Reader Comments

By Ian Wyatt, Daily Profit | CHK | Oct 20, 2008 | comment

*****Friday was another very volatile day for stocks. The Dow Industrials went from a 200 point loss to a 200 point gain and finished with a 127 point loss.  This wide range of trading shows that investors continue to struggle to find the right prices for stocks.

There’s still a lot of uncertainty about the depth and duration of any recession. But at the same time, stocks are down considerably. And if earnings come in decent, investors may even decide recession is priced in.

*****There’s no doubt that some stocks look cheap. I’ve offered one example of natural gas/oil company that seems to have a lot of bas news priced in already. Chesapeake Energy (NYSE:CHK) fell from $74 to $11. It’s rallied back to the $20 range, but is still trading with a forward P/E of 5.

The issues for the company are fairly obvious – demand and prices for energy have fallen. And credit crisis has made funding a problem. The question is, are these risks to the company’s profits reflected in the current price.

Late last week Chesapeake secured a $480 million line of credit. That should ease fears that the company can fund its operations. And with a forward pricing multiple of just 5, the company may be cheap enough to attract buyers even if earnings fall.

*****In light of the apparent bargain prices for Chesapeake and a lot of other stocks, I asked, you, Daily Profit readers, if you had any stocks you were watching that seemed to be trading at bargain prices given assets and valuations.

It’s my hope that we may be able to uncover some profitable opportunities from the stock market’s rubble.

Well, I got a ton of emails from you. And I have to say, Daily Profit readers have some great ideas. Now I’d like to offer some feedback from your suggestions. Given the volume of responses, I won’t be able to comment on all you suggestions. But I’ll offer what should be a good representation of what you had to say…

*****Here’s a general stock market question from C. Ross:

“Yes, yesterday didn’t look so bad, but look at today. What’s going on????

Is it all over for us? What should we do with our 401K/s, etc?

I’ve just been ‘holding’ like many, but something is better than nothing.

Should we just get out what we can and run the other way??”

This question doesn’t address a particular stock, but it does point to a question that’s on a lot of investor’s minds right now.

Obviously, this is a complex question. I don’t know how long C. Ross has until that 401K money is needed. And that’s an important factor in how to proceed with your investments. But I will say that if you have a few years before retirement, now is not the time to sell everything.

Sure, stocks have been battered. And I’m sure 401K statements are showing big losses – 30%, 35% for the year. Now, I can’t tell you that prices have bottomed and it’s all upside from here. But just from a historical perspective, it’s very likely that prices are closer to a bottom than a top.

In other words, if you sell now, you’re locking in those losses and taking away any chance to see your investments reverse some of those losses.

So I know it’s tempting to throw up your hands and pull all your money out, but that would be the wrong decision at this point. In my opinion, this is a great time to adjust portfolios and pick up nice income stocks that have a solid asset base and stable businesses.

*****J. Jones said “I thought GE was looking good and the day after I bought Warren Buffett bought so I felt good but so far not much action. 

General Electric (NYSE:GE) hasn’t traded this low since mid-90’s. So it’s cheap. The forward P/E of 11 is historically low. GE is a well-diversified business and it certainly isn’t going out of business.    

Of course, GE does have exposure to the credit markets through its GE Capital subsidiary.  Outside of the potential for falling earnings from recession, GE Capital is the big risk for the stock.

GE cut earnings estimates twice before it reported in-line earnings on October 10.  While GE reaffirmed its earnings outlook for the year, there is concern that the company will be forced to lower its estimates. That’s why the stock is trading so low.

Warren Buffett is one of the most successful investors of all time. And it’s tough to go wrong following his lead. But it’s important to be aware of Buffett’s investment parameters. First, Buffett is a long-term investor. He’s very patient. He doesn’t get frustrated if his investments don’t immediately show a profit.

Also, Buffett got a sweetheart deal when he bought GE stock. He bought preferred shares which pay a higher dividend, plus he got an option to buy more stock at low prices. Still, I think you’ll make money on GE. But you’ll probably need top be patient.

*****I received a lot of suggestions for energy stocks. And I think energy is one of the best places to be looking for bargains right now. Oil prices are down based on demand numbers, but there’s no doubt that demand will pick up again in the future.

Margaret sent this note:

“You asked for good stocks trading low........PVX   provident energy, 

nice dividend.....trading low”

Provident Energy Trust (NYSE:PVX) is a Canadian Energy Trust. Canada’s government allows energy companies to set up a tax-exempt structure if they pay most of their earning to shareholders in the form of dividends.

I love the idea of energy trusts, as they return the value of the company back to the shareholders. At current prices, Provident pays a 21% dividend.

The only problem I have with Canadian Energy Trusts is that Canada’s government is planning to end the tax-exempt status for these companies in two years. That means those big dividends will be disappearing. And in light of that, I can’t help but think there’s a limit to how much these stocks will appreciate.

Fortunately, there’s an equivalent to the Energy Trust here in the U.S. They’re called Master Limited Partnerships (MLP). They are usually pipeline companies. They have tax-exempt status because they return most of their income in dividends.

I’ve been recommending MLPs in the current environment. The dividends are great and because pipeline companies have fairly stable lease rates for their pipelines.

I recently published a Special Report on MLPs, which you can access here.

***** M.Menachem sent in a big list of stocks. I can’t comment on all of them, but some of the choice suggestions were: PBR--Petro Brasilero,

XOM--Exxon Mobil, and GHM—Graham.

I know Graham Corp (NYSE:GHM) very well. This stock was featured in my Growth Report newsletter in March of this year. My readers made a 125% gain on the stock. And now, it’s dropped below our original entry price.

Graham is an industrial equipment company that does a lot of business with oil refiners. It’s got a large back log, plenty of cash and essentially no debt. It’s been a very volatile stock lately, but with a forward P/E under 10, it looks like a good value.

Petro Brasilero (NYSE:PBR), or PetroBras, is the state-run oil company in Brazil. It has some of the largest off-shore reserves in the world. While there’s risk because the stock is from an emerging economy, the size of its reserves and the relative stability of Brazil make it a good long-term investment.

Finally, there’s Exxon-Mobil (NYSE:XOM). I’ve seen this company mentioned more than any other as great stock to buy now. As the most profitable company in history, it’s hard to argue against it. Exxon has a ton of cash and is devoted to increasing shareholder value through dividend and stock purchases.

Exxon owns something like 25% of the world’s oil reserves. It’s hard to imagine going wrong buying Exxon stock.

*****There were a few more questions I want to get to, but today’s letter is running a bit long. I’ll address another batch of questions in tomorrow’s Daily Profit. And thanks again for your responses.

Comments on this article

There are no comments for this entry yet.

Add your comments