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Top Investments For 2015

2014 Year in Review Well 2014 turned out to be another interesting year. It was a strong year for investment returns despite numerous issues going on around the world. China is clearly slowing down, Europe is facing deflation, and Russia annexed Crimea. As I said last year, uncertainties are always abound but capitalism continues to unleash human potential. Commodities and oil & gas in particular got slammed again in 2014, following up on steep losses in 2013. I have been recommending that investors avoid commodities for a couple years now ( Canada – Headed for a Crash & Canada: A Storm Brewing in China ). Also I have commented numerous times on how the high oil prices don’t make sense ( Saudi America & US Oil and Gas Drilling ). Before discussing what oil did in 2014 and last year’s market returns, I want to remind readers of what I said last year at this time ( Top Investments for 2014 ). I find it remarkable how oil prices have held up in 2013. US oil production has been off the charts, going up in a parabolic curve. US dependence on foreign oil fell to a 27 year low ( Click Here ). In 2005, the US imported 60.5% of their oil requirements and last year that fell to only 34%. This is a result of the shale oil revolution in the US where oil production is up 46.5% or 2.36 million barrels a day since 2007. If oil prices fall in 2014 that will be another significant headwind for the Canadian economy. Fellow Canadians could have benefited from the fall in commodities by not owning Canadian Dollars. Canadians who invested in the US not only realized out sized gains this year, they also realized foreign currency gains that contributed an additional 7% to their returns. I figured it was only a matter of time before oil fell and boy it did fall off a cliff in 2014. Similarly, the falling Canadian dollar was another theme that continued in 2014. As I have said before, this is a great way to be short commodities since the Canadian dollar is very closely tied to commodity prices. I will be returning to both of these themes throughout this post. 2014 Market Returns Market returns were strong again, making it the sixth straight year of solid gains. Just like 2013, Canadian investors could have benefited from the drop in commodity prices by owning US companies, realizing over a 9% gain from the falling Canadian Dollar. I would still recommend avoiding Canadian dollars as the loonie will likely fall further in 2015 as our economy stalls. Last year I included this chart from JP Morgan that puts market returns into context: (click to enlarge) Commodities As already mentioned commodities got slammed this year. Below is a list of the damage. Oil and natural gas were both down significantly in 2014. Metals also fell as well as agricultural commodities. The only bright spots were the 3Cs – Cattle, Cocoa, and Coffee. For those wondering why oil was down, the answer is shown below. (click to enlarge) Source: Carpe Diem Blog Now if anyone would have said back in 2005 to 2008 that US oil production would rise by over 4 million barrels per day by the end of 2014, everyone would have considered them crazy. Look at that graph again, US oil production has almost doubled in 4 years. Let me say that again, oil production went up 4 million barrels per day in 4 years. That is an economic miracle and we should be thankful for the entrepreneurs who made this happen. To me this is the fantastic part of capitalism, as we all enjoy the benefits of what these entrepreneurs have created. For investors, the above graph shows 4 million reasons to avoid oil investments going forward. Don’t get me wrong there is money to be made in the oil, but just like airlines, it is hard to pick the winners from the losers. We are in the top of the first innings of the shale oil revolution and if you don’t think this isn’t a paradigm shift, you need to look at that graph again. In the words of Henry David Thoreau, “It’s not what you look at that matters, it’s what you see.” 2014 Stock Recommendations So how did the stock recommendations for 2014 turn out? Total returns include dividends and I also included what the total returns were in Canadian dollars (CAD). Overall the results were decent with the exception of Lightstream Resources ( OTCPK:LSTMF ) [TSE: LTS]. I have more to say about Lightstream below. Here is what those yearly returns looked like throughout the year. (click to enlarge) Looking at the graph, Lightstream was up over 40% in May before going on an epic slide erasing nearly all of the equity value of the company. Of course, I pick these stocks for fun and use the year end as arbitrary start and end points but much higher gains can be had for those who sell once the facts change or when the company approaches its intrinsic value. As I said last year, Bank of America (NYSE: BAC ) has been like shooting fish in a barrel. After being up 110% in 2012, it returned 34% in 2013, and returned a respectable 15% in 2014 (with dividends). Like last year, Bank of America is recommended once again for 2015. It is still selling below its intrinsic value. The same can be said for Citigroup (NYSE: C ). Citigroup’s poor returns in 2014 are mostly attributable to failing the Federal reserve’s stress test. That likely won’t happen again this year. Like Bank of America, Citigroup is once again recommended for 2015. POSCO (NYSE: PKX ) and Ezcorp (NASDAQ: EZPW ) are both very cheap and again recommended for 2015. POSCO, a steel producer, is still profitable but struggling to earn decent returns. The steel industry is over-capitalized, iron ore prices have plummeted and the outlook is uncertain. With a book value of $140/share and the current quote of $63.81/share, the stock is cheap. They are a low cost producer so they will be fine. Comments on Lightstream Lightstream was recommended last year but as some readers know I subsequently changed my mind on the company after reading the year end reserve report released in late March (I have made comments elsewhere on an internet investment forum). At the time when I recommended LTS, it was selling for $5.88/share. Looking back at 2012 (the most recent reserve report) they had spent just over $320 million in capital, added 27 million barrels of reserves, and the cost looked very reasonable at around $12 per barrel. I also did a quick and dirty analysis of the company’s proved reserve value and came up with a rough Net Asset Value (NAV) of about $9/share. This has been their NAV for a while, ever since I said it was a poor company back in 2010. (There are several other posts on there about PBN & PBG, If you want some fun reading… do a search on my blog as I had some interesting debates on the company in the past. Click here for an example. ) Anyway, once the reserve report and annual financial statements were released in late March, it became clear LTS had deteriorated significantly. First of all, they spent $719 million in capital in 2013 and added 12.3 million barrels in reserves, This gave them a finding and development cost of over $70 per barrel. That was only the beginning. Obviously, they spent a pile of cash and generated NO value. This can clearly be seen in the annual report where they wrote off the $1.4 billion in goodwill they were carrying. The annual report also revealed to investors how they justified the carrying amount of their assets on their balance sheet. A careful read would have found this comment buried in the details. In addition to discounted cash flows, the Company also considered a range of market metrics in assessing fair value less cost to sell for certain CGUs. Market metric information was obtained from recent transactions involving similar assets.” Ok, so they used “market metrics” to justify the fair value, not the reserve report which is as close to reality as you can get given the assumptions. Anybody looking to acquire a property would do the same analysis and also adjust for drilling opportunities. Market metrics is exactly what most of the people who invest in oil and gas do to justify their overvalued holdings. The problem is every property has different costs and netbacks, so blanket metrics do not work well. Going back to their reserve report, they had a pile of technical revisions and it really makes you question if management was being candid with shareholders. I would also add that the NAV got a 5% boost due to higher commodity prices. They won’t be getting that boost this year. Given the fact that LTS has a very short reserve life, the reserve value will take a huge hit. I have calculated this for LTS and I estimate a 50% haircut to their reserve value. The last thing I determined from the reserve report was that the NAV was less than $2/share after taking into account other assets and all liabilities. This result was based on the over $90 per barrel oil price used in the reserve report. So basically the company destroyed 60-70% of their value with a terrible return on a huge amount of capital. The capital is gone and the equity investors have lost their capital. Anyways, that is what happened to LTS this year. I actually spent a decent amount of time this year analyzing the reserves and asset values for 68 of the 108 oil and gas companies listed on the Toronto Stock Exchange. I didn’t find a single company to invest in. 2014 Other Recommendations For 2014 I also recommended IBM (NYSE: IBM ) in the Safe & Very Cheap category. Here are the results. Clearly the market is still worried about future of IBM. Most of what I have read is concern over IBM’s falling revenue. I really don’t understand what all the fuss is about. IBM has had flat revenue for 10 years. Revenue per share is up 6.5% over the past 10 years and as an owner that is what counts. Also, IBM has been shedding divisions that generate billions in revenue and generate little-to-no profits. That’s right, some lose money. IBM is currently selling one division that generates $7 billion in revenue but loses $500 million per year. I’m looking forward to the higher earnings when that earnings drag isn’t getting in the way. This is a common situation at many companies when you dig into the details. IBM falling 11% does bother me in the least. Revenue and earnings were higher on a per share basis in 2014. It now offers outstanding value. Top Investments for 2015 IBM (NYSE – IBM, $160.44) Ezcorp (NASDAQ – EZPW, $11.75) Bank of America (NYSE – BAC, $17.89) Citigroup (NYSE – C, $54.11) POSCO (NYSE – PKX (ADR), $63.81) If you want investment commentary on these stocks, see what I wrote last year ( Click Here ). For Canadian investors, I believe owning US dollars will once again be advantageous in 2015. I’ll likely discuss a few interested tidbits from the Ezcorp annual report next year. I’ll leave them for you to find. As mentioned last year, be sure to do your homework on any investment. The markets are at all-time highs and while that shouldn’t alarm you, it should invite caution. All of these companies have wide appreciation potential but anything can happen in the short term. All of the recommended companies have short-term headwinds that will clear over time. Cheers to another great year! Disclosure: I own BAC common, BAC Class A warrants, EZPW, & IBM. Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Zacks’ Bear Of The Day: EQT Corporation

Many investors have been focused in on the oil crash of 2014 as prices for the important commodity have basically been halved in the year. Yet many investors might not realize that even with a chilly start to 2015 across much of the nation, natural gas prices remain subdued as well. In fact, natural gas prices trading on the NYMEX have crashed in just the past two months with prices tumbling from $4.60 to their current level right around the $3.00 mark. This represents a dramatic 35% loss in basically just the past six weeks, and even winter seems to be doing very little to boost prices in the near term and save this commodity from further losses. As you might expect given these terrible trends, natural gas-focused stocks have also been having a very rough time, much like their oil-driven peers. A great example of this trend, and a company that you should probably continue to avoid in 2015, comes to us from Pennsylvania with EQT Corporation (NYSE: EQT ) . EQT in Focus This Pittsburgh-based company focuses on exploring for and producing various hydrocarbon resources in the Appalachian Basin. The company also has a midstream division as well, which helps to get natural gas and other energy resources out of the fields and further downstream to refiners and other processors. This business has actually been a pretty solid one to be in over the past half decade as EQT was actually putting up a very nice performance. The stock was actually beating out the S&P 500 on a five year look until this past December when the energy crash finally caught up to EQT and pushed the stock down roughly 25% over the past six months of 2014. Some might think that the worst is over for this company, and especially so if energy prices can find a new equilibrium in the near term. But if you look to recent analyst estimate revisions for EQT’s earnings, you’ll see that more trouble may be ahead for this stock and that you should probably hold-off on trying to catch this falling knife to start 2015. Recent Estimate Revisions Not a single analyst has stepped up to the plate and raised their earnings estimates for EQT in the past sixty days. Instead, all of the new estimates have been lower for EQT, including five lower for the current year in the past two months. This has had a dramatic impact on the full year consensus estimate for EQT as this has plunged from $3.50/share 90 days ago to just $3.13/share today. We have seen a similar trend for the next year time frame, as estimates here have fallen by 20% in the period, suggesting that analysts do not see a turnaround coming in the near future. For these reasons, we have assigned EQT a Zacks Rank #5 (Strong Sell) and are looking for more underperformance from this company to start 2015, and especially so if energy prices remain subdued. Other Picks? The oil exploration and production industry is having a very difficult time right now thanks to the macro environment. This leaves the industry with a rank that is in the bottom 10% overall, suggesting that there are far better choices out there for investors. However, if you are dead set on the oil E&P space, you might want to consider LRR Energy (NYSE: LRE ) instead. This company currently has a Zacks Rank #2 (Buy), while it just saw a great earnings beat and a huge surge in analyst estimates for the company’s upcoming earnings. This may make LRE a better choice in the space for investors right now, or at least an arguably more favorable pick than EQT for the time being.

Oil And Gas ETFs As Seen By Market-Makers

Summary Mostly there’s not very attractive candidates for new capital commitment in any current competition, in comparison with top alternatives. But they may be about even with the equity investment population overall. Better single-stock choices are to be outlined in our third survey, of the broad oilpatch, coming next. The oil commodity price decline scares nearly all investors ETF risk protection from a basket of similar eggs may not be all it’s cracked up to be. When we run our Intelligent Behavior Analysis of ETF price range forecasts derived from the hedging actions of market-makers [MMs], the resulting outlook is not very attractive. Here is a picture of how the current upside price prospects compare with what price drawdowns actually transpired following similar prior forecasts. (used with permission) The cast of characters: [1] Direxion Daily Energy Bear 3x ETF (NYSEARCA: ERY ) [2] SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP ) [3] iShares US Energy ETF (NYSEARCA: IYE ) [4] First Trust ISE-Revere Natural Gas ETF (NYSEARCA: FCG ) [4] iShares US Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) [5] Direxion Daily Energy Bull 3x ETF (NYSEARCA: ERX ) [6] SPDR S&P 500 ETF (NYSEARCA: SPY ) [7] Vanguard Energy ETF (NYSEARCA: VDE ) [8] ProShares Ultra Oil & Gas 2x ETF (NYSEARCA: DIG ) [9] Energy Select Sector SPDR ETF (NYSEARCA: XLE ) [10] iShares US Oil Equipment & Services ETF (NYSEARCA: IEZ ) [11] SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA: XES ) [12] ProShares Ultra Short Oil & Gas 2x ETF (NYSEARCA: DUG ) [13] Market Vectors Oil Services ETF (NYSEARCA: OIH ) The non-standard ETFs are ERX and DIG – leveraged long; ERY and DUG – leveraged short; SPY – a broad market tracker for background comparison. All the others are ETFs focused on the oilpatch in general or various parts thereof. The map places each ETF at the intersection of its forecast upside (the green horizontal scale) and its average actual worst-case price drawdowns following prior forecasts like today’s (on the red vertical scale). Attractive investments typically are found down in the green area. Each ETF is the product of its current market price and the MMs’ impression of what their clients (who have the money muscle to move markets) are likely to do in coming weeks and months. Multiple daily phone conversations with them about desired portfolio changes, plus their own world-wide instantaneous information gathering systems and support staffs attempt to keep the MMs from being victimized by their clients. For further protection, the MMs turn to their skills in using the derivative markets and the arbitrage opportunities they provide in the form of price change insurances. The block trade desks of the MM firms are the usual buyers of the insurance, MM proprietary trade desks are the usual sellers. That makes this typically a well-informed, knowledgeable, experienced activity, bounded by the willingness of the clients to transact trade orders at prices that contain the costs of the price insurances. Those negotiations make possible the MM commitments of firm capital to balance that part of volume orders the market otherwise would not accommodate. Implicit in the hedging are expectations of likely possible price change limits, both up and down. Here are details on these ETFs and a comparison with population averages in the format of our daily Top Ten ranking: (click to enlarge) The blue-line average of these 13 ETFs does not compare very favorably with the most favorable 20 stock and ETF current competitors. In particular, please note columns (5) and (6). The prior price drawdowns of nearly -10% are nearly double those of the best-ranked 20. While the ETF upside promise of about +16% beats the 20’s +12%, it appears to be a hollow enticement, since prior forecasts like today’s – in (9) – averaged only +2.5%. The 20 actually bested their current promise. Further, the prior performances of the 20 best were profitable 12 out of each 13 times (92% win odds) compared to only 2 out of 3 (12 of 18 or 67%) for these ETFs. Even the market, in its tracker ETF of SPY did much better at being profitable 85 out of each 100 prior like forecasts. Specific ETF Potentials The two inverse (short-structured) ETFs, ERY [1] and DUG [12] are the least attractive, indicating that their prices already contain ample recognition of likely continued weakness in oil and gas commodity prices. Their prior forecasts at today’s level of balance between upside and downside prospects have produced negative net returns when subjected to our TERMD (Time-Efficient Risk Management Discipline) of portfolio management. All others were at least slightly net profitable. The most attractive energy ETF performers in this set, ERX [5] and DIG [8], fall far short of the 20 best equity competitor averages in terms of payoff performance (9) and win odds (8). When compared to the market average SPY, they have had better price payoffs, and approach its win odds. Conclusion This continues to be a poor time (and prices) for investment in energy ETFs. That does not need to be the case for specific stocks that can separate themselves from their surroundings because of special company, geography, or competitive advantages. Or merely more advantageous stock pricing at the present. All that will be examined in our next review of the market-makers price range outlooks for specific energy stocks in groups as outlined by energy expert Richard Zeits.