Can The Mosaic Company Help Grow My Portfolio?

Let’s get dirty. Let’s dig around in the ground and look for some cash. That’s what The Mosaic Company (NYSE: MOS) does, everyday. Although lately that cash seems harder and harder to find. What do they do? They mine and process minerals that eventually make their way to farmers for use as fertilizer. Mosaic produces around 12% of the world’s annual capacity of potash, which makes up 41% of North American capacity. Their phosphate segment is even more impressive. Mosaic basically digs these important crop nutrients out of the ground and sells them to distributers and farmers.

The world population is growing, right? And people have to eat, right? Developing nations are consuming more calories. People are eating better all over the world, right? There’s only so much farmable space on the planet, so we need to utilize that space as best we can to feed all these people, huh? Slow down.

That’s been a major investment thesis for Mosaic and other fertilizer companies for years. Open a 10 year chart of Mosaic, or Potash Corporation of Saskatchewan (NYSE: POT) or most any other fertilizer or agricultural stock. Many of these charts look pretty ugly over that time period. Demand for calories is on the rise, sure, but is that the only part of the story? Generally, if an investment thesis is that obvious and well known, it seems to me that it doesn’t always work out as investors plan. Let’s dig deeper.

Mosaic is currently trading around $25 to $26, near multi-year lows. Why? Because of the price of potash and phosphates. Belaruskali, a major foreign player in the potash business, recently announced a large deal with India, selling 700,000 tonnes for $227 per metric ton. Last year the price was $332. This represents a 10 year low in potash prices. The upper end of that 10 year range is around $850. This informative Investopedia article has more detail on the deal. Phosphate prices are also currently very weak.

What makes Mosaic interesting to me? Aside from the usual ‘beaten down stock’ syndrome I seem to be so in love with, it’s the dividend. At $25, Mosaic offers a 4.4% yield. Not too shabby, as dividends go. But how safe is that dividend? There are good arguments on both sides of this ‘safety’ issue, and I believe this issue is key to finding the right time to invest in MOS.

So why might this dividend be safe? Mosaic has a great balance sheet: almost $4 billion in current assets, while only about half that in current liabilities. A nice balance sheet is great to see in a company going through tough times in its larger market. MOS pays out around $96 million in dividends each quarter, so there is reason to believe that the company could maintain the dividend in tough times, if it wanted to. Also, Mosaic’s earnings over the past year have exceeded (lowered) expectations, despite the tough pricing environment. Another positive sign, Mosaic earned $2.78 to $2.90 a share in 2015 (depending on what financial site you use to gather information!), while only paying out about $1.075 in dividends. So their coverage ratio is good!

So why MIGHT they cut their dividend? Despite Mosaic’s strong performance so far, 2016 earnings are expected to plummet. Some expect earnings to be below the current amount paid in dividends. So maybe the company tightens its belt and cuts the dividend even though it may not necessarily HAVE to because of its strong balance sheet. That’s a reasonable thing to worry about. Why drain cash to fund a dividend? Funding a dividend from cash on hand could potentially hurt the company’s credit rating.

So what will happen here? Darned if I know. If I had to guess, I’d say that Mosaic won’t cut their dividend. But that is by no means a prediction that I’d stake much on. In fact, at current prices it’s not a prediction that I’d stake anything on. So here’s the game plan. Mosaic hit a recent low of $22.02 in early February. I’m hoping that that dividend fears bring the stock price down even lower than that. Maybe to the high teens? Then I’d be very interested to start a position. Or maybe they do cut the dividend suddenly and the price dives. I’d love to be there to pick up some shares in that case. Patience can keep me out of some good investments, but it can also help keep me out of trouble while I’m learning how to navigate around Mr. Market.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

First Solar, Revisited

As those following along know, I got back into First Solar Inc. (NASDAQ: FSLR) last month. I first bought into First Solar in July of last year, selling my position in December, for a nice 36% gain, albeit on a very small position. Due to a recent selloff I’ve gotten back in.

I wrote about First Solar last July: Why I Think First Solar Has Upside! Have a look. The basics haven’t changed as far as I’m concerned. So why did I sell First Solar when I did? And why did the price drop so much a few months later?

I sold in December because I’d had a nice run on my position, and I set an automatic limit order to sell, because I felt at the time that if it went up much more, it would be time to take profit and wait for a pullback. I don’t recall exactly where I placed the limit order, perhaps around $62ish. What I didn’t expect was the government to significantly extend the Investment Tax Credit (ITC) out of nowhere. When that was announced I was automatically sold out of my position at pretty much the low of the day, at $63.52. I wasn’t crying too hard, as a 36% gain in 5 months isn’t shabby at all, though eventually the stock traded as high as $74.29 a few months later. I love limit orders, but I wasn’t feeling super great about this one with First Solar in the mid $70’s.

But then again, had I not had it in place, who knows if I would have sold at all? I might not have had the opportunity to use those same funds in the recent harsh downturn in price. I think I’d have sold in the high 60’s, but that’s easy to say looking back at lines on a chart.

On April 27th First Solar reported earnings of $1.66 a share, which handily beat analyst’s expectations of 0.93 cents. Revenue, however, came in under expectations. First Solar peaked at over $74 around a month before earnings, but had fallen to around $61 – $62 when they reported. Also announced was that CEO James Hughes will be stepping down on July 1st, to be replaced by CFO Mark Widmar. James Hughes was apparently hired to whip the company’s technology into shape, which he has undoubtedly done when you look at the recent efficiency improvements in their solar panels. Mark Widmar’s job will be to take those improvements and turn First Solar into an even better money making machine. Though further efficiency improvements will certainly be important for First Solar going forward.

Mr. Market didn’t like ANY of this. Over the next few weeks First Solar dropped much further, as low as $46.67, on May 19th. And who do you think was buying? Ok… no surprise if you’re awake while reading this: I was.

This is what I love about the stock market. At some point in March FSLR was worth $74.29. Almost exactly 2 months later, it’s worth $46.67. Can this be rationally explained by investors carefully analyzing First Solar’s future earnings power? A careful consideration of how the company will deploy its resources effect shareholder value? Discounted cash flow analysis? Give me a break. The stock market is as much emotion, feeling, and instinct as anything else, at least in the short term. That’s my current opinion anyway. I don’t see anything changing it anytime soon. Have I discovered one of the secrets to wealth on Wall Street? Buy good companies when others are selling in panic? Is it really that simple? I guess I’ll find out if that’s the case here.

But if you pull back and look at the last 3 or 4 years of price action in First Solar, you see that this is nothing new, not by far. It has large swings up, and large swings down, and back up, that generally lead the stock higher. So following the pattern, I should sell around $74, just to be safe. But I think this is such a good company, so should I sell, especially since the government is trying to encourage this technology? And what about 8point3 Energy Partners (NASDAQ: CAFD)? This YieldCo, another profitable holding of mine, keeps feeding First Solar money, and should continue to buy more and more of FSLR’s projects. First Solar is a very profitable company with a GREAT balance sheet, but it’s being treated like garbage by investors. Keep it up; I’m set to buy more at $42.75!

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLIAMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

 

Bonds Bonds Bonds!

Let’s talk about bonds! Woot!!! I’m sure it’ll get your blood pumping. Ok, maybe not. I considered adding some pictures of fashion models in bikinis to go along with this post, just to liven it up. (Don’t scroll down, I didn’t.) Let’s get down to it. Why bonds?

First of all, I’m not big on diversification. I certainly don’t want too much money in one stock, but I have no problem having a lot of exposure to one sector. As I write this, I have 37% of my money in energy companies of one type or another, and that’s if you include my cash position, which is about half of my portfolio. So I’m certainly not concerned about asset class diversification. If I had my entire portfolio in individual stocks, the only concern I’d have is that I wouldn’t have money to buy more.

But did you know that you can buy exchange traded funds that invest in bonds? I just found that out recently. I knew there were ETFs out there for just about everything. There’s even a few that track livestock. So of course there are ETFs for bonds. But why would I, a stock picking guy, want in? Yield, of course. And, for me, an ETF has certain advantages. First, I can buy and sell them in my regular accounts, the way I’m familiar with. Second, and probably more important, is diversification. Ok, that contradicts what I said above, but hear me out.

If I want yield in bonds, what do I need to invest in? Junk bonds, of course! And junk bonds are risky, right? The ratings companies say the ‘paper’ isn’t ‘investment grade’ or whatever, so there is default risk, hence higher yield. So if I go out and buy a single junk bond, never having bought a bond before and not really knowing what I’m doing, and the company decides not to pay, I’m screwed. I just picked one of the ETFs I’m considering at random and looked: 996 holdings. So if a few default, not the end of the world, right?

Currently the ETFs I’m looking at are yielding around 5.5% to 7.5%. Nice, but not particularly impressive, especially compared to some of the stocks I’m in. Nope, that isn’t going to do it. But what if these funds start to tank? What about the rate hikes that people are talking about? Rate hikes hurt bond prices, though from what I’m reading they don’t effect junk bond prices as much. But I think the real threat to the ETF share prices might be from some severe economic weakness, real or perceived.

As I vaguely started to allude to in my recent piece on Intel (NASDAQ: INTC), I’m looking to start a ‘Financial Doomsday’ shopping list. There will come a time when confidence in the financial system and the economy drops off a cliff. The markets will tank, and some people will scream that they won’t come back for a long, long time. It may not happen this year, or the next, but if history is any indication, it WILL happen. Bond ETFs will just be another tool on my Financial Doomsday shopping list. At 6% yield I’m not that interested. But 12%? 15? More? It could happen. It might not, but if it does, I want to be prepared.

The first one I’m looking at is iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG). This ETF has over $17 billion of net assets, and a yield of about 5.8%, and an expense ratio of 0.5%. The largest sector of its holdings is communications, at about 25%, with several recognizable names. Their energy exposure is around 10% of their holdings. Nearly half of their holdings are BB rated, with most of the rest B rated. Only about 11% of their holdings are CCC rated, with almost noting below that. So not terrible. Slightly over half of their loans reach maturity in 3 to 7 years.

SPDR Barclays High Yield Bond (NYSEArca: JNK) is similar to HYG, currently yields about 6.3%, but its holdings have a slightly worse mix of ratings, and the fund has at expense ratio of 0.4%.

SPDR Barclays Short Term Hi Yld Bd ETF (NYSEArca: JNK) is smaller, with only around $3 billion of assets under management. It currently yields around 5.5%, and has an expense ratio of 0.4%. This fund has shorter term bonds, with most maturing in 3 to 5 years.

Market Vectors EM High Yield Bd ETF (NYSEArca: HYEM) is all about emerging markets junk bonds. Hong Kong, Brazil, Argentina, Mexico, Ukraine, Jamaica, South Africa, Thailand, Croatia, Spain… you get the idea. Perhaps not for the faint of heart? I’ve never felt the need to invest in any of these countries, but for enough yield? Maybe. Currently it’s yielding about 7.3%. I’m not touching it for that. This fund has an expense ratio of 0.4%, and only about $245 million assets under management. This would have to yield way more than the others for me to become interested.

So these are the 4 I’ve put on my radar, but there are a bunch more. There are ETFs that track municipal bonds, investment grade bonds, and others categories, but this is what I’m looking at now. If anyone is interested in these, I would certainly encourage them to do some research. Look at fact sheets, holdings, and prospectuses. This is fairly complex stuff that I’m just starting to look into myself.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLIAMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

Oil and Natural Gas, Let’s Up the Ante!

Despite oil’s recent rebound off of multi-year lows, it’s still very low from a historical standpoint. The same can be said for natural gas. And while I don’t expect either to shoot up from here, I am of the opinion that oil has bottomed. I’m not quite as confident about natural gas, but it’s pretty darn low. I would like to take this opportunity to admit that my opinion shouldn’t carry a whole lot of weight, but there it is.

I’m currently exposed to these commodities through my investments in Chesapeake Energy (NYSE: CHK) (which is going poorly) and Energy Transfer Equity (NYSE: ETE) (which is doing quite well). I’m seeking more exposure, with the realization that pain might come before pleasure. Listed below are 3 companies that I believe will be long term winners.

ConocoPhillips (NYSE: COP) is a major independent oil and gas company with around 50 billion in market cap. They are very exposed to the price of oil and natural gas, each making up around 40% of revenue.

The big news out of COP recently is all about the dividend. It was 74 cents, and is now 25 cents. This caused quite a stir, as management vigorously defended their commitment to the dividend for a long time… right up until the point they slashed the heck out of it a few months ago. Many feel that the move should have been telegraphed beforehand, but it seems to me the cut itself was obviously needed given the environment. While COP’s balance sheet is better than many of its peers, it could use a little boost. The savings from the cut will help the balance sheet quite a bit, especially if they find themselves needing to borrow cash in the future.

I have a limit order to start a position in at $35 dollars. As I write this, it last traded at $40.08, with a low of $31.05 about a month and a half ago.

Occidental Petroleum Corporation (NYSE: OXY) has weathered the current commodity storm better than most independent oil and gas companies. This comes from a balance sheet that contains very little leverage compared to the vast majority of its peers. OXY also has over $4 billion in cold, hard cash. That’s a good position to be in, especially if things get worse and other companies are forced sell more assets at fire sale prices. Also, consensus is that the company won’t have to cut its dividend, currently yielding almost 4.5%.

One reason the company has this cash is that it’s been selling non-core assets to focus on better quality, better price-point assets. That’s a pretty common thing to hear in the industry today, but compare OXY’s balance sheet to others saying this.

In addition to being exposed to oil and natural gas, Occidental also has a segment that manufactures and markets basic chemicals such as caustic soda, vinyl, polyvinyl, sodium silicates, and many others. So there’s a little diversification there as well.

I have a limit order in to start a position at $63.75, a bit above the low of $58.24.

My next pick is an oil services company, Baker Hughes (NYSE: BHI). BHI is the third largest oilfield service provider out there. They sell equipment and services to exploration and production companies, such as my 2 picks above. The downturn in oil has hurt this group, because lower E&P CapEx spending directly affects their revenue.

The big news with BHI is that they are being bought by Halliburton (NYSE: HAL), the world’s second largest oil services company. I originally started looking into Halliburton, expecting to buy it, but looking over the terms of the deal I’ve come to the conclusion that Baker Hughes is the way to go. If the deal goes through, each share of BHI will get $19, plus 1.12 shares of Halliburton. So if it goes through, I’ll end up owning HAL anyway, plus a little extra cash. Of course this all depends on where stock prices are at the time, I guess. What do I know about mergers and such? Not much, honestly.

But US and EU regulators seem to be giving HAL a hard time. The deal might not go through. And if that happens, it seems to me that HAL will take a bigger hit than BHI, and HAL will owe BHI a $3.5 billion fee, even if the deal is blocked by regulators. BHI already has a very strong balance sheet. It seems to me that the market is pricing BHI as though the deal won’t go through, meaning that if it does, there could be some real upside here. The key is that I would like to own BHI whether or not the deal goes through.

I have a limit order for BHI placed at $41.50, just below the $43.37 where it is trading as I write this.

I am well aware of the risks involved in owning stocks that depend on the price of oil.

While each company has issues of its own, the driving factor in each is a relatively strong balance sheet. These names seem nowhere near as risky as my investment in Chesapeake, but I understand that they will not skyrocket higher simply because they come down a few percent to my buy points. I will be cautions and continue to buy them on weakness if the opportunity becomes available. Risky, yes, but look at the charts; the time to buy them wasn’t when oil was trading above $120.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLIAMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada

Is Intel Right for My Portfolio?

 

First of all, I wanted to call this article ‘Intel Inside… My Portfolio’, but that’s probably been done already. So why am I looking at Intel? On the surface, Intel is way less sexy than anything else I’ve talked about. Intel Corporation (NASDAQ: INTC) is a HUGE, OLD monolith of a company that doesn’t seem to make very large moves over short periods of time. Sure it’s a technology company, but it’s old tech. Can you think of a less interesting old tech name? I mean, this thing is part of the DOW for goodness sake.

Perhaps most surprising, for me, is that it isn’t a heavily beaten down name. People who bought it in the mid to high $30’s in late 2014 might disagree with me on that, but for me, the decline isn’t all that appealing. As I write this it’s almost $32 with a 52-week high at $35.59.

So why am I interested in this stodgy name? The last couple of weeks my portfolio has been whipped around a lot. I’ve gone from over $700 in the hole, to just under $700 in profit. As I write this, Sunday March 13, I’m up a bit under $200. My oil and natural gas investments are, perhaps, starting to move in the right direction. I’m not scared of some volatility, especially since up until now I’ve been in the red almost constantly, but I think I could use a steady name to help balance things out a little. Also, while the potential to make a huge amount of money in INTC in a reasonable amount of time is very limited, a little over half my account is currently in cash. If I can get even a modest return out of Intel, why not? As with anything, it all depends on where you buy. More on that later.

So what’s going on at Intel? They are still the leader in desktop CPUs. That’s been the case for a long time, and it seems like that won’t change anytime soon. The problem is that PC sales are in decline, and have been for awhile. More and more people compute via smart phones or something else that is easily carried around. Personally, I like a nice clunky desktop, and plan on buying one in the next several months. Mine is ancient. But I only got a smart phone less than a year ago, so maybe I’m not your average user.

So does Intel have a significant piece of the mobile game? I honestly couldn’t tell you. From what I’ve read, some people are bullish on Intel’s current mobile business, while some people think they’ve dropped the ball. There are rumors that Intel is going to be inside many of the upcoming iPhone 7’s. Then there are people who laugh at those rumors. So what do I know? I get the feeling that Intel isn’t strong in the smart phone biz.

So how does Intel intend to grow? The big thing here is their Data Center Group, which grew 11% last year. The DCG basically makes chips for cloud servers and network infrastructure in general. Companies like Google (Alphabet? Whatever) are huge buyers of these chips. Qualcomm (NASDAQ: QCOM) is trying to get into this business, and there are rumors that they might win Google as a client. So there is risk, but from what I understand, Intel has a significantly better product.

Another growth factor is NAND flash memory. This business grew 20% last year. I’d love to talk more about NAND flash memory, but I’m limited on space and knowledge of what exactly NAND flash memory is. But it’s growing, YAY!

Another growth area is the Internet of Things (IoT). I’ve heard the ‘Internet of Things’ phrase thrown around a lot, but I never really took the time to look it up and understand what it actually means. Apparently in a few years everything will be connected to the internet. Light bulbs, cars, appliances, underwear, you name it. Billions upon billions of devices, and Intel wants a piece of it. They’re helping to develop 5G connectivity to facilitate this, and they want their chips in these devices. They may have missed out on phones, but they want in everything else. This business grew 7% last year.

There are a lot of moving parts to this company. In 2011 Intel bought McAfee and changed it to Intel Security. They recently bought Altera, an acquisition that should strengthen their IoT and DCG businesses. They are trying to get into the augmented reality business, the drone connectivity/collision avoidance business, and the 3D video business. I don’t know how any of this will work out for them, but at least I can tell they are trying to innovate as opposed to simply churn out CPU’s and hope for the best.

I’d like to expand on their work with drones. AT&T (NYSE: T) and Intel are working together to improve drone utility. Their focus is high altitude and beyond-line-of-sight capabilities. This has obvious implications to companies like Amazon (NASDAQ: AMZN) but that’s not all. Think of the other possible applications where these aspects would be important. A bartender friend of mine (thanks Vernon) pointed me to an article at DRI (Desert Research Institute) about cloud seeding via drones. Drones might be used for all sorts of things if the technology improves. If Intel can get a piece of that business, so much the better. Check out the article:

Desert Research Institute

While the article has nothing to do with Intel directly, it illustrates one of the many non-recreational uses that could benefit from what Intel is currently working on.

Intel has a strong balance sheet, and a nice dividend of around 3.5%. The dividend seems interesting to me. They have a decent history of raising it, and they only pay out around 40% of their earnings. So not only does it seem safe, it seems that there is room for it to grow. The more I learn about investing, the more I like dividends.

So how do I plan on starting a position in Intel? Just jump right in? No no no… Intel is around the middle of a 2 year trading range at the moment. I’m not super anxious to own it. I’m basically initiating coverage of the company. That’s official Wall-Street speak for ‘I’m going to keep an eye on it’. If I get some real weakness and still like the story, I’ll act. The market averages are showing some weakness, and if there’s a major correction over the next several months, Intel might be a good company to load up on long term.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender

Does Fitbit Fit in My Portfolio?

Wellness is big business in America, and health based companies have taken Wall St. by storm. But for one company’s stock, the storm is nothing but clouds and rain. I’m talking about Fitbit, Inc (NYSE: FIT). But will the clouds eventually clear for this company?

Fitbit is a leading manufacturer of wearable fitness devices that track things like calories burned, sleep metrics, steps taken, distance, heart rate, and other things. Many have GPS and can connect to your phone to show text messages, etc. Most of them fit on your wrist like a watch, and I believe that all of them can connect to your smart phone via an app that will display and analyze your health and workout statistics.

Now I’ve never used one of these things, but I got interested in the company when several friends and a few people I work with started using them. Then I started noticing them in stores, a LOT of stores. Stores you wouldn’t necessarily associate with ‘wellness electronics’. These things are everywhere. I got really interested in the company when I heard about their corporate wellness business.

Fitbit doesn’t just make these devices and sell them through their website and various retail outlets. They reach out to companies and make agreements to provide large numbers of units that the company in turn provide to employees. Many companies go with the more basic, low cost products, but some allow employees to pitch in and upgrade to more expensive units. Some companies even subsidize the cost of the more expensive units. Last year Target (NYSE: TGT) gave 335,000 of its workers a Fitbit device. Other corporate accounts include BP (NYSE: BP), Bank of America (NYSE: BAC), Time Warner (NYSE: TWX), and GoDaddy Inc. (NYSE: GDDY). There are plenty more. This business makes up nearly 10% of Fitbit’s revenue.

When I think of the opportunity in corporate wellness, I see dollar signs. Think about the benefits to the companies involved. They are providing a benefit that many employees will see as a positive. And what about health care costs? Encouraging healthy lifestyle choices can only be good for health insurance costs. Who isn’t worried about the cost of health insurance these days? I know my personal costs have gone WAY up in the past year.

Fitbit was founded in 2007, and went public in the summer of 2015 for $20 a share. Fitbit bulls are all about growth growth growth. In the short time the company has been public, it has proven the potential to grow. Growth in the short term is not really in question. And by all accounts Fitbit has had an awesome holiday season. So why did the stock rocket up to nearly $52 dollars post IPO, only to drop down to $16 bucks a share where it’s currently trading? Well, there are some issues. (There are always issues.)

One problem is the number of companies that want to get into the wearable fitness tracking business. There are some BIG names that want a piece of the pie, and a few that investors are wary might jump in as well. Names include Under Armor (NYSE: UA), Apple (NASDAQ: APPL), Nike (NYSE: NKE), Samsung, and about a zillion others. It makes sense; if there is money to be made, these companies want in too. Fitbit is THE name in the space at the moment, but will that be the case in 2 years? 3 years?

Another concern is Apple. While listed as a competitor above, this is a slightly more fundamental concern for all companies involved. What’s to prevent this entire industry from simply becoming an app on everyone’s iPhone? Sure it’s a little more complicated than that, but Apple already makes a watch. Maybe Apple simply uses its enormous resources and customer base to basically incorporate this entire industry into its already large ecosystem.

On January 5th, Fitbit stock fell over 18% after the company introduced its newest product, the Fitbit Blaze, a ‘smart fitness watch’. Invertors were not impressed. The market is apparently comparing Blaze to Apple’s watch. Investors seem to think that Fitbit is taking on Apple with a product that has less features. Blaze has no internal GPS, can’t call or reply to texts, and can’t support third party apps. While Blaze is much cheaper, people feel that it won’t compete with Apple’s product. Fitbit bulls maintain that it’s not really supposed to compete with Apple. I kind of agree, but I wouldn’t be surprised if Blaze is a disappointment compared to some of Fitbit’s other products.

Another problem is a class action lawsuit claiming that the heart rate monitoring technology Fitbit uses is inaccurate, especially at higher heart rates. It’s a little early to tell if the lawsuit will go anywhere, but it’s certainly a concern. Investors who’ve lost money in Fitbit are also seeing an opportunity for litigation.

Many articles out there now compare Fitbit to GoPro (NASDAQ: GPRO). Both electronic companies were high fliers post IPO, both face severe competition, and both are having a tough time on Wall St. Both intend to drive sales and awareness via social media. (Becky ran 3.4 miles today and burned 500 calories, what have YOU done?) Some say that Fitbit is destined to fall as hard as GoPro. Fitbit, even at $16, is still priced for WAY, WAY more growth than GoPro when you look at their P/E multiples. If that growth is called in to question on the same scale as GoPro’s has, Fitbit could see mid single digits easily. That’s a sobering thought right there.

So where does this leave me, your average investor and amateur blogger who’s interested in the company? I can’t pretend to have any long term clarity on where this industry is going. I believe the wellness space will be strong for a long time, but wrist based wearables that are primarily fitness devices? I have no idea. I do believe that for the next couple of years, at least, Fitbit will dominate this space. I like the company based on that, but I am cautious.

As I write this Wednesday night, the 27th of January, Fitbit closed at $16.05, very close to its all time low of $15.52 from a week ago. Of course I’d like to get in lower than that. The company should be reporting earnings soon. Even if the earnings are good and the stock pops, I bet there’s a good chance that a lot of the burned investors use that as an opportunity to sell. So maybe it drops immediately after said pop, and people get even more frustrated and sell. Or it may simply continue tanking before earnings. I’m looking to become VERY interested in this company at the $10 to $12 level. Concerns over competition or the latest product might push it that low. A lack of execution would probably push it a lot lower. Investing involves risk, who knew?

Of course it’s one thing to have these scenarios in my head, but it may never reach my price. It might go straight to 50 again without me… and that’s ok. While I like the company, I’m not comfortable with the current price. Most things are attractive at a certain price, and for Fitbit, I have mine.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender

The Energy Transfer Family and Energy MLP’s in General

There’s a lot of buzz in the financial news about master limited partnerships these days. You hear that they’re the buy of the decade, then you hear they’re a sucker’s bet. The sucker’s bet people are currently screaming the loudest, and if you look at the charts and the high yields on many MLPs, investors are listening.

 

So why am I interested in MLPs? I’m looking for a longer term investment in the energy space that is currently beaten down, but has somewhat less exposure to the price of oil and natural gas than your typical energy company. As anyone who’s been following along knows, my investment in Chesapeake Energy (NYSE: CHK) has really held back my results so far. I’m sticking with CHK, but I’d like to increase my exposure in another area of the energy universe.

 

So to start this process I looked at Energy Transfer Partners (NYSE: ETP). Why did I focus on ETP? Jim Cramer, of CNBC fame, did a piece on it a few months back and got me interested, so I’ve had an eye on it for awhile. Mr. Cramer is one of those love-him-or-hate-him types. I’m sure there are a lot of people out there who’d ridicule me for watching his show, but I enjoy it, and I’ll take ideas however they come to me.

 

ETP is an MLP that is makes money off of the transport and storage of natural gas and natural gas liquid. According to their website, they own and operate around 62,500 miles of pipeline. They’ve got their fingers in some other businesses, including crude oil pipelines, and retail marketing of fuel and other merchandise through company owned locations, to name a couple, though some of these activities are through companies owned or partially owned by ETP. It seems a little complicated, but what is REALLY complicated is the Energy Transfer family in general.

 

Energy Transfer Equity (NYSE: ETE), itself an MLP, also owns the general partner and 100% of the incentive distribution rights (IDRs) of Energy Transfer Partners. ETE is basically the top dog of the Energy Transfer family. I think I have a fairly good handle on the organizational structure here, but I’m not comfortable commenting on it much further as it is complex and it would be easy for me to get the details wrong. Suffice it to say that there are several entities I haven’t yet mentioned that are in the mix in various ways.

 

Part of the problem here seems to be the complexity itself. From what I’ve gathered, many investors are uncomfortable with the structure. Frankly, I can’t blame them. Go to ETE’s website and look at the flowchart. It makes you want to give up and go buy Apple (NASDAQ: AAPL).

 

But then, Apple isn’t yielding around 13%. Energy Transfer Partners is, depending on what day you look at the price. Of course it’s only yielding that because of investor fear that the current commodity environment will hurt the Energy Transfer family, causing ETP to lower its dividend, similar to what Kinder Morgan, Inc (NYSE: KMI) recently did. Will ETP cut its dividend? There is no clear consensus, and for a small investor such as myself, it’s impossible to know. But researching ETP has brought me to two tentative conclusions.

 

First, I think Energy Transfer Equity is the company to invest in, not Energy Transfer Partners. ETE has a good deal of insider buying, which is nice to see. Also, what’s good for ETP seems good for ETE because of the IDR payments from ETP to ETE. ETE seems to rely on ETP for most of its financial health, but has additional income streams as well. Plus ETE is in the process of buying another pipeline company: Williams Companies (NYSE: WMB), and its associated MLP, Williams Partners (NYSE: WPZ), for what looks to be a good price. The main question here is whether or not ETE has taken on too much leverage making the acquisition.

 

This acquisition opens up new parts of the country to the Energy Transfer family, brings economy of scale, but does nothing to simplify the flowchart of who owns what, who owes IDR’s to who, and what assets will be dropped down to which entity. If the Williams acquisition goes through, ETE, itself an MLP, will be the leader (general partner) of four other MLPs, as well as a liquid natural gas company that is not publicly traded. So the alphabet soup involved here is ETE, ETP, SUN, SXL, with ETE buying WPZ and WMB. Still with me?

 

My second tentative conclusion: Understanding this is hard. Or, to put it another way: Screw it, I’ll just buy an ETF. So the Alerian MLP ETF (NYSEArca: AMLP) might just be the way to go. AMLP owns ETP and a bunch of other MLPs in similar businesses, and even a couple of others in the soupy mix mentioned above. Generally I’m not a huge fan of exchange traded funds. Why not just do the research and pick the good companies and go with those? Well, in this case I’m searching for yield (and the floor of protection it provides), and it’s pretty unknowable, for me anyway, whether or not any particular company is going to cut its dividend, thereby tanking any investment in its stock. With the ETF, at least the risk is spread around.

 

It seems that this sector of the energy market is in for more pain. I’m keeping a close eye ETE and AMLP, while keeping ETP on the radar. Maybe someone in the Energy Transfer family cuts its dividend and the stock plunges, maybe another big player does, or maybe sentiment just gets so bad in the space that the stocks plunge without a dividend cut. I’m usually happy to tell you where I think something should be bought, where I have my limit orders at, etc… But for this, I’m just going to have to keep an eye on it and go with my gut.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender