It’s often said in sports that “the best defense is a good offense.” When it comes to investing – and my particular approach to portfolio-building – that means focusing on companies that produce floods of cash and that “pay us first.”
What does “pay us first” mean? Well, it means companies that put shareholders and long-term stability at the top of the priority list.
And when we can buy these rare companies at clearance-sale prices, we have to jump before it’s too late.
Then we sit back, enjoy the dividends and share buybacks, and watch our investments increase in value.
This way, there’s no need to worry about “the market.”
“Buy and hope” is never a good strategy – particularly not now, with the market at all-time highs and the second-longest bull market in history.
It’s easy to kick down barns, however; much harder is crafting solutions. And I have one right now.
As I noted, cheap, cash-gushing companies offer built-in gains, and lately my focus has been on the energy sector.
Now, this corner of the market is certainly cheap. The sector has been a “hot potato” for going on three years, with losses of more than 30% – and as much as 50% at the depths of the selloff – since its mid-2014 highs.
This bear market for oil-and-gas-focused companies was deadly. More than 200 formerly high-flying drillers, transporters, and service-providers crashed into bankruptcy from the start of 2015 through October 2016.
But not all energy businesses are created equal. And because most market thinking is superficial in the near term, I’ve long had my oven mitt on, ready to catch the tastiest energy “hot potato.”
This is where I found the latest addition to my Hidden Profits model portfolio, and it’s hot – in a very good way.
Let’s back up a minute. The oil and gas supply chain is divided into upstream, midstream, and downstream subsectors. Investors usually focus on the first two. “downstream,” gets the least love. Other investors think it’s “too tough.”
Downstream includes refining crude oil into gasoline, diesel, jet fuel, and other essential products. This generates something held in very high regard in this space… Something we like to call “hidden profits,” hence the name of my newsletter.
We go where others are too busy or too occupied to venture. That means we find real values that pay you first – and big.
Plus, right now the cost of inputs for refiners is low and the “crack spread” – the margin between what a refiner pays for oil and rakes in from product sales – has been rising since March. In other words, that’s very bullish indicator.
But not all refiners are created equal. Far from it. There’s one great, highly refined opportunity available to us right now.
Keep in mind that refining is messy. Environmental permits are costly and take forever to secure.
No wonder there hasn’t been a new refinery built in the U.S. since 1977. Or that over half of U.S. refineries have closed since 1984! A well-positioned refiner can easily expand its existing locations, and my find just happens to find itself in the sweetest spot of any other company in the refinery game.
Superficial investors worry about yesterday and today, but I see what’s setting up this forgotten star for a double or more – just by being back in favor. That’s without accounting for growth.
Every part of this company looks great. But the opportunity won’t last
John Del Vecchio
Editor, Hidden Profits