The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Tobin Smith's ChangeWave
03/07/2003 12:00 am EST
"Our goal is not necessarily to be a growth investor or a value investor, but to benefit from generational changes," says Tobin Smith, editor of the excellent ChangeWave Investing. "We like to ride out multi-year supply-demand imbalances." Here he explains his philosophy and some favorite stocks.
"The basic idea of our investment portfolio should be structured like a pyramid: No-risk/low-risk investments represent the base. Low/moderate-reward investments are the foundation. Moderate/higher-risk rewards add enhanced returns. Going into a war, we suggest that you place 80% or more of your portfolio in Ballast Income investments and short-term cash, at the base of the pyramid. This will allow you to have assets to strike when opportunity presents itself. Then have the other 20% of your money (depending on your age, work status, and stomach for volatility) in growth stocks at the top of the pyramid. These should deliver up to 50% of your overall return while keeping the majority of your foundation in high-dividend paying investments that you reinvest. This greatly increases your overall annual return without adding an undue amount of extra risk.
"Here are two recommendations that offer high yields for your short-term cash. Strong Ultra Short-Term Income Fund (STADX) is a good buy under $9.42. This fund owns short-term corporate bonds (less than one year to maturity), yet has a yield of nearly 4%. So, you get a higher yield than ten-year Treasury bonds without the risk of losing principal if long-term interest rates jump. This fund did quite well during the 1994 bond massacre. It looks like a winner for holding your no-risk cash. Aberdeen Asia-Pacific Prime Income Fund (FAX NYSE): Consider buying FAX under $4.80. The fund yields over 8% returns and also has capital appreciation potential. It invests in Asian and Australian debt securities.
"In the corporate bond fund area, I'm adding the PIMCO Corporate Opportunity Fund (PTY NYSE) to our Ballast Income buy list. This is a newly created investment grade fund (i.e. higher rated than junk bond ratings) that pays more than 10%. Our recommended buy under is $15.50. The new portfolio has acquired high-quality, high-yield bonds at great prices and avoided the bombs that sit in some funds. PIMCO is the premier bond manager in the world, and their closed-end funds usually sell at 10%+ premiums to their net assets. In the reasonable case scenario for a quick war, their bonds will soar in value. I also continue to like the New America High Income Fund (HYB NYSE) as a play on our economic recovery for lower-rated corporate bonds. We recommend HYB with a buy under of $2.15. These closed-end funds usually sell at a healthy premium to their high-yield bonds, but we can now buy HYB at a small premium. The market is assuming a 15% default rate on junk bonds for 2003, and this is too high in my opinion. As the economy slowly grinds to a decent recovery in 2004, I see this fund going at a strong premium to its net asset value and the 10% yield is too juicy to pass up.
"In addition, among our income picks, we like FBR Asset Investment (FB NYSE), PrimeWest Energy (PWI NYSE), Preferred Income Fund (PFD NYSE), Enerplus Resources Fund (ERF NYSE), Entertainment Properties Trust (EPR NYSE), Apex Mortgage Capital (AXM NYSE), and RAIT Investment Trust (RAS NYSE) all represent a great mix to add to the fixed-income bond funds. The whole idea here is to get the monthly momentum of high rates of income reinvested to achieve a 20% overall return - yield and appreciation. If you have been with us a while, you could have been getting these returns from Ballast Income for the last 24 months - even with the occasional botched call like AXM.
"Finally in the growth area, we are searching gas services and exploration, medical devices, new generic plays, and other exciting slower, longer-growth plays. We already have three names in this group. American States Water (AWR NYSE) finally came in with the earnings we expected. AWR recently reported 21% higher earnings over the year-ago period. This was the bump we were looking for from the rate hikes that were delayed in 2002. I expect the almost 4% dividend to rise in 2003 as well. Matrix Services (MTRX NASDAQ) announced a key acquisition that will juice earnings in 2003 by about 40% - way to go. The $50 million acquisition of Hake Group will expand MTRX's offerings, establish a foothold in the Mid-Atlantic region, and should be immediately accretive to earnings. The transaction should be complete by the end of March. I'm returning the buy under for MTRX to $9 and making this a must-own in the growth portion of your portfolio. The third name in this trio, Quality Systems (QSII NASDAQ), comes from the Healthcare IT and continues to roll and hit new highs every week. We wish all our picks could perform like this.
"Finally, one wave that we are riding right now is natural gas. The price of natural gas is going to continue to rise simply because we're still in a supply-demand imbalance and will likely remain so for the next 18 months. I recommend PrimeWest Energy (PWI NYSE). This is a prime example of a conservative stock. I have my family, my parents, and my own IRA invested in this stock. The stock is generating about an 18% cash yield right now. The yield should continue to grow. They are also taking 30% of their money each year and reinvesting in new fields, so it's a regenerating asset that should last for perhaps the next 15 years. Another benefit is that about 40% to 50% of the cash flow is a return of capital, so you are not taxed on its currently. (Editor's note: Always check with you own tax advisors regarding the tax implications of various investments.) The after-tax yield is over 20% for what I consider to be one of the most conservative investments you can buy today. If you don't own this energy trust, I think you are making a big mistake."
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...