Archive for stock analysts

Casey Energy Opportunities

For readers who found my comments about other stock analysts useful (Especially the one about Doug Casey) I’ve just published a review of Casey Research’s market newsletter Casey Energy Opportunities, which focusses on small energy companies, including alternative energy.

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Top Ten Reasons I’m Glad the second CFA® Exam is over

10. Free T-Shirt from Schweser (They were handing them out as we left the testing site.)

9. Got to use my short-cut for multi-stage dividend discount
model valuation problems. (I admit, I’m a math geek.)

8. Time to catch up on my reading.

7. Going vacation to Glacier National Park in 9 days (after the Colorado
Renewable Energy Conference
)

6.  More time to blog.

5. New ideas for articles.

4. I got some ideas on good arguments I intend to use that renewable energy
projects deserve to be evaluated at a lower discount rate in the next Least Cost
Plan at the Colorado Public Utilities Commission.

3. Don’t need to study for the next one ’til 2008.

2. Ethanol (not the type they put in cars.)

1. I think I passed (actual results don’t come out until August).

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My Thoughts on Analysts: Doug Casey

I first encountered Doug Casey at the 2004 World Gold, PGM, & Diamond Conference in Vancouver.  Around a year before, I became convinced that we were in the early stages of a Gold bull market, partly based on the arguments of Richard Russell, and partly based on my own conviction that people would come to see the world as an increasingly uncertain place in the years to come (a process which, in my opinion, has much farther to go.)  I was dissatisfied with Russell’s picks (his top pick for a gold mining company was Newmont, based on the fact that it was the largest gold company at the time.  NEM has risen about 20% in the three and a half years since Russell first brought it to my attention, which is an uninspiring performance, considering that gold has risen about 70% over the same period.  As I’ve said before, Russell isn’t much of a stock picker… he just has an incredible feel for market and sector moves.) 

I also have some serious reservations about Gold mining, because of its serious environmental impacts.  This was before it was possible to buy precious metals in the form of ETFs such as IAU, GLD, or SLV, and so I was looking for an analyst who understood mining companies, and might also be able to point me towards companies that mine precious metals relatively responsibly.  No one at the conference was talking about environmental responsibility, but two of the analysts whose talks I attended stood out as having an understanding of how mining companies and the precious metals industry work.  Those two were Paul van Eeden and Doug Casey.  

Casey in particular caught my attention because he was a big proponent of a type of company he refers to as “Land Banks:” these are companies which do not have any actual mining operations, but rather buy up mineral rights that have already proven.  They hold these mineral rights, doing only exploratory drilling to further prove out their reserves as a speculation on rising prices.  While the intent is always that they will eventually sell the mineral rights to other mining companies, since they are not engaging in current mining operations, they are less harmful to the environment than companies that actually dig the stuff out of the ground.  Silver Standard, SSRI was the company that invented this model buy buying up cheap rights to silver deposits when the metal was cheap in the late 1980s and 1990s, while Vista Gold, VGZ is following in SSRI’s footsteps by investing in gold deposits.  Robert Quartermain, the president of Silver Standard serves on Vista’s board.  (Note: I and some of my clients hold substantial positions in both stocks.)

Casey is not interested in the land banks because his is an environmentalist (quite the opposite, see below), but because he recognizes that, if you believe that gold (and silver) are “Going to the moon” as he says, then the built in leverage of owning metal in the ground can make more sense than digging the metal up and selling it while the price is still rising.

After the conference, I bought a 2 year subscription to Casey’sInternational Speculator newsletter (for $299… I note that the price has since risen along with gold.)   Here are a few of my conclusions:

  • He knows the world of junior mining companies backwards and forwards.   Small start up companies are always the most fertile ground for a company analyst, because less is known about them, and because few investors are paying attention, it is much easier to find information or come to conclusions about a company that are not widely recognized by the investing public.  His picks among the large and medium cap companies don’t seem any better than anyone else’s, but his picks among the small and medium cap miners have been excellent.
  • His 7 P’s framework for evaluating resource stocks is an excellent framework for organizing the relevant information about a company.  I have adopted a modified version which I use to evaluate renewable energy and energy efficiency companies.
  • He takes libertarianism to an extreme.  “Wacko” is a word that comes to mind.  But being crazy and being intelligent are not mutually exclusive; in fact, they often seem to go hand in hand.  In my opinion, that’s the case with Casey. 
  • Enough people follow his newsletter that it often was not a good idea to buy a stock right after he recommended it.  I had my best results by waiting a while and buying them a month or two later, if they had not just kept on rising.  For big spenders who want to seriously speculate in resource stocks, the Casey Investment Alert would likely be worth the money, given that they had a few hundred thousand dollars with which to speculate.  For myself, I’m very tight with my money, and I was more interested in understanding his methods than following his advice.  Of the stocks I did buy on pullbacks after he had recommended them, about half have more than doubled, another third are roughly flat, and the rest are down… which works out to be excellent average returns.
  • The only stock of his (other than Vista and Silver Standard) that I made a large investment in was Nevada Geothermal (which I still own… I even bought some more recently, and have recommended it to clients.)  It’s only up slightly since I first bought it, but since it is a renewable energy company, I’m happy to hold it for the long haul.  I’ve also heard some good things about it from other sources.

I did not renew my Speculator subscription when it lapsed last summer, mainly because I feel that while the precious metals bull market is likely to continue, the risks are much greater than they were when I first started allocating money to the sector.  I am currently slowly reducing my exposure to precious metals, although I still recommend small investments in precious metals (via the GLD, SLV, VGZ, and SSRI) to my less conservative clients.  I also like Rio Tinto for a general exposure to metals, because, in my opinion, RTP the most environmentally responsible miner out there.   I note that the main page of their website says “Rio Tinto supports the main conclusions of the UK’s Stern Review on the economics of climate change.”  (Again, some clients and I have positions in RTP.)

Back to Casey, after my International Speculator subscription lapsed, I signed up for his free newsletter What We Now Know (WWNK).  Naturally, there aren’t stock tips in WWNK, but I wanted to keep an eye on what Casey thought about the markets and world events in general.  WWNK is a lot more of a political tract than the Speculator (although he often had some rather scathing things to say about the US government, and I could not help but be amused at the way he refers to US citizens as Boobus Americanus.) 

Casey does not write much of WWNK, but I’m confident that the people who do are on the same wavelength.  The underlying message is that any sort of regulation is evil, an attitude which is unsurprising in an investor in mining companies.  As Jared Diamond outlines in his excellent book Collapse, gold mining companies usually leave environmental problems behind them that are much more costly to clean up than all the profits they ever make from selling their product.  Since Casey primarily analyzes and invests in mining companies, it’s no real surprise that he’s hostile to regulation, since real regulation would bankrupt most of his babies.

Unlike my previous entries in this series, I was prompted to write this entry in response to an article in WWNKDoug Hornig wrote a diatribe in an attempt to contradict the arguments for global warming.  It’s the usual stuff… “temperatures have not gone up that much”  “there have been previous periods of warming” “evidence for past temperatures is all indirect”… all attempts to muddy the waters, and no mention at all of the massive increase in the main driver of global warming: atmospheric CO2.  I’m not going to bother to deal with all his points… it’s not really a serious fact-based argument, rather a litany of the reasons (some real, some imagined) why there is some doubt about the reality or consequences of global warming, and, as such, just an exercise in obfuscation. 

It’s unfortunate, but people who want to believe that global warming isn’t happening gravitate towards arguments like these.  It’s not really a logical argument, but rather just people seeking to justify belief in what they want to believe.  I think it’s better perhaps to just make a meta-argument: if global warming is just a figment of liberal’s imaginations, why aren’t there a lot of wackos out there trying to muddy the waters by casting doubt on “the scientific theory of global temperature stability or cooling.”   No one is trying to cast doubt on the theory of “global temperature stability” because there is no such theory… and no evidence that our climate is stable.  It’s getting hotter, and it’s likely to get a lot hotter unless we get serious and do something (actually a lot of somethings) about it. 

In conclusion, Doug is a great analyst of resource companies, and if you’re interested in investing in those companies, you will do well by giving him a read.  But he also has a political agenda, and his belief that government is always bad is, simply put, wrong.  I wish he and his buddies would stick to their knitting.

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My thoughts on Analysts: Richard Russell

I’ve been reading Russell’s Dow Theory Letters since 1990.  When I spoke of Jim Cramer, I concluded that he represented the triumph of intelligence over wisdom.  Russell’s strength is his wisdom, his depth of experience, and his instincts.   

            Russell has a long history of great market calls, calling the major market turns since the 1960s.  I wasn’t even born when he first started writing the Dow Theory Letters, but since I began reading them around 1990, he was skeptical about the late 1990’s stock market boom beginning in around 1997, was advising his subscribers to be cautious for the entire period 1997 through 2000.  In late 1999, he called the bull market top, advising all his subscribers to get out of the market.

 

            In 2002, he became excited about gold, soon after the gold price started heading up.  I was initially skeptical, because he is a long term gold bug, and constantly harps about hoe the Federal Reserve Board is devaluing the dollar (He condescendingly calls former Fed Chairman Alan Greenspan, “Greenie”), and had gotten me interested in gold for a short time in 1996… I got cold feet after about six months at a small profit, but his predictions of a new gold bull market at the time proved to be illusory.  However, in 2003, a combination of his constant harping on gold, combined with my own growing conviction that the world was becoming (and still is) a more uncertain and unstable place, led me to finally follow his advice after gold had climbed from $220 to the mid $300’s.  Considering that it is now over $600, I certainly don’t regret following that advice, any more than I regret being out of stocks (partly due to him) in 2000, and getting heavily into foreign bonds in 2001.  While none of these have been one way tickets, they have all produced excellent long term returns.

 

            Russell is often hard to pin down to one particular opinion about the market, so attributing any particular “call” to his can sometimes be a stretch (however, he does come out and say “This is it!” as he did at the bull market top in November 1999… but calls like this are few and far between.   Since I started reading him in 1990, the 1999 bull market top and the start of the gold bull market in 2002 were the only definitive calls I remember.)  Most of the time he rambles about how the market looks like it might do one thing, but on the other hand, something else might happen.  For instance, he’s been worried about the housing market for years, but even though it now looks like that bubble is popping (or deflating gently, according to the optimists), he never “called” the top.  Admittedly, given the lack of good data for the US housing market, I don’t know how anyone could make that call definitively, even in hindsight.  With hindsight, all we can definitively say is that it happened sometime probably early in 2006, and the precise time depends on your particular housing market.

 

Russell shares his insight, but if he isn’t certain about something, he’ll hedge until he may not have said anything at all.  For instance, on 11/9/06 he worries about the Dow Jones Transports’ failure to “confirm” (follow to the upside) the Dow Jones Industrials to two successive new highs.  “Either the Industrials will pull the Transports higher to a new record high — or the Transports will pull the Industrials and rest of the market down.”  If you think about that too much, you’ll realize that he has not said anything.  But then he goes on to say: “My experience tells me that the Transports will have their way. In such situations, the Average that refuses to confirm is usually the winner.”  So he feels that these recent record highs for the Dow won’t last… but he’s not willing to stick his neck out.

 

I respect Russell for his unwillingness to make definitive predictions.  As he says, the market is smarter than any of us.  Forecasting the stock market is an art, not a science, and anyone who makes precise, definitive predictions is going to be definitively wrong—a lot.  Russell knows this, and knowing his limitations, he gives us a more accurate picture of the market.

 

            I met Russell (and his wife Faye) in 2003 at a hedge fund conference in
San Diego, which is a rare treat, since he never travels.  I most likely would not have attended the conference at all if it had not been for the fact he was attending.  In person, he does not strike a personally impressive figure, and compared to some of the extremely insightful other analysts on hand, in particular
Martin Barnes of Bank Credit Analyst, who struck me at the smartest man in a large room of highly intelligent men (yes, they were practically all men.)

 

At the time, Martin was short-term optimistic for the stock market at the time, and his arguments were penetrating and insightful.  In hindsight, Martin was also right on the money.  Russell, however, maintained his long-term bearish stance, which he has held since late 1999.  I recall Martin challenging him, asking “What would it take to get you to change your opinion?”

 

            Russell, in response said, “I base my opinion on human nature, and I’ll change it when human nature changes.”  What Russell meant by that are that long-term secular market cycles arise from a fact of human nature: We cycle from periods of extreme optimism to extreme pessimism and back over periods of several decades.  Now, we are moving away extreme optimism, which peaked in 2000, and we have a while to go before extreme pessimism is fully here. 

I think both Russell and Barnes were right that day in April of 2003.  We saw the stock market have a very good year in 2003, just as Barnes predicated, but Richard Russell does not tend to focus on short term movements of the market (He talks about them endlessly, in terms of what they might mean, but I’ve never heard him make a definitive prediction.)   We may not know if Russell was (and is) right or not for another five to ten years.  If extreme euphoria emerges again, without a period of extreme pessimism in between, then we will be able to say he was wrong.  If, on the other hand, we see what he calls “Great Values” (P/Es below 10, 5+% dividend yields, and extreme pessimism) before we again see euphoria, we’ll know he was right.

 

It may be a long wait, but investing is not for the impatient.  There are smarter guys than Russell, and he can’t pick a stock out of a paper bag, but if you’re looking for a great feel for the long term trends of the market, I don’t know anyone who is better.

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My thoughts on Analysts: Jim Cramer

Jim Cramer 

He’s the bad boy of the investing world, making trading look like a frat party. 
But I agree with Rick Aristotle Munarriz when he writes on the Motley Fool today that “I think that he is housing one of the most brilliant investing minds inside that noggin of his.”  Well, maybe not “most brilliant.”  I have a feeling the most brilliant investing minds out there are probably hiding from the limelight, not seeking it, like my hero Warren Buffett did before he got too bloody rich to hide from the limelight anymore.  I think there’s another generation of Buffetts out there, quietly raking in the cash for themselves and a few lucky or perspicacious investors.

            Case in point for “lucky investors:” my wife was on the Board of a nonprofit in Tucson, the Tucson Centers for Women and Children for a short time while we lived there.  Another one of the directors, and the biggest benefactor of the Centers, owed his fortune to the fact that he was Buffett’s neighbor in Omaha when Buffett was just starting out.  My guess is that Buffett was simply the savviest financial guy he knew, and so he gave Buffett some money to invest for him.  Now he buys buildings for nonprofits.

            Back to Cramer.  He may be brilliant, but it’s no longer possible to make money on his stock tips because too many people follow his advice.  His antics also make my life a lot harder.  I taught a workshop on investing in alternative energy stocks earlier this week, and tried to focus it more on the basics of investing, rather than stock tips.  I talked about paying off your debt, diversification, and started in on how to pick your own stocks, with the crowd getting more and more restless: They wanted to know which stocks and renewable industries I thought were a good deal right now.  In short, they wanted Cramer.

            I wanted to teach the attendees how to fish, but the instant gratification TV culture that Cramer is an iconic part of for the investing community has trained them to look for handouts of fish. 

I’m sad to say: I gave in.  At least, I did list stocks to look at in various industries, staying away from saying anything was a “buy” or a “sell” right now.  I save that for my clients.  And I did tell them which industries I like better: Energy Efficiency, Wind, Geothermal, some biomass.  (Note: I bet most of my readers, and that means you, got a lot more interested when you read that last sentence.  Case in point.)

Knowing what to buy now will never make anyone the sort of money they could make by knowing how to decide when to buy and when to sell.  When are they going to sell the stocks they are going to buy just because I mentioned them?  For most of them, at the wrong time. 

Superior investing performance is all about knowing yourself, and making rational, not emotional decisions, a skill we all think we are better at than we actually are.  And that was the skill I was trying to teach in my workshop.

In the end, we all get what we deserve.  I only regret that the attendees who really were open to the skills I was trying to teach could have learned a lot more if I hadn’t pandered to the instant gratification crowd.

 

Okay, that wasn’t really about Jim Cramer, and he’s not responsible for the instant gratification culture we live in, but he does pander to it.  I think he is brilliant, but intelligence and wisdom never were the same thing.  You’re not going to make real money following his advice.  If you want to make real money, you have to have the luck and insight to find the right advisor before he becomes too successful to want your account, or you have to learn to do it yourself.

Maybe I’ll call my next workshop “Making Money the Hard Way in EE/RE Investing.”  I’ll probably have an attendance of two, but at least they’ll know what they are getting into.

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