Investing Ideas: June 2019

They say the time to buy is when blood is in the streets… Well, I’ve starting to see plenty of red over the last couple of weeks.  I guess that means it’s time for another investing ideas post!

Yep, it really has been months since I last wrote one of these investing ideas posts.  It wasn’t because I lacked any interest in investing; I just couldn’t find any great ideas.  Everything just looked too expensive to my eyes over these last 6 months.

Now, there’s a trade war on, and a high probability of a recession coming soon.  It’s causing turbulence on the stock market, and that means potential investing opportunities!

This Investing Ideas post is going to have a theme of investments that will either offer opportunities during the trade war OR investments that will be resistant to business disruption in the coming months…

Meaning, businesses not tied to exports, with revenues coming mostly from domestic demand, low debt levels, even lower dividend payout ratios, and (of course) a good business that earns good returns on equity when the economy isn’t crumbling.

FAQ & Boilerplate Warnings

Before we begin, I’d like to get a few things out of the way…

Readers enjoy these ‘ideas’ posts, but they also generate a ton of questions.  In response, I’ve put together a Investing FAQ that should answer the bulk of common questions.  If you’ve got a question, please check there first.

Be Warned: DO NOT consider any of these investing ideas as a solicitation to buy shares.  I’m not endorsing or advising anyone purchase these investments for themselves.  These are merely investing ideas that I’m considering this month.  I am not a financial advisor.  Please do your own research.

I’m also not paid to endorse these investments.  I may or may not put money into these investing ideas, but if I decide to buy shares I will disclose it.

With that out of the way, let’s look at this month’s investing ideas!

Marathon Petroleum Corporation

Over the last month, the refining sector’s share prices have been sinking much faster than the general market.  Marathon Petroleum’s (Symbol: MPC) shares have fallen by 23% over the last 30 days.  Yes, in one month!  Partly this is because of a bad first quarter, and partly because the U.S. energy industry has become a net exporter in recent years (instead of a net importer of energy as in previous decades).

Technically most U.S. oil refiners are both importers and exporters of oil and oil-based products, so the situation is a little complicated in the refining space… but the point is that news of a trade war is extremely unwelcome for shareholders.  Shares were sold-off in a giant fit, and are now trading at or near a 52 week low.

But in the case of MPC I think they might be throwing out the baby with the bathwater!

MPC primarily operates in the downstream segments of the energy industry — refining, midstream (transportation), industrial products, and retail (aka gas stations).  What’s interesting here isn’t that MPC is one of the biggest refiners in the country, it’s that they happen to be the low-cost provider for gasoline in many major U.S. cities.

Being the low cost provider is a huge advantage during a recession.  It’s a moat that should protect shareholders in the event of a recession… so much so that Marathon may see a much smaller financial impact than it’s competitors.

That’s all very interesting, but do the share represent good value?  Currently the shares are trading for less than book value, which I think represents a pretty decent bargain.  (Although there is significant goodwill on the balance sheet, so beware!)

Couple that fact with a fairly safe Debt/Equity ratio of 0.83, a healthy dividend yield of 3.5%, and conservative payout ratio of 29%, this stock should safely weather the storm of a recession.

While it is true that domestic fuel usage does decline somewhat during recessions, domestic demand for gasoline and natural gas is hardly going to drop to zero.  Why?  People still need to heat their homes and commute to work.  Those expenses are non-negotiable in most cases.

With such a low payout ratio, and strong competitive position, I find it highly unlikely that MPC would need to cut its dividend during a recession.  (Even considering the impact of slower exports.)

If shares fall any further, it could be a great opportunity to buy shares of Marathon Petroleum.

KLA-Tencor

KLA-Tencor (Symbol: KLAC) is a large company you’ve probably never heard of.  They don’t produce products that consumers buy.  Rather, other companies buy KLA-Tencor’s semiconductor manufacturing equipment to make semiconductors.

Confused?  This is the company that makes the equipment that makes the chips that go into your Samsung phone.  (Seriously — sales of equipment to Samsung represent over 10% of revenues for KLA-Tencor)  Think of machines that make and test silicon wafers full of chips.

Of course, with KLAC being front and center in the semiconductor manufacturing industry, shares have been selling-off in recent weeks… because of trade-war scares.  Shares have fallen 18% in the last month.

The fear is that sales at KLA-Tencor will decline… because every computer, phone, and chip is made in China.  Right?

Well, the situation at KLAC isn’t as bad as many investors fear:

Sporting a debt to equity ratio of 1.2, this one could seem a little on the risky side, but the company is in solid financial shape — With around $2 billion in cash and $3 billion in debt, there’s plenty of wiggle room for a bad year (or two) in the balance sheet.

It’s worth pointing out that the semi-conductor industry frequently sees years of boom and bust (as newer, faster, and smaller chips get introduced).  It’s the chip-manufacturing cycle.  This makes shares a little volatile, but averaged-out over the entire cycle KLAC is a pretty good business.

The company sports significant market share above and beyond it’s competitors in the space:

KLA market share is significantly higher than competitors, and stable.The stock might be volatile, but the shares have rewarded long-term shareholders for many years with a nice growing dividend.  Just what I like to see as long-term investor…

Being linked so closely to semiconductor manufacturing (along with all the negative trade sentiment), there’s the possibility shares will fall even further.  KLA-Tencor is not a bargain… yet, but this is a stock to watch in upcoming quarters.  It could be a real bloodbath.

It’s worth noting, there could actually be a scenario where sales at KLA-Tencor improve if manufacturers shift away from China.

Say for example, if Apple decides to setup semiconductor manufacturing in Vietnam.  Well, they can’t just turn off the factories in China immediately.  Just-in-time manufacturing means companies like Foxconn (Apple’s manufacturer of choice for iPhones in China, and a major KLAC customer) try to keep minimal inventories of chips on-hand and produce everything “just in time”.

This could mean expanding semiconductor manufacturing to a new country like Vietnam might result in sales of new equipment for KLA-Tencor.  It’s one possible scenario that says sales at KLA-Tencor might not decline as badly as some investors are predicting.

Definitely this is a stock to watch over the next year.

Delta Air Lines

Readers of this blog know that I’ve been invested in Southwest Airlines for awhile now.  Delta Air lines (Symbol: DAL) was a close second.  At the time, I looked at all four of the major airlines and tipped my hat to Southwest — Primarily because of Southwest’s rapid transition to 737-Max planes was supposed to drive improved profitability.

Ooops!

Well, we all know how that turned out — The MAX planes started falling out of the sky, and they now sit idle on the ground for an unknown period of time.  Southwest and other airlines have had to cancel flights numbering in the thousands.

Around my house, the word ‘Boeing’ is preceded and followed by four letter words.

Meanwhile Delta didn’t purchase the 737-Max, and all their planes are still flying… Which means Delta is actually taking market share from the other Big 3 airlines in the U.S.  It might only be a temporary advantage, but right now Delta is killing it.  Every month they’re setting new records for passengers flown.

Except Delta’s shares don’t really reflect this unique and profitable set of circumstances.  Shares have actually under-performed the market and declined 10% in the last month.

Now, shares are looking like a bargain, with a TTM PE of 8.58.  That’s not really a consolation prize for airline investors, but Delta does pay a nice growing divided to reward investors while they wait for capital appreciation.

With a debt to equity ratio of 0.83 and a dividend payout ratio of 23%, Delta is one of the more financially conservative airlines in the U.S.  In the first quarter alone, Delta was able to repurchased $1.3 billion in shares.

As you can see, Delta is doing quite well and taking advantage of the situation where the other Airlines have their hands tied with the 737 MAX debacle.  How long will this temporary advantage last?  I have no idea!  That’s up to regulators and to the public (if they’re willing to fly on the MAX again).

Only time will tell, but it could be an entire year of open skies for Delta.

Raytheon

Raytheon (Symbol: RTN) is one of those stocks I like to call a “Steady Eddie”… because the company is relatively unaffected by little things like…err… the economy.  As a defense contractor, Raytheon makes missile systems, missiles, radar equipment, torpedoes, as well as ballistic missiles and other defense systems.

OK, clearly a company that makes war machines isn’t going to be for everyone.  Some investors will shy away from such companies based on moral and ethical grounds.  Absolutely nothing wrong with that.

If building missiles and selling defense systems to the government doesn’t bother you, and you’re looking to invest in a company that can pretty much shrug-off a recession and a trade war, Raytheon is a very good candidate.

Considering a debt/equity ratio of 0.42 and a payout ratio of 32%, Raytheon is about as steady as they get.  The only problem is, shares of Raytheon never get all that cheap.  Currently they’re sporing a PE of 16 and 2% dividend yield.

Nothing too terribly cheap or exciting.

But investing isn’t supposed to be exciting.  It’s supposed to be pretty boring.  Just sitting around waiting while your money compounds.  If investing is exciting, then you’re probably doing it wrong.

Speaking of not exiting — Raytheon has a good track record of rewarding shareholders, with roughly 50% of free cash flow going into dividends and share buybacks.  Over the years, this has led to a steady drop in shares outstanding.  Slow and boring, right?

Investors have been well rewarded by Raytheon over the years and this positive trend looks set to continue with sales growing at 7% yoy in the most recent quarter and dividends growing by 8.6% yoy.

If you’re looking for a defensive investment to ride out the trade war and a potential recession, this defense stock might just be what your looking for.

Final Thoughts

Thanks for reading this most recent edition of my Investing Ideas series!  I hope you enjoyed this most recent set of “trade war resistant” ideas and “trade war opportunities”.  Maybe you’ll even decide to invest in one!

As always, I’m curious to hear your feedback!  So please feel free to share your own ideas in the comments!

Until next time!

[Image Credit: Flickr1, Flickr2, Raytheon, Flickr3]