Tags: investors | quiet | rally | 2018

Investors: Join in This Quiet Rally in 2018

Investors: Join in This Quiet Rally in 2018
(Dollar Photo Club)

By    |   Thursday, 04 January 2018 03:45 PM

Stocks continue to soar in the New Year. The Dow hit 25,000 Thursday. That’s a nice, round number. It doesn’t tell us much about the underlying earnings of the 30 companies that make up the index… but what it does tell us is that the powerful trend is still in place.

The rally feels bigger in high-flying tech. The Nasdaq topped 7,000 for the first time earlier in the week. Overall, 2018 is shaping up to be a great year.

There’s just one catch. Valuations. They’re high. And not to sound like a broken record, but unless earnings improve substantially, investors are taking on a moderate risk buying at high levels.

Yes, earnings can improve, in part to perception that the economy is going well. The recently-passed tax reform can be good for corporate America’s bottom line as well.

While the average company is trading at a historically above-average valuation, however, not all companies or sectors have gone along for the ride.

One such area is the commodity space. It’s quietly rallying along—and valuations are in a much better place than the average stock. Let’s briefly just look at two big places in the market: gold and oil.

Gold closed 2017 just over $1,300, about a $50 rally from the fortnight before the holidays. And oil rose throughout 2017 to close the year at $60, putting the price of crude at a 2 ½ year high. This marks the second year in a row that we’ve seen commodities rally. Overall, gold rose over 10 percent, and oil over 15 percent in 2017, following similar rallies higher in 2016.

It now appears, with the benefit of hindsight, that early 2016’s panic low in gold and oil ($1,050 and $30 respectively), was the bottom of the most recent commodity bear market.

Where do we go from here? In investing, particularly in commodities, there’s a simple saying: The trend is your friend. And that trend is favorable, just as it still is with the stock market.

That’s also confirmed by supply and demand data. Gold demand is holding steady, as is supply at current prices. And the oil market, which sees a lot more volatility on a daily basis, is showing signs of a growing balance between supply and demand following the supply-heavy markets of 2014-2016.

It’s a long, slow process that sees a lot of setbacks and can be frustrating at times. But in the early stages of a commodity rally, things tend to be especially slow. It’s only after some big gains have been made that more speculative money is attracted to the space and the rally really takes off.

In the early 2000’s, for instance, gold and oil rose gradually from their 1999 cyclical lows, only to head substantially higher in the 2006-2008 window. You can make money quickly in commodity markets, but buying early in a bull market means making larger gains.

In short, we’re still in the early stages of a commodity rally. The extreme bargains of early 2016 aren’t there anymore, but the chances of a big slide from here have largely abated. We could start to see some real speculative money hit the commodity space later in the year, especially if current trends continue.

I’ve been a fan of buying physical gold—to add to my insurance holdings against market uncertainty and fear—at or under $1,300. Today, the metal trades slightly above that, but may dip in the coming weeks. For a longer-term gold rally, however, there’s a better way to play this trend: mining stocks.

Call me crazy, but even gold’s lackluster returns in most of 2017 led to some compelling buying opportunities in mining company. But even after a moderate run higher for gold mining shares last year, shares of the average gold miner would still need to more than double to get back to an average valuation based on where the company’s historically traded in terms of earnings.

In a real gold rally that challenges the 2011 high of $1,900 per ounce, shares of a smaller company like Yamana could more than triple. That’s the power of owning a mining company. You get leverage to the underlying price move. That’s terrible during the down times, but phenomenal when things are on your side.

Investors interested in the space but who don’t want to pick and choose can get a solid bang for their bucks with the VanEck Vectors Junior Gold Miners ETF (GDXJ). Owning a basket of smaller gold mining companies should led to great results should gold’s rally intensify.

On the oil front, the easy money has come and gone. On a valuation basis, I don’t like the majors, and even many smaller companies have rallied so much in recent months that there feels like there’s little money to be made.

But one area still stands out: pipeline companies. Many are affected by a limited partnership (LP) structure, which makes for a tax headache. So what? Paying taxes means you’re making money. What matters here is that most pipeline companies fell with oil prices back in 2014-2016 but haven’t rallied yet. And, as a partnership, they’re required to pay out 90 percent of their income to owners. That means huge income in the now-rallying energy space.

While some pipeline companies are shedding their LP status, a few bargains remain. One standout names in the space is NuStar Energy (NS). Shares trade around $30 today, down from periodic peaks to around $70 per share during a big oil rally. Buying now also locks in a dividend yield north of 14 percent. Even if oil prices remain stuck around $60 for most of 2018, this company could go nowhere and deliver returns that beat the market on average.

The commodity sector is quietly rallying. Supply and demand fundamentals look good. And in the major parts of the market, there are a few, but dwindling number of investment opportunities at a great price. Join in this quiet rally while you can still get a solid deal.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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There’s just one catch. Valuations. They’re high. And not to sound like a broken record, but unless earnings improve substantially, investors are taking on a moderate risk buying at high levels.
investors, quiet, rally, 2018
Thursday, 04 January 2018 03:45 PM
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