Agriculture
Energy independence is a goal of both American political parties. The farm states have tremendous political power. That combination has produced one of the most amazing booms that our nation has ever seen: the agricultural boom, which is still in its infancy. You may not be filling up with ethanol yet—you may not even believe in renewable resources—but the commitment’s been made, and being a farmer in this country is going to be lucrative for years to come. Throw in the fact that the federal government has proven to be completely incapable of reining in farm subsidies and you can see why “farm” replaces “pharma” in this generation’s raging bull markets. Most people on Wall Street are skeptical of this group. They view it as a boom-bust sector, a cyclical sector with good times and bad. They fail to realize that the commitment to domestic fuels that don’t destroy the environment (hence no coal) is irreversible and growing.
I like to look at the stocks in the ag bull market as secular growers, immune to the economy’s vicissitudes. They should be viewed not as companies that help bring food to market but as companies that are the new oil-service companies, suppliers of energy at less and less cost each year, as the companies improve their products. The ag bull market is a tight-knit one. There’s Deere for farm implements, Monsanto and Bunge for seeds—each is amazing at producing strains of vegetables that can generate more and more fuel per stalk of corn or soy—and Agrium and Mosaic for fertilizer. It’s not a big cohort, but it is one that has become a market leader and has proven to go up no matter how the stock market performs. Deere is the best in show of this group, but Monsanto’s the sleeper. The market values it as if it were a stodgy old chemical company, its legacy. In reality, it is a company that produces patents to develop better and better seeds. I consider it a biotech company for fuel, and that’s something that will be in demand for years and years to come.
Oil and Oil Service
We are running out of oil, yet it will still be our fuel of choice for at least the next twenty-five years. We aren’t producing enough renewable energy to satisfy demand. We are trying to expand nuclear energy, but the power plants are expensive and, in this country, still considered too dangerous and difficult to build. (As someone who for a spell lived next door to a power plant in Sacramento, I find this outlook odd, but then again, who else would willingly live next to one of those scary cooling towers!) Coal is just not attractive anymore, and the technology to make coal clean is costly. That keeps sending us back to black gold, and it is something that a whole host of companies benefits from.
When we speak of oil we think of the majors, the Exxons and Chevrons and Conocos. These are giant companies that produce stable cash flows and dividends; they are and will remain great investments for years and years. But, as in any mini-bull market, there are tons of other stock subsectors that will do great because they are involved in energy. We don’t have enough refiners, which means that Valero and Marathon (which also has substantial oil properties) are going to be buys whenever they come down in price. We have plenty of natural gas in this country, which will increasingly have to be relied on as we run down our crude resources. Natural gas has been cheap in this country because we haven’t been able to store as much as we would like. Still, I believe that companies like XTO, Devon, Apache, and Anadarko are all fantastic long-term buys.
For years, we starved the drilling and oil services businesses because oil was priced too low by OPEC to make alternative fuels profitable enough to develop. (OPEC’s own inability to produce enough oil was responsible for much of the recent surge in oil prices, which I think will last for years.) Now there are only a handful of companies with the expertise to drill and harvest the oil that is found. National Oilwell Varco is the only major company left that can build drilling rigs. Schlumberger is the only company with worldwide ability to find and drill oil. Halliburton, its smaller rival, has similar skills, but linked more to natural-gas drilling. The remaining big prospects for oil and gas are all in deep water in remote areas, and only Transocean has the rigs—and the might—to hit pay dirt in those areas. Core Lab and FMC Technologies have the brainpower, the intellectual capacity, to get the most out of wells thought to be spent. All of these service companies work for publicly traded oil giants and nations that are eager to exploit their resources. If I could invest in only one sector, if you put a gun to my head and said, “Promise me you will not diversify,” I might just let you pull the trigger, that’s how important diversification is to me. But in the end, I would relent and say, “If I have only one sector to give to my portfolio, let it be oil and oil service.”
Minerals and Mining
For years, the minerals and mining group of stocks was perhaps the worst group of stocks to own. They were never “investable” because they frequently needed financing; they were poorly run; and any time the U.S. economy sneezed, this group got pneumonia. I can’t tell you how much money I lost at one time or another on Amax, Asarco, and Phelps Dodge, to name some terrible stocks of yesteryear. These were serial cutters and omitters of dividends that would then catch a few years of warmth and institute new dividends and buybacks, only to suspend them again the moment the U.S. economy slipped into neutral. Those days are over, totally over. We always hear about the pull of China, how China is going to reshape the world and become a global power—with India not far behind it—and investors—pros and amateurs alike—just can’t stop looking for ways to play these markets. Stop looking: minerals and mining are the way to play them.
Let me give you one quick anecdote about how this group has ceased to be levered to the U.S. economy and a Federal Reserve Bank that cares far too much about inflation and not enough about growth. Ten years ago, the United States used 30 percent of the world’s copper and China used 10 percent. Now China uses 30 percent of the world’s copper and the United States uses 10 percent. And that is not because we’ve ceased to grow. As in the ag, oil service, and aerospace bull markets, there was so much starvation for so long that many players merged or were driven out of business. That left just a few powerhouses, all of which are totally investable.
Countries like to have a one-stop mineral shop, like a supermarket, to produce their goods. That’s why, when I think of minerals and mining, I think of CVRD, the Brazilian powerhouse linked to low-cost nickel; Freeport-McMoRan, a U.S. gold and copper producer; and BHP and Rio Tinto, which mine and smelt just about everything. A portfolio without a mineral or mining company will miss the greatest secular trend of our lifetime, the growth of what we used to consider Third World or less-developed countries into countries that can compete globally or eventually exceed us in the production of goods and services.
Infrastructure
Most of the mini-bull markets I have described specialize in one aspect of business—producing weapons or energy or fuel. This last bull market is more complex. Once again, because of starvation of orders for multiple years, it doesn’t have enough players to satisfy investors so they can keep rallying as new dollars come in. Infrastructure is and will be an era of gigantic projects to tackle major needs: (1) the need to refine oil and gas; (2) the desire to replace oil and gas with other complex fuels that have to be harvested, cleaned, and refined; (3) the need to repair and replace our aging highways before they become too worn out or too dangerous; and (4) the need for more power as poor consumers in foreign countries become wealthier. Remember, the first thing that a poor person in a newly industrialized nation does with his or her paycheck is buy an appliance that needs power, so you have to build plants to service them. Power plants worldwide are in short supply.
A small group of companies excels at just these kinds of projects and tasks. You want to build new roads and bridges or fix them up? Call AECOM or Chicago Bridge & Iron. You need to build power plants that run clean energy? McDermott, ABB, and Foster Wheeler can do that, including coal and nuclear. You need to make sure that urban infrastructure, sewers, levees, and piping are working? Call URS or Shaw Group. You have to build refinerie
s or factories in hard-to-get-to places? That’s Fluor, or KBR, the old Kellogg Brown & Root subsidiary of Halliburton. All of these companies, with the exception of ABB, are based in the United States but do tremendous amounts of business overseas because of their reputation for quality work and expertise. The projects they get called for are long-dated projects that give these companies exceptional visibility to the “out years,” where they can make projections for earnings that can last far longer than what other companies can project. For these companies I’ve mentioned, the foreseeable future extends well into the next decade.
At any given time, the leaders in these mini-bull markets can change. It’s hard to pick a best-of-breed infrastructure or oil play that I can guarantee will stay that way for life, so to speak. But the sectors I outline are going to stay strong, and if you call me when I play “Am I Diversified?” on Wednesdays on Mad Money, you will hear me say that you should swap out of that lame financial stock or that boring drug company and pick a stock in one of the five sectors I just outlined that you may not have exposure in. It’s a trick of the diversified trade, but it will ensure that your stocks live in the best neighborhoods possible for years to come.
Beyond the five bull markets, you want specific stocks, ones that should hold up for eighteen months, or even years, longer. You might think it’s impossible to find stocks that are truly good for the long term, but that would be a mistake, as long as you stay in touch with them and make sure that the things that I like about them hold up. I’m really going out on a limb here and doing something that’s quite unusual for any book about money, especially one that’s geared toward long-term financial planning. I’m giving you my list of stocks that work for the long term. A year from today, not every stock on this list will still be worth owning. This list is good, but it’s tentative by necessity, because not everything that looks good for the long term right now will stay that way. That’s why this list goes beyond the five bull markets.
How do you start? First of all, of course, you must start with diversification. That means you need to pick sectors, sectors that have a long-range thesis and very little overlap with each other. The five bull markets are all strong sectors, but we want a list that gives you more choice and diversification in case the five bulls get mauled by bears. Then you need to pick stocks in those sectors and make sure they have long track records of doing the right thing for shareholders, along with strong managements that have been able to pass the baton effectively. You don’t have to have the same weightings as the S&P 500 or any of that Wall Street gibberish, and you don’t have to keep track of these stocks day-to-day or even week-to-week, because this portfolio is not meant to be traded.
Impossible? I thought that when I wrote Real Money, which was the handbook of my old hedge fund and had a trading orientation to it that required quick-wittedness and a sense of what was happening now. That’s always been my code on CNBC, to the point where I used to be referred to as Reverend Jim Bob Cramer of the Church of What’s Happening Now. But those times are past. I have switched to a strategy that is far more like what I am asking you to do at home, picking stocks with an eighteen-to twenty-four-month perspective and trying not to feel that I have to sell them unless I am being so piggish that one or two stocks just become too dominant in my holdings. I’m picking twenty stocks for the long term for you, and I want you to consider this as a menu. I am loathe to give you just ten, because I fear that you simply might not like enough of those—if you recall, you must be comfortable enough and care enough about each stock that you’ll enjoy following them. Some stocks simply aren’t for everyone, so you have to know yourself. If you think that you can’t keep up with them, remember that I manage to keep up with these stocks myself on a daily and weekly basis as part of my charitable trust, ActionAlertsPlus.com, which is affiliated with TheStreet.com. It may be the lazy man’s way of staying in touch with the stocks, but I still encourage you to follow these names on your own.
So here it is, my list of great stocks with long-term potential:
Twenty Stocks for the Long Term
1. Caterpillar. Caterpillar is the world leader in the production of heavy industrial machinery. It has the most sales, is in two hundred countries, and has the largest dealer network in the world. Despite a yield of nearly 2 percent and a constant buyback, usually in the range of $7.5 billion at any time—one-fifth of the company’s capitalization—the stock has traded for roughly twelve times earnings, which is only two-thirds of the historic market multiple of the S&P 500. Caterpillar is the foremost large engine and infrastructure play worldwide. Its machines are used in everything from road-building to residential and commercial construction to alternative energy products to the mining of just about anything. Management has been able to transform this once largely American company into a global powerhouse that is respected on all continents and by all government and private contractors. It is the lowest-cost producer and yet is able to charge the highest prices because of its reliability and its brand name. Any portfolio needs a company that is known as a “cyclical stock,” meaning that it does best when economies are strong. Given the nature of the worldwide economy, where nations are going from being underdeveloped to being part of the twenty-first century in what feels like days, CAT is the best way to play this longer-term trend. I suspect that this stock can be virtually a lifetime stock given that the most important trends in the world, from alternative energy to the buildup of the world’s infrastructure—buildings and roads and homes—need Caterpillars to make it all happen.
2. Goldman Sachs. Okay, call me biased. I worked at Goldman Sachs in the 1980s and have been enamored of the place ever since. It is a gathering of the best financial minds worldwide and has always been a leader in stocks, fixed-income securities, mergers and acquisitions, corporate finance, trading, and private equity. This is a company that has been run by legendary players in the industry, everyone from the deans of finance John Weinberg and John Whitehead when I worked there, to Bob Rubin, the former Treasury secretary; Jon Corzine, the governor of New Jersey; Hank Paulsen, another Treasury secretary; and Lloyd Blankfein, a friend for many years. Once perceived as a strictly American company, Goldman now derives 50 percent of its income from overseas. It makes most of its money advising companies, issuing stocks and bonds for them, merging them, and taking them private. These businesses are going to be strong for years and years ahead, and Goldman is the market leader in every one of them. I like Goldman more than the other firms because most of them have had some turmoil at the top or have not been able to capture business away from Goldman, no matter how hard they try. Plus, bizarrely, this stock has been cheap compared to the rest of the market almost since it came public despite its massive outperformance, meaning it has done so much better than the rest of the stocks out there. It is the bedrock financial stock, and that’s a group I believe you must have a position in. This is the best one there is. It will be for many years to come. While financials are a big part of the stock market, I am not willing to put more than one of these stocks in your portfolio for fear that you will end up stuck in one that is too related to American housing or to the Federal Reserve’s whims. Goldman makes money in any environment.
3. ConocoPhillips. I am a huge believer that energy will be in short supply for most of the rest of our lives, so not having a couple of energy plays in your portfolio is a giant mistake. I like this group so much that I am including three of them. ConocoPhillips is one of the world’s largest integrated oil companies, with operations in oil, exploration and production, midstream, refining and marketing, and chemicals. Despite its leadership status, the stock trades for less than ten times its earnings, a significant discount compared to its large, integrated peers like Exxon Mobil and Chevron. In addition, the company has one of the largest buybacks, a multiyear one for $15 billion that I expect won’t be complete until 2009. That’s more than 10 percent of the company! While most energy stocks have had a big run over the past five years, including Conoco, I
believe much more upside remains. The world economy is growing rapidly and there just isn’t enough supply to keep up with demand. Any new oil that is being found comes from increasingly unstable locations, and supply disruptions are common. These stocks are still discounting a steep drop in oil prices that I think just isn’t in the cards. With a low valuation, huge share buyback, and tremendous exposure to oil and gas prices, I believe Conoco is tremendously undervalued.
4. XTO Energy. XTO, a domestic oil and gas company, is among the best-run companies that I follow—not just in energy, but in any sector. Since coming public in 1993, the company has grown its proved reserves 30 percent a year, an amazing achievement that no other oil and gas company comes close to matching. The stock has gone up more than fifty times its IPO price. The company’s finding costs are consistently among the lowest in the industry. It also uses a disciplined capital strategy to grow production through low-risk acquisitions and investments in high-return projects in “safe” areas immune to geopolitical problems, something almost no other large oil and gas company can claim. XTO has allocated $3 billion for more acquisitions over the course of the next couple of years. It expects to grow production 10 percent a year for the foreseeable future. Most recently, the company has proved reserves of 6.94 trillion cubic feet in natural gas, 52 million barrels of natural gas liquids, and 214 million barrels of oil. Pretty good for a business you have probably never heard of. To produce more predictable cash flows so it can wildcat more than most companies (meaning drill for oil in places where none has been drilled for before), XTO uses derivatives to hedge some of its production at what have been really favorable prices. It has sold forward about 65 percent of its natural gas production for several years into the future at prices that are dramatically higher than anything near the current price of natural gas, a brilliant move considering the fact that almost every other company I follow is stuck producing gas at the current low prices. It has also hedged out about 40 percent of its 2008 oil production at $74.26, a very, very smart decision that makes XTO far less hostage to the ups and downs of oil pricing. These above-market prices are a prime example of good management in action. All of these factors make XTO a best-of-breed name in the oil and gas space—and a great investment at these prices. It’s another stock that is at a huge discount to the S&P’s market multiple, the benchmark I measure all stocks against, even though it grows much faster than the average S&P stock.
Jim Cramer's Stay Mad for Life Page 23