smallcap Fund (DFJ), iShares MSCI Australia Index Fund (EWA), iShares MSCI Singapore Index Fund (EWS), Cambria Global Tactical Fund (GTAA), iShares iBoxx High Yield Corporate Bond Fund (HYG), iShares Dow Jones U.S. Insurance Index Fund (IAK), SPDR Barclays High Yield Corporate Bond Fund (JNK), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), SPDR Utilities Sector Fund (XLU), Automatic Data Processing (ADP), MGM Resorts International (MGM), RPM International (RPM), Dominion Resources (D), Corning (GLW), American Financial Group (AFG), Brookfield Asset Management (BAM), Chart Industries (GTLS), DCP Midstream Partners (DPM), Cheniere (LNG), Chevron (CVX), Superior Energy Services (SPN), CVS Caremark (CVS), GenMark Diagnostics (GNMK), and Microsoft (MSFT).
Why do some stocks go up and others go down? Because markets are crazy... Send your questions to feedback@stansberryresearch.com.
"I am confused how very high P/E stocks like Netflix soar, & low P/E ones like Apple (till recently) fell. Apple 10 days ago announced bad quarter, so price is up 50 pts. since then! Can you shed some light?" – Paid-up subscriber Bob Baker
Goldsmith comment: Markets are inefficient and irrational. Short-term movements in stock prices rarely reflect the stock's fundamental value. As we say, in the short term, the market acts as a "voting machine" – prices change on the whims and emotions of millions of participants. It's only over the longer term that these fundamental valuations play out. That's why we say that over the long term, the market acts as a "weighing machine."
"After a couple of years of begging your readers to, first buy, then be patient with, MSFT, it is starting to look like your persistence is being rewarded. I have been fortunate enough to build a full position in MSFT, buying from June of 2011 through November of 2012 at prices ranging from $23.90 to $27.36. I bought most of the shares by selling puts and allowing the shares to be 'put' to me on dips. Counting options premiums and dividends, my cost basis is around $24.50. Now you have to brace yourself for the readers (who had two years to buy the stock), incessantly writing to you asking you to raise your buy-up-to price so they can get in. They will do this instead of using the current opportunity to build their positions in CSCO or EXPD. Those are the puts I'm selling now. Thanks for your excellent research and well written analysis." – Anonymous
Regards,
Sean Goldsmith
Miami Beach, Florida
May 1, 2013