Building on Energy

In This Issue: Building on Energy Midterm Elections Send Mixed Message Canada's Jobs Trend Is on the Mend Buffett Rule Number Two: Look for Skin and Win Always invest in companies where management has skin in the game, says the world's greatest investor. Buffett firmly believes the "hunger for success" of owner-operators can rack up 50% a year in fundamentally sound smaller companies. Earn just half that much and you'll triple your money in five years. Care to join us? To find 4 "hungry" stocks… click here. Building on Energy 11/14/2014 By Benjamin Shepherd Oil prices have plunged nearly 30% since peaking in June, with Brent crude recently fetching just $78 a barrel, hitting a four-year low. While falling demand has played a substantial role in that --Europe is still struggling to break its recession even as the Chinese economy becomes less energy intensive --surging production here in the US has had more than a bit part as well. According to the International Energy Agency (EIA), American production has risen by 1 million barrels per day per year over the past year as shale oil production has taken off. Unfortunately for companies even remotely related to the energy sector, investors haven't taken much comfort from rising production. As energy prices have fallen, so too have energy stocks with the sector down by nearly 5% as the S&P 500 is up more than 12% so far this year. That decline has created a lot of opportunities. For instance, shares of Chicago Bridge & Iron (NYSE: CBI) have nosedived this year, losing a third of their value so far in 2014. An engineering and construction company which plays a big role in building energy patch infrastructure, its being priced as if America's energy revolution is coming to a screeching halt. While falling oil and natural gas prices will likely cause production to fall, it isn't coming to an end. Even as the EIA is forecasting that oil prices are likely to fall further from here, the agency still expects American production to rise by about 850,000 barrels per day (BPD) to about 9.4 million BPD over the next year or so. So much oil and gas is being produced that facilities are being built on the coasts to liquefy natural gas for export. There's also such a glut of oil that BHP Billiton (NYSE: BHP) is actually testing America's export ban by selling US oil without a permit from the government, which also requires unique infrastructure. Chicago Bridge & Iron plays a major role in building those export terminals, as well as the pipelines which transport the oil and gas to the coasts. There are literally thousands of miles of new pipelines, both big and small, on the books for construction. It also has a growing presence in China, a country which has been working to exploit more of its own domestic energy resources. The company has secured three contracts over the past few months alone, bulling a power station in Pennsylvania to help power the fracking boom, a hydrogen plant in Kansas and a public works project in Arizona. Amazingly, while the market is saying it isn't optimistic about Chicago Bridge & Iron, Wall Street analysts are clearly bullish. Despite the problems in the energy market, the median forecast is for earnings grow of 22.9% this year, taking full-year earnings per share up to $5.20. They look for even more growth in 2015, forecasting EPS of $5.91. That's roughly in line with the company's average historical earnings growth of about 19.8% over the past decade. Even if business were to slow down, the company has $3.3 billion of cash and assets on its balance sheet. At the same time, it has a debt to equity ratio of just 0.6, so the company isn't facing any sort of existential crisis. From a valuation perspective, Chicago Bridge & Iron has rarely been this cheap. It currently trades at just 9.9 times trailing one-year earnings, well below the industry average of 19.5 and its own five-year average of 15.4. It's also trading just 9.2 times forward earnings, compared to 17.6 times for the S&P 500 as a whole. If you need more proof that it is an incredibly attractive value, Warren Buffett's Berkshire Hathaway has been steadily adding to its stake in the company, now owning more than 10% of Chicago Bridge & Iron. So while oil and natural gas are fairly cheap today, that's largely because there's just so much of it. With more infrastructure to move that production from field to market, prices would likely improve. Chicago Bridge & Iron, with its engineering and construction expertise, will play a major role in that. And that construction is going to be moving forward regardless of energy prices, a fact that Wall Street and Warren Buffett clearly understands. A great value with plenty of growth ahead, Chicago Bridge & Iron is a buy up to $65. One More Midterm Election Shock Keystone XL will at long last be approved. Likely new Senate Majority Leader Mitch McConnell can count on added Democrat support for the embattled pipeline. Obama will have little choice but to sign off. The president's environmental donors will be furious – but he's not running for election anymore. Join us as we get rich from the torrent of Canadian black gold that will boost share prices of a select group of stocks – many of which are NOT oil stocks. Go here. Midterm Elections Send Mixed Message 11/14/2014 By Jim Pearce Republicans and Democrats alike agree that last week's election results can be interpreted as a repudiation of the past two years of the Obama administration. This appears to fly in the face of conventional wisdom that ultimately voters are most influenced by the current economic environment. Republicans are rightfully proclaiming that voters have delivered a mandate for change, and change is what they intend to deliver. The more difficult question may be exactly what it is they intend to change. Political biases aside, it would be hard to make a strong argument that our economy has not managed to gradually improve over the past two years despite being weak almost everywhere else in the world. The empirical facts are simply this: the U.S. stock market is near all-time record highs, the national unemployment rate has dropped below 6% for the first time in years, and corporate profitability continues to rise. In other words, most American who want a job have one, their 401k plans should be worth as much as they ever have been, and their employers have enough cash flow to remain solvent and even invest in growth. Why then, do so many people apparently feel that massive change is in order, if in fact that is what the Republicans trouncing of Democrats seems to imply? The stock market rally over the past three years (since its last correction of more than 10% during the summer of 2011) is often referred to as "the most unloved bull market ever," and last week's changing of the congressional guard suggests this is true. Generally speaking, when the electorate is comfortable financially they don't feel a strong need to shake up its political leadership. All of which begs the question: Is there something else going on financially that is not reflected in these traditional measurements of overall economic well-being? But if employment, corporate profitability, and stock market strength aren't reflective of economic health, then what is? For starters, if you are the parent of a child in college then you are feeling the strong pinch of escalating tuition costs, which are growing at a much faster pace than overall economy. So even if your salary is increasing at the same pace as inflation (as measured by CPI), you are losing ground each time you pay for another semester of college. Also, if your 401k plan account is invested in a Target Date Fund or some other type of diversified portfolio, then your rate of growth has probably been less than that of the oft-quoted S&P 500 Index. Let's face it: It's not much fun listening to a bunch of Wall Street portfolio managers on CNBC crowing about how great their investments are doing when your money is not growing nearly as fast. Finally, the unemployment rate is becoming an increasingly inaccurate barometer of job security, as it does not reflect underemployment. While the "creative destruction" brought about by technology has been good for corporate profits, at the same time it has lessened demand for human capital in many fields. Whether you like it or not, you are not paid for how hard you work: you are paid according to how difficult it would be to replace you. I think all of those things are what many voters were sensing when they stepped into the polling booths last week. They don't like the idea of watching corporate profits escalate while they pay more for their healthcare benefits and their children's college education. And they don't trust that they have enough job security to spend more freely. They want change they can believe in, but the problem is they don't know what to believe. This article originally appeared in the Mind Over Markets column. Never miss an issue. Sign up to receive Mind Over Markets by email. If making money were a race… It wouldn't even be close. Over the past 10 years, these odd securities have beaten stocks by nearly 3 to 1. But add them all together and their market cap is less than two Exxon Mobils. So despite their success, they still have plenty of room to run. Click here to get in now. Canada's Jobs Trend Is on the Mend 11/14/2014 By Ari Charney One month does not a trend make, as the old adage goes, but what about two months? For the second month in a row, job creation in Canada's economy has blown past expectations. According to Statistics Canada (StatCan), employment jumped by more than 43,000 in October, trouncing the consensus forecast of a drop in 5,000 jobs, based on a survey of economists by Bloomberg. The latest result also finally ends the tendency of job gains in one month to be followed by job losses the next, a frustrating pattern that had persisted for nearly a year. Equally important, September's stellar number, which was initially reported as a gain of 74,100 jobs, survived StatCan's customary revision intact. October's numbers were strong enough to lower Canada's unemployment rate by a substantial three-tenths of a percentage point, to 6.5%, the lowest level since the onset of the Global Financial Crisis (GFC). The labor force participation rate held steady at 66%, in line with expectations, though at a 13-year low. The participation rate measures the number of people employed, as well as those who are actively seeking work. This number may seem discouraging at first glance, but there could be structural factors at play, particularly the ongoing retirement wave among baby boomers. The fact that it's taken so long for the country's unemployment rate to drop to pre-GFC levels underscores the Bank of Canada's (BoC) observation that the period since the downturn has been more akin to a post-war recovery than a typical cyclical rebound. At the same time, when viewing data for the unemployment rate over a much longer-term period, it's clear that the period that preceded the Great Recession makes for an exceedingly tough comparable--and one that may not be all that instructive. That's because, according to economists with BMO Capital Markets, the only other time during the past 40 years in which the unemployment rate was at or below its current level was during the three-year period between late 2005 and late 2008, amid that era's global commodities boom. Given this context, Canada's job market may be doing better than it seems. There were also promising developments below the headline numbers. October's results were largely driven by full-time employment, which rose by 26,500, while part-time employment was up 16,500. Full-time positions are considered higher quality than part-time jobs, owing to the lower pay, fewer benefits and higher turnover characteristic of the latter. Despite the impressive increase in full-time employment over the past two months, there's more work to be done on the job-quality front. Employment over the trailing year has still largely been driven by growth in part-time jobs. During that time, the number of full-time jobs has grown by just 0.6%, or 81,000 positions, with the entirety of that gain occurring in just the past two months. Meanwhile, part-time jobs grew by 3.0%, or 101,000 positions. And overall job growth over the past year has been a tepid 1%, while the number of hours worked, an important indicator of future labor demand, has risen by just 0.4%. Wage growth has also been sluggish, up just 1.9% year over year for full-time employees, slightly below the rate of inflation. For investment themes, we like to monitor which industries are enjoying the strongest jobs growth over the trailing year. While the resource-oriented industries in the goods-producing sector have understandably pared their hiring in the wake of falling commodities prices, job growth in the manufacturing sector is up 2% year over year. This suggests that, just as the BoC has hoped, a lower exchange rate is finally flowing through to the country's beleaguered export-oriented manufacturers. Of course, a resurgent U.S. economy is the other key factor here. In fact, BMO's chief economist Doug Porter notes that, with surpluses posted in six of the past eight months through September, the trade balance appears on track to post a surplus for the full year. And Export Development Canada, the country's export credit agency, believes a low loonie and a growing U.S. economy will be a boon for Ontario's export industries in the coming year, particularly in the areas of industrial machinery, chemicals and plastics. That's evidenced by the sudden surge in jobs in the manufacturing-oriented province. Companies domiciled in Ontario boosted payrolls by 37,000 in October, causing the province's unemployment rate to drop six-tenths of a point, to 6.5%, from the prior month. In the service sector, the transportation and warehousing industry continues to be one of the top hirers, with employment up 2.5% year over year, further evidence perhaps of the strength in cross-border trade. So even with the downturn in the resource sector, Canada's economy is showing that the country is more than just a commodities play. This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email. 74% Profit Upside I promise you this buying opportunity won't last long: The recent oil-price panic has offered up dream bargains. Quality energy stocks have been driven down to absurdly cheap prices – some plunging nearly 50%. That's just crazy – but crazy good for you. The best of these stocks will bounce back hard and strong. There's one I project will have a whopping 74% profit upside, and another 64%. I have 4 in all with an average profit upside of 52%. They could go higher. 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