By Kirk Spano
I have gone to the well once again with a quote from Warren Buffett because I'm not sure what the stock market will do this year. As I wrote last week, it seems to me that 2013 could look a lot like 2011, but that's not a huge factor in what I am buying or selling.
What I am most concerned with is how individual companies will do given a macro environment that becomes more apparent each day; that is, moderate inflation, increasing resource scarcity, ongoing debt de-leveraging, slowly increasing demand from emerging markets and demographically driven aggregate demand sluggishness in the developed world. As usual, I am looking for growth at value prices.
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
In looking at where I want to add exposure in 2013, let's start with a true Buffett stock in a sector that should continue to improve over time — banking. While many others are talking about selling the banking sector after its fantastic 2012, I do not think that wholesale selling makes sense. With balance sheets that have improved in general, a housing sector that has stabilized and massive tax losses to write off over time, many banks are sitting in a good to great position.
Clearly leading the banking sector is Wells Fargo /zigman2/quotes/203790192/composite WFC +0.83% , which I mentioned several months ago when it traded at a lower price in the article "3 Banks Whose Time May Have Come," Wells has been scooping up new mortgage deals at a breakneck pace which will provide it with fantastic cash flow over time. As interest rates rise sometime this decade, Wells will be able to reinvest that monthly stream of income very profitably.
For investors with little or no bank exposure, Wells can be bought for a percent or two of a portfolio now. For others, like myself, who have a small position, selling cash-secured puts near-the-money seems a prudent strategy.
Right now the February $34 puts are getting about .60 per share. That is a 1.7% return for six weeks, and if the stock drops to below $34 per share, the net cost on buying the stock is $33.40, which is a nice discount to today's price. Remember, Wells has quite a floor under it as whenever it gets cheap, as Buffett swoops in and buys more.
Also on my list are the stocks I have touted for well over a year now, oil-exploration and production companies, as well as service companies. In "Second and Third Chances to Buy Oil Stocks," I outlined several companies in very strong positions. Virtually all of the companies mentioned continue to be buys or cash-secured put opportunities. With doubt about the economy and signals of a return to normality on monetary policy, finding more than one entry point makes sense, as these companies are viewed very cyclically and pull back from time to time.
Another fantastic oil company to add or sell cash-secured puts on is Whiting Petroleum which I named a " must own " stock in my American Resource Boom Letter a few weeks ago when it traded a full 10% lower. Whiting's stable of assets includes, but is not limited to, very good Bakken shale in North Dakota.
In addition, the company has valuable Niobrara and Permian assets, as well as the potentially sale of an enhanced oil-recovery operation. Whiting management, in fact, did retain Merrill Lynch a while ago to feel out the market for suitors — possibly for the whole company. My valuation of the company is that it is ultimately worth around $80 per share in the three- to seven-year window.
A company that I have aggressively sold cash-secured puts on the last six months is MEMC Electronics , which is a global leader in solar engineering, procurement and construction. The company enjoys a solid position in the solar industry as a builder, as opposed to being a pure panel company. I discussed EPC plays in "3 Stocks Set to Prosper in a Solar Future."
MEMC has fallen hugely the past several years due to the commoditization of solar panels. The company was forced to restructure, and that has gone well, as it has focused its operations on profitable EPC through its Sun Edison subsidiary.
Growth in solar is almost limitless for the next decade or two, and received a significant bump with President Obama's election. Management has been a buyer of shares, which is a good sign, but do your homework, this is a turnaround play.
Another scarcity play I have discussed for over a year is Veolia Environnment . Beaten down by the slow-motion repeating crisis in Europe and its own debt issues, share prices are deeply discounted vs. its long-term intrinsic value. Veolia is the world's largest water-infrastructure company and has a very good position in developing nations. It also has substantial waste-management operations which provide it with annuity-like income.
There is a light options market on Veolia, so I have been able to sell cash-secured puts a few times — as discussed here in my first MarketWatch article. As always, make sure to use limit orders as spreads can be wide. Primarily, I have been a buyer of shares, and Veolia has grown to a substantial position for me now. It is also the Target Stock list at the American Resource Boom Letter.
All four of the companies mentioned are strong candidates to be rotated into if you are selling overly diversified funds as suggested in “What To Sell in 2013.” Each appears to have established new upward price trends, making them safer to build positions in. Buying incrementally on pullbacks and selling cash-secured puts is my simple strategy for entry for each company.
Disclosure: Clients of Bluemound own shares of Wells Fargo, MEMC and Veolia, and have sold cash-secured puts on MEMC and Whiting. No trades are planned in the next three days. Opinions subject to change at any time without notice.