I picked the 50 stocks in my book "The Jubak Picks" for the long term: five years certainly and 10 years quite probably. They all have at least one of 10 strong long-term global trends behind them.
But even long-term trends have their peaks and valleys, and even great companies with strong trends behind them can see major changes in their fortunes. By following this link, you'll find a page that lays out my current thinking on the ebb and flow of my 10 major trends.
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All books go out of date, perhaps none more quickly than investment books. I think the methods in "The Jubak Picks" and the 10 trends I explain will serve as long-term guides for building a successful portfolio. And this page is intended to keep the book as useful as possible, for as long as possible, by updating the most ephemeral element in investing: individual stocks. On this page you'll find a chronological list of my updates on the stocks in "The Jubak Picks," starting with the most recent update.
April 21, 2009: You'd have to go back to 2004 to find shares of PepsiCo (PEP, news, msgs) trading as low as $50. Even though earnings for 2008 were below those for 2006 and 2007, earnings have grown 20% since 2004. With an economic turnaround looming in 2010, these shares look very, very reasonably priced now. (It doesn't hurt that the shares pay a 3.3% dividend while investors wait for the economy to heal.)
And PepsiCo's management isn't waiting passively for that turnaround. On April 20, the company launched a bid for the parts of its two biggest North American bottlers -- Pepsi Bottling Group (PBG, news, msgs) and PepsiAmericas (PAS, news, msgs) -- that it doesn't already own. The offer values the companies at a 17% premium to their recent depressed bear market stock prices.
April 21, 2009: Coach (COH, news, msgs) has plenty in reserve, which is why the company has been able to invest full steam ahead in its newest target market, China, even as it cuts back on investment in the mature U.S. and Japanese economies. In December, Coach finished the second quarter of its fiscal 2009 with cash of $424 million and long-term debt of $25 million. At the end of its fiscal 2008 in June, its debt-to-equity ratio was 0.02.
April 21, 2009: Flowserve (FLS, news, msgs) has the kind of balance sheet I like to see when an economy slows. The company did have $546 million in long-term debt at the end of 2008, but that was nearly balanced by $472 million in cash. The company's debt-to-equity ratio stood at a low 0.42, and the quick ratio, a measure of how much cash and other liquid assets a company has in comparison to its current liabilities, was 0.9. At a quick ratio of 1.0, a company would have enough liquid assets to pay off its liabilities even if all sales suddenly stopped.
April 9, 2009: I think the stock market has run way, way ahead of the economy. Too far ahead.
A month ago, every bit of news was seen through the darkest glass possible. Today, everybody is going gaga over the slightest sign that things aren't getting bad as quickly as they were in January. One result has been a strong rally in the price of oil -- the spot price of benchmark Brent crude has climbed 25% in a month, for example -- that just can't be justified by the economic data.
With everybody from the Federal Reserve to the Organization for Economic Cooperation and Development growing more pessimistic about when the recovery will arrive (2010 now) and how strong it will be (not very), I think oil prices are due to retrace a good part of that gain. That means oil stocks, especially those that have moved up most strongly, are facing a correction, too.
Shares of Petrobras (PBR, news, msgs) have climbed 137% since the Nov. 20, 2008, market low and 33% since this year's March 9 low. As much as I like the long-term prospects for Petrobras, I think the process of turning those prospects into oil is going to make so much capital and so much time that right now they're priced into the stock. My target price on these shares is $41 by December 2009, and, at a current price near $36 a share, I just don't see the upside in holding right now. So I'm going to sell these shares with an eye on re-establishing a position in the mid-$20s when this rally falters.
March 9, 2009: Chevron (CVX, news, msgs) will slow investments in some new oil projects. ConocoPhillips (COP, news, msgs) will cut capital spending by $2.8 billion in 2009. But Exxon Mobil (XOM, news, msgs) will stick with its plans to invest $29 billion this year and an average of $25 billion to $30 billion a year over the next five years.
In 2008. the company started production at eight major projects, which will add 260,000 barrels a day at peak production. That's a little less than 7% of current production. In 2009, the company will start production at nine more projects, which will add 485,000 barrels a day (about 12% of current production) at peak. "We are really making no adjustments to our business strategy," CEO Rex Tillerson has told investors.
Feb. 23, 2009: When I first selected Deere (DE, news, msgs) for Jubak's Picks on Jan. 12, 2007, it was in a column titled "How to profit from rising food prices." A better headline for today might be "How to survive until food prices start climbing again." (By the way, I'd say we'll see food inflation again in 2010.)
Well, Deere is hanging in, but 2009 certainly isn't going to be a year to crow about. On Feb. 18, the company announced fiscal first-quarter earnings of 48 cents a share, 15 cents below the Wall Street consensus estimate and a 42% drop from the same quarter in 2007. Revenue fell just 1.1% to $5.2 billion, which was considerably above Wall Street estimates of $4.6 billion.
Don't expect much from the rest of 2009 either, the company has told investors. Sales will be down about 8% for the year, partly because of a 6% hit from a stronger dollar in the first and second quarters. The biggest problems are -- surprise -- outside the U.S. Farm-machinery sales are forecast from flat to up 5% for the year in the U.S. and Canada but down 2% worldwide. Order cancellations were somewhat above normal in South America in the first quarter, but the real problem is in Russian and Central Europe, where economies are rapidly deteriorating.
The company is not seeing any problems in North America from the credit crunch because high crop prices have led to strong cash flows for farmers. I don't see Deere facing a collapse in its sales in 2009 or significant balance sheet problems, and the company is well-positioned for a turnaround in 2010.
Jan. 27, 2009: Global financial crisis or not, Petrobras (PBR, news, msgs), the Brazilian national oil company, is steaming full speed ahead with plans to invest $174 billion through 2013 to develop its new oil finds. The recently announced capital budget is a big increase from its $112 billion in the 2008-12 plan.
The new budget also is the first to include big bucks -- about $28 billion -- to develop what are called the "pre-salt" fields, discovered in 2007 under miles of seawater, rock and salt in the South Atlantic. One, the Tupi field, holds estimated reserves of 5 billion to 8 billion barrels, and another, Iara, holds an estimated 2 billion to 4 billion. That's enough to almost double -- at the upper end of estimates -- Brazil's proven reserves of 14 billion barrels. Estimates for the ultimate size of the reserve have climbed as high as 100 billion barrels, but that estimate has more politics than geology in it.
The company's 2009-13 budget is based on $42 a barrel for benchmark Brent crude, which in January 2009 traded at $47 a barrel for November delivery. Most of the capital budget is covered by company cash flow, and the rest seems within reach. Petrobras announced that it had already arranged $16.9 billion of the $18.1 billion in financing it needs for 2009, but it still needs to arrange $10 billion more in financing for 2010. The company projects that production will climb to 5.1 million barrels a day by 2020 from 2.2 million barrels a day in 2008.
Still hanging over the company and its stock are unresolved talks in Brasilia about how revenue and ownership of these new fields should be divided up between Petrobras and a possible new Brazilian oil company. The collapse in oil prices and the company's huge investment needs may, in that context, be a plus, since limiting the cash flow at Petrobras would make it much harder for the company to raise the capital it needs. And without that capital, there's no oil for anyone.
Jan. 13, 2009: Shares of Transocean (RIG, news, msgs) took a real beating Jan. 12 on news that the company had canceled a contract for one of its midwater drilling rigs after the company that hired the rig failed to make a payment. The market sent the stock tumbling on fears that other customers, especially the customers that make up Transocean's huge backlog of orders, would default on their deals, too.
I think that's a relatively small danger. The big companies that make up the bulk of Transocean's customers aren't hurting for cash, and, given the long lead time for rigs as recently as 2007, I doubt they'll want to lose their place in line. Instead, what investors are likely to see is a constant drip, drip, drip of bad news as smaller customers default on contracts. That's a worry because it will make it hard for the stock to move up.
But more troublesome to me is news from oil- and natural-gas-service industry leader Schlumberger (SLB, news, msgs) that it would cut 5% of its North American work force and make comparable reductions in its international operations. Schlumberger wouldn't make that move unless it expected an extended slump in oil and gas exploration and development. The kind of highly trained workers whom the company is laying off are exactly those the company would like to keep on board because they are scarce and hard to replace.
Transocean confronts us with the classic value investor's dilemma: Its stock is now selling for far below its fundamental value, but it may be quite a long time before the stock's price recognizes that value. For example, the book value -- that's the value of the stuff like deep-water drilling rigs that Transocean owns at the price the company paid for them -- is $46.91 per share. That's not so far below the stock market price of $50.53 on Jan 12. Book value underestimates the value of assets, such as drilling rigs, that have climbed in value since they were first purchased. The replacement value -- what it would cost to duplicate Transocean's biggest-in-the-industry fleet of deep-water rigs today -- comes to $123.97 a share. So at $50 a share, an investor is getting about $2.50 a share in assets for $1. When will the stock's price recognize that value? I'd guess 2010 or later.
So investors who own these shares should either sell -- if they've got a better investment for their money over the next two years or so -- or be prepared to be very, very patient. (Full disclosure: I own shares of Transocean in my personal portfolio.)
Dec. 23, 2008: The global credit crunch is tightening the pincers on Fortescue Metals Group (FSUMF, news, msgs). Fortescue has canceled a contract with dry-bulk shipper Angelicoussis Group and now finds itself being sued for $130 million. Dry-bulk-shipping rates plunged to a low of $2,316 a day on Dec. 2, and, under the contract, Fortescue had been paying $77,500 a day. The suit wouldn't be a big deal except that Fortescue continues to show signs that it's running out of cash. On Dec. 19, the company said it had paid a contractor owed $2.5 million not in cash but in company shares, priced at the closing price on the Australian stock market.
The company has also said that it will delay paying some suppliers for 180 days after they've submitted invoices. At the end of the third quarter, the company reported $624 million in cash on hand, but Fortescue has so far not updated that figure. That has left investors wondering whether the company is simply being very careful with its cash or whether its coffers are almost empty.
When I updated this stock Oct. 21, I wrote, "This stock remains what it has been since I added it to Jubak's Picks last November -- a highly risky bet with a very high potential return." That's still true. The upside on this stock is still, I calculate, $5 a share by December 2009. The downside is $0.
If the company runs out of money, it will still have significant physical assets in its mines and shipping infrastructure, but owners of the equity are unlikely to see much of anything if the company has to seek bankruptcy protection. (Anybody know anything about Australian bankruptcy law?) A buyout is possible, but current management is still in the "we won't do that" stage, and any potential acquirer might well decide to let the situation get more desperate before stepping in.
At this point, shares of Fortescue are a speculation. You shouldn't have money invested here that will cause real hardship for you if you lose it all. (Full disclosure: I own shares of the company in my personal portfolio.)
Dec. 23, 2008: Why own Exxon Mobil (XOM, news, msgs) stock when oil prices are collapsing? First, because as an integrated oil company, Exxon Mobil makes money refining oil and then selling gasoline and other refined products. That dampens the effect of falling crude oil prices on Exxon Mobil's revenue and earnings. (The company often makes a bigger refining profit as crude oil prices fall, for example.)
That's one reason Exxon Mobil shares were down just 18% in 2008, as of the close on Dec. 19, and the shares of exploration and production companies such as Apache (APA, news, msgs) and Anadarko Petroleum (APC, news, msgs) were down 30% and 43%, respectively.
Second, because with its huge cash flow, the $37 billion in cash in its vault and the 2.4 billion of its own shares that it's holding, Exxon Mobil is perfectly positioned to pick up the pieces as overextended oil companies crash.
And, third, though Exxon Mobil's dividend was a small 2.1% as of Dec. 19, the stock still pays you to wait for a turnaround in oil prices and oil stocks. These days, 2.1% isn't anything to sneeze at: A two-year Treasury note yields just 0.74%.
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