Friday Haymaker
In The Ring - September 29th, 2023
“It's a strange world of language in which skating on thin ice can get you into hot water.” - Franklin P. Jones
“Folks, you can’t borrow 7.3% of GDP every year and get away with it; and most especially not when American society is plunging into a 100 million strong baby-boom retirement wave — accompanied by a shrinking work force and tax base…” -Former Reagan administration budget wizard, David Stockman
“When someone gets something for nothing, someone else gets nothing for something.” -From an anonymous source, but of great relevance to America’s current fiscal follies.
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Champions
(Please see the new Highlighted Stock section for our write-up on Devon Energy.)
The shares of one of the largest global producers of agricultural equipment that doesn’t rhyme with “Dear” have been soft lately, like so many other stocks. It is now trading in the low teens and sells for roughly seven times earnings, with a dividend yield poking above 3%.
Ag-related stocks were bid up sharply during the early stages of the Ukrainian war. Since then, investors in them have been on a bit of a starvation diet. Despite that, the long-term story for North American-focused ag plays remains very healthy, in my view. Patience is likely required and the market’s recent squishy price action suggests a slow, dollar-cost-averaging approach. This is particularly the case based on the recent shocking weakness in longer-term U.S. Treasury notes and bonds.
Champions List
Farm machinery stocks
Japanese yen
Blue-chip gold miners with high dividend yields
Gold & gold mining stocks, particularly junior gold miner ETFs
Select cyber security software stocks
Copper-producing stocks
Industrial sector ETFs
Defense industry (particularly those contracted to manufacture in-demand weapons systems)
Select financial stocks
S. Korean stock market
For income:
A midstream energy infrastructure company that has eased about 13% from its recent peak.
A BB-rated bond from one of America’s former Nifty Fifty
BB-rated bonds from dominant media companies and healthy automakers with upgrade potential
BB-rated intermediate term bonds from companies on positive credit watch
Certain fixed-to-floating-rate preferred stocks
Emerging Market debt closed-end funds
BB-rated energy producer bonds due in five to ten years
Select energy mineral rights trusts
Highlighted Stock
Hopefully, this is good news for our readers who like to see company-specific research: Our compliance officer has given us the okay to highlight individual stocks and bonds. The caveat (there had to be one of those, right?) is that I’m not able to put out an explicit buy recommendation or place these under the Champions heading.
This week’s spotlight name is Devon Energy (DVN). Neither Evergreen nor I currently own this security, though we have in the past. Frankly, over the last year, it’s been a dog. It peaked at nearly 90 in the summer of 2022 and made essentially a double-top last fall. Since then, it’s been a downhill racer, sliding all the way to the mid-40s. In other words, it was basically cut in half. The culprit was a serious correction in oil prices combined with a vicious bear market in natural gas. This double-whammy caused earnings per share to tumble from $8.31 last year to an estimated $5.40. However, even at those greatly reduced profits, the shares trade for just 8.7 times earnings.
A conservative way to earn superior returns is to buy low P/E stocks on trough earnings. Often, especially with cyclical names like oil and gas producers, the P/E ratio is well above the market on depressed earnings. This reflects the rebound potential offered by these types of situations. My point is that it’s rare to find stocks trading at single-digit P/Es on what are, hopefully, bottom-of-the-cycle profits.