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ETFs For Quick Profits From The Oil Rebound

Oil has been showing immense strength in recent weeks with prices bouncing from their recent lows. In fact, the price of oil jumped over 9% last week, with U.S. crude currently hovering above $36 per barrel and Brent oil trading above $39 per barrel at the time of writing. With this, U.S. crude prices are up nearly 33% and Brent oil is up 27% from their 12-year lows hit in mid-February. Inside The Surge The impressive gains came on the back of improving demand/supply dynamics, which are rebuilding investors’ lost confidence in the rebalancing of the oil market. First, talks over a deal by major oil producers to freeze oil output at the January level infused an air of optimism. Second, output from the Organization of the Petroleum Exporting Countries (OPEC) dropped by 79,000 barrels per day last month while U.S. production slipped by 25,000 barrels per day for the week ending February 26. The positive weekly data from oil services firm Baker Hughes (NYSE: BHI ), which showed that the number of rigs fell to the lowest level since December 2009, also supported the rally in oil price as it reflects that U.S. output will continue to decline in the coming weeks. Finally, the International Energy Agency (IEA) projects a sharp decline in oil production to 4.1 million barrels a day over the 2015 through 2021 period from 11 million barrels a day during 2009-2015. This is because a slew of capital spending cuts last year and another round of major cuts this year will continue to curb oil production and reduce global supply, and thereby lead to higher oil prices. On the demand front, the global outlook is looking bright. Abating fears of a recession in the U.S. following the recent encouraging data, and renewed optimism of growth in China, Europe and Japan could drive oil demand in the coming months. Given the fresh round of optimism and signs that the oil market may begin to tighten, many investors have turned bullish on the energy sector and are seeking to tap this opportunity. How to Play? For them, a leveraged play on energy could be an excellent idea as these could lead to huge gains in a very short time frame when compared to the simple products. Below, we have highlighted five leveraged energy ETFs that could be excellent picks for investors seeking to make large profits from the energy space in a short span: Direxion Daily Energy Bull 3x Shares ETF (NYSEARCA: ERX ) This fund creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $545.2 million and average trading volume of 4.2 million shares. The ETF gained 20.1% over the past one week. ProShares Ultra Oil & Gas ETF (NYSEARCA: DIG ) This ETF seeks to deliver twice (2x or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $151.4 million in its asset base with trades in a good volume of more than 302,000 shares per day on average. The product was up 12.9% in the same time frame. Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares ETF (NYSEARCA: GUSH ) This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $47.7 million in its asset base since its inception in late May 2015. Average daily volume is solid at around 913,000 shares while expense ratio is 0.95%. The product gained 57.7% over the past five trading sessions. ProShares Ultra Oil & Gas Exploration & Production ETF (NYSEARCA: UOP ) This product also tracks the S&P Oil & Gas Exploration & Production Select Industry Index, but offers twice the returns of the daily performance with the same expense ratio as that of GUSH. It has AUM of just $0.8 million and trades in a paltry volume of 2,000 shares. UOP was up over 28% in the same time frame. Direxion Daily Natural Gas Related Bull 3x Shares ETF (NYSEARCA: GASL ) This product seeks to deliver thrice the daily performance of the ISE Revere Natural Gas Index, which derives a substantial portion of its revenues from the exploration and production of natural gas. The fund has amassed $55.1 million in AUM and trades in heavy average daily volume of 2.2 million shares. Expense ratio comes in at 0.95%. The fund delivered whopping returns of 88.6% in the past five trading sessions. Bottom Line As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures. Still, for ETF investors who are bullish on the energy sector for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world. Original Post

Comments On Mistakes And Buffett’s Original Berkshire Purchase

I was reading through the 2014 (last year’s) Berkshire Hathaway ( BRK.A , BRK.B ) annual report and 10-K, looking for a few things, and happened to reread Buffett’s letter from last year. I wrote a post a couple weeks ago concerning buybacks and Outerwall (NASDAQ: OUTR ), and how a company that is buying back stock of a dying business is not a good use of capital. I noticed a passage in last year’s letter that is relevant to the topic – Buffett himself was attracted to buybacks on a dying business, Berkshire Hathaway, in the early 1960s. Berkshire was a Ben Graham cigar butt – it was trading at around $7, and had net working capital of $10 and book value of $20. It was a classic “net net” – a stock trading for less than the value of its cash, receivables, and inventory less all liabilities. Buffett liked the fact that Berkshire was (a) trading at a cheap price relative to liquidation value, and (b) using proceeds from the sale of plants to buy back shares – effectively liquidating the company through share repurchases. Here is what Buffett was looking at when he originally bought shares in this company in the early 1960s: Like Outerwall, Berkshire’s business was in secular decline. In fact, it had been dying a long time, as the meeting notes from a 1954 Berkshire board meeting stated: “The textile industry in New England started going out of business forty years ago”. Also like Outerwall, Berkshire was buying back stock. One difference (among many, of course) between Berkshire then and Outerwall now is that Berkshire was closing plants and using proceeds to buy back shares. From the 1964 Berkshire report (which can be found on page 130): “Our policy of closing plants which could not be operated profitabily was continued, and, as a result, the Berkshire King Philip Plants A and E in Fall River, Mass. were permanently closed during the year. The land and buildings of Plant A have been sold and those of Pant E offered for sale… Berkshire Hathaway has maintained its strong financial positiona nd it would seem constructive to authorize the Directors, at their discretion, to purchase additional shares for retirement.” Outerwall, on the other hand, is producing huge amounts of cash flow from its operations, not from the sale of fixed assets. Liquidation versus Leveraged Buyout Another difference is that Berkshire was in liquidation mode, and was buying out shareholders (through buybacks and tender offers) from cash proceeds it received from selling off plants. Outerwall hasn’t been liquidating itself through buybacks-instead it has leveraged the balance sheet by issuing large amounts of debt, using the proceeds to buy back stock, which has reduced the share count, but not the size of the balance sheet or the amount of capital employed. Outerwall had total assets of around $1.3 billion five years ago, roughly the same as it does now (goodwill, however, has doubled due to acquisitions). These assets were financed in part by $400 million of debt and $400 million of equity in 2010. Today, the company’s assets are financed by roughly $900 million of debt, and shareholder equity is now negative. Outerwall has historically produced high returns on capital, and it’s a business that doesn’t need much tangible capital to produce huge amounts of cash flow (an attractive business), but has been run similar to companies that get purchased by private equity firms – leverage up the balance sheet, issue a dividend (or buy out some shareholders), thus keeping very little equity “at risk”. It’s a gamble with other people’s money, and sometimes it results in a home run (sometimes, of course, it doesn’t). So, Berkshire in the 1960s was more of a slow liquidation. Outerwall is basically a publicly traded leveraged buyout. In the case of BRK, shareholders who purchased at $7 were rewarded with a tender offer of just over $11 a few years later. But that’s the nature of cigar butt investing – sometimes at the right price, there is a puff or two left that allows you to reap an outstanding IRR on your investment. In Buffett’s case, had he taken the tender offer from Seabury Stanton, his IRR on the BRK cigar butt investment would have been around 40%. He didn’t, though, and the rest is history. It’s interesting to note another mistake that he points out in last year’s letter – one that I think is rarely mentioned, but was very costly. Instead of putting National Indemnity in his partnership, which would have meant it was 100% owned by Buffett and his partners, he put it into Berkshire Hathaway, which meant that he and his partners only got 61% interest in it (the size of the stake that Buffett had in BRK at the time). I think this could have been Buffett’s way of doubling down on Berkshire (then, a dying business with terrible returns on capital). He thought he could save it (not the textile mills, but the entity itself) by adding a good business with solid cash flow and attractive returns to a bad business that was destroying capital. Obviously, as Buffett points out, he should have shut down the textile mills sooner, and just used National Indemnity to build what is now the company we know as Berkshire Hathaway. Two Mistakes to Avoid Two takeaways from this, which, in Buffett’s own words, were two of his greatest mistakes: It’s usually not a good idea to buy into bad businesses, even at a price that looks attractive If you are in a bad business, it probably doesn’t make sense to “double down” – for most of us, this could mean averaging down and buying more shares. In Buffett’s case, it was already a 25% position in his portfolio, and he “doubled down” by throwing good money after bad (putting National Indemnity – a good business – inside a textile manufacturer, instead of just a wholly owned company inside of Buffett’s partnership. The good news – things have worked out just fine for Buffett and for Berkshire. Although the textile mills unfortunately had to finally shut down for good, National Indemnity has come a long way since Buffett purchased it for $8.6 million in 1967 (see the original 2-page purchase contract here ; no big Wall Street M&A fees on this deal). National Indemnity now has over $80 billion of float and over $110 billion of net worth, making it the most valuable insurance company in the world. The insurance business that started with National Indemnity paid dividends to Berkshire last year of $6.4 billion, and holds a massive portfolio of stocks, bonds, and cash worth $193 billion at year end. Buffett estimated his decision to put National Indemnity inside of Berkshire instead of in his partnership ended up costing Berkshire around $100 billion. It’s refreshing when the world’s best investor humbly lays out two of his largest mistakes, his original thesis, and the thought processes he subsequently had in regard to those investments. It’s also nice to note that despite two large mistakes, things worked out okay. I own shares in Berkshire, purchased for the first time ever just recently, and I’ll write a post with a few comments on the recent 10-K and annual report soon.

Is Security Analysis Dead? Why Ben Graham Eventually Embraced Efficient Markets

Could the man who literally wrote the book on security analysis actually have thrown it all away? If you’re a value investor, or have already requested free net net stock picks , you’ve undoubtedly heard of the father of value investing himself, Benjamin Graham . Most investors come to Graham through the writings of Warren Buffett, and for good reason. Buffett has continuously called Graham the biggest investing influence in his life, so it’s only natural to pay homage to the legendary teacher. But Graham was also a legendary investor and prolific writer, producing two of the best investment books books ever written: Security Analysis and the Intelligent Investor. Both went on to become long running series. What many value investors are less aware of, however, is that in one of the last seminars given before his death, Graham actually rejected the idea that detailed security analysis added much value. Those comments were made available in an article titled “A Conversation With Benjamin Graham,” published in the Financial Analyst Journal, and are definitely surprising given Graham’s focus on dissecting a firm’s financial statements to uncover superior value investment opportunities. What exactly did he mean? What changed? The Death of Security Analysis The first thing you should recognize is that Graham still favored buying common stocks as part of an investment portfolio. In his words, “[The] investment value and average market price [of common stocks] tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings–incidentally, with no clear-cut plus or minus response to inflation.” A decent assessment of stocks in general, and it’s easy to see why. Given that stocks provide, on average, a higher average return than pretty much any other asset class, Graham was well justified in his assessment. But while Graham liked the idea of buying stocks, he also revealed a decided shift on how he viewed the practical use of detailed analysis. In his words, “I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham and Dodd” was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I’m on the side of the “efficient market” school of thought now generally accepted by the professors.” It’s shocking that Graham could be seen on the side of the efficient market crowd, given that he based his career on the ability of individual investors to make above average returns using his value investing techniques. When it came to institutional investors in general, Graham described another devastating handicap. “…institutions have a relatively small field of common stocks to choose from–say 300 to 400 huge corporations–and they are constrained more or less to concentrate their research and decisions on this much over-analyzed group.” Give the ocean of analysts and mutual funds that are now choking the investment world, if Graham was right in 1976 when he made those remarks, things have only gotten worse. Yet, a number value investors have forged great track records since 1976, suggesting another path to great returns. Ben Graham’s New Path Forward Graham spent a lot of his investing life learning about securities and studying a wide range of investing strategies. It should be no surprise that Ben Graham’s shift towards believing in efficient markets still left open the possibility for great investment success. “…the typical investor has a great advantage over the large institutions. ………most individuals can choose at any time among some 3000 issues listed in the Standard & Poor’s Monthly Stock Guide. Following a wide variety of approaches and preferences, the individual investor should at all times be able to locate at least one per cent of the total list–say, 30 issues or more–that offer attractive buying opportunities” Professional investors often have to manage billions of dollars in a single fund, and most funds are well over $100 Million USD. Because of that, these managers only ever have a small pool of stocks to pick from. In comparison, individual investors can choose among far more investments, including the stocks of tiny companies that professional investors just can’t touch. This means that small private investors face much lower competition if they stick to small, mirco, and nano cap stocks. But how did Graham think a small investor should capitalize on this? “The individual investor should act consistently as an investor and not as a speculator. This means, in sum, that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase–in other words, that he has a margin of safety, in value terms, to protect his commitment.” Ben Graham clarifies, “[I recommend] a highly simplified [strategy] that applies a single criteria or perhaps two criteria to the price [of a stock] to assure that full value is present and that relies for its results on the performance of the portfolio as a whole–i.e., on the group results–rather than on the expectations for individual issues.” Benjamin Graham’s suggestion for a value strategy is exactly what many investors today call “quantitative value investment strategies,” or “mechanical” strategies. He continues, “The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. Typically, he should set a reasonable profit objective on each purchase–say 50 to 100 per cent–and a maximum holding period for this objective to be realized–say, two to three years. Purchases not realizing the gain objective at the end of the holding period should be sold out at the market.” Graham’s recommended buy and sell strategy is much simpler than the strategy he used to favor, thorough analysis in the hopes of uncovering unrecognized value. According to Ben Graham’s comments, investors can forget about industry and competitive analysis, or even income and balance sheet assessments, in favor of buying a diversified group of stocks based on simple metrics. Ben Graham did also have something to say about the sort of metrics that investors should be looking for. His favorite, in his words, “…[this] technique confines itself to the purchase of common stocks at less than their working-capital value, or net-current-asset value, giving no weight to the plant and other fixed assets, and deducting all liabilities in full from the current assets. We used this approach extensively in managing investment funds, and over a 30-odd year period we must have earned an average of some 20 per cent per year from this source.” Graham used to buy 100s of “working-capital value,” or net net, stocks to fill out his portfolio yet was able to earn returns in excess of 20% per year. That’s a great record, but as I’ve written to those who’ve requested free net net stock picks , by using the growing body of research covering net nets to focus on the best possible opportunities investors should be able to earn even better returns. That’s the approach that I’ve adopted, and it’s worked quite well. As Graham describes, “…we found it almost unfailingly dependable and satisfactory in 30-odd years of managing moderate-sized investment funds. ………I consider it a foolproof method of systematic investment–once again, not on the basis of individual results but in terms of the expectable group outcome.” What other endorsement do you need? Ben Graham’s Net Net Stock Problem There is a well known problem when it comes to buying net nets, however. They tend to dry up as markets advance. This has been a problem for people who insist on only investing in their own domestic market. Graham’s experience was no different. “For a while, however, after the mid-1950’s, this brand of buying opportunity became very scarce because of the pervasive bull market. But it has returned in quantity since the 1973-74 decline. In January 1976 we counted over 300 such issues in the Standard & Poor’s Stock Guide–about 10 per cent of the total.” I started Net Net Hunter to solve this very problem. By branching out to friendly international markets, investors can widen the pool of available investment candidates enormously. This is the same technique legendary Canadian value investor Peter Cundill employed during his career. But by looking internationally, investors don’t just find more net nets, they can also significantly improve the quality of the net nets in their portfolio. So while Ben Graham gave up on detailed security analysis at the end of his life, he by no means abandoned hope that small investors can beat the market by significant margins if they play their cards right. When it comes to your own portfolio, you have a tremendous advantage over the pros if you’re willing to look at tiny companies and buy a diverse group of ugly, beaten down, stocks such as Graham’s famous net nets. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.