What sectors to benefit from declining cheaper oil?

Further to the topic on the crashing oil, one certainly will be interested to know which sectors will usually benefit from it. The most obvious one is the airline business. That's why you will notice that the stocks for airliners are generally reacting very positively to the declining oil. The problem for airliner stocks is that it is very cyclic and sensitive to the oil. In the past 1-2 years, the sector overall has advanced so much that the remaining momentum for them is likely limited. If you are purely a trader, you may make some money with quick short-term trading but the risk is quite high. A much better sector is probably the retail business, especially those big ones which have to consume huge amounts of gas for transportation. I have talked a lot about Target (TGT) lately. Warmart (WMT) is another big beneficiary. Both of them are good ones for long-term investment, especially TGT valuation-wise. There is another one that I have never talked about but a great stock to own: Sysco Corporation (SYY).

Sysco is the largest US company for transporting food-related products, not only in the US, but also in a few countries like Bahamas, Canada, Republic of Ireland, and Northern Ireland. It is definitely dominating in this industry and it is very friendly to shareholders by consistently paying increasing dividends for over 30 years or via buy-back of stocks. Its current dividend yield is 3%. Looks like SYY is just breaking out its all time high now. This is a good sign that SYY may start its next leg of moving up. In any case, SYY is a stock you can buy and forget and sleep well at night.

Capitulation for oil sector

It feels like the end of the world for the oil sector! Two days ago, OPEC announced that they would not cut their oil production. This was widely expected but people were acting like it was totally a surprise. They simply ran and dumped anything close to oil. Oil itself dropped like a rocket by 10% on Friday and the extremely panic and depressed sentiment also spread to the whole sector quickly. Any stocks that smell like oil would be thrown out and abandoned. What a bloodshed!

For those speculating on oil stocks for quick profit it must be extremely painful. But for long-term investors, this is a great opportunity not coming so often. As the living master investor Warren Buffett said:  Be fearful when others are greedy and greedy only when others are fearful. This is the time you should be greedy, not fearful if you really want to be rich. No, I don't in any way suggest that you can be rich quickly by buying oil stocks now. Rather, this is the time you should start to look for quality oil stocks and buy them for long term. One such a stock I have been watching for years is Exxon Mobile (XOM), the biggest integrated oil company with the best management team who knows how best to allocate their assets. I once owned XOM years ago but I impatiently sold it because it was such a slow moving stocks at that time. Like many general "investors", I wanted to see big profits quickly. It was really one of may stupid things I had done before. I immensely regretted later when I started to realize how great XOM is as a business. XOM can easily still make money even if the oil price drops to $10. This is how good it is!! I have been watching to re-enter XOM. I think the time is coming now. XOM has declined by 10% in the past few weeks. It is rather cheap with a P/E around 10 and paying near 3% dividends. You can simply buy XOM and forget about it. More it goes down, more you should buy! Of course, don't forget to reinvest your dividends!!

Quick gain from Boeing is very likely

Almost 2 years ago I recommended to buy Boeing (BA), again when it was experiencing rather difficult time period. Talking about the contrarian idea! It was below $80 at that time and since then it has moved up quite a lot, close to double. After it topped around $150, it has been just bumping around side way in the past year. As you can see, it has got 3 well defined bottoms during the year. In the past few days, BA has just broken out to upside. Fundamentally BA is relatively cheap and a year long side way moving is likely an energy accumulation for it to launch a big move. I think this is likely the time for it. Seasonally this is also a great time for stocks with a year-end rally ongoing. I bet BA could easily move up at least 10% in the next few months to kiss its previous high around $150.

Final result of the gambling for Alibaba

Nov 22, the third week Friday when options expire. As we discussed 2 weeks ago, the chance for losing money was high for the guy who bet huge on Alibaba (BABA) with options. Unfortunately this guy indeed would lose big money if he/she still held the options till expiration. BABA closed at $111 on Friday. Per my calculation, each dollar would mean a $300,000 loss. So this guy could have lost $2.7 million in a short few weeks. This guy went in for a max $2.4 million gain but ended up with $2.7 million loss. Ouch!

Again, don't play fire with options if you don't know how to control your risks! It can bankrupt you!!!

Target: a painful short squeeze!

If you are tired of hearing me talking about Target (TGT), bear with me one more time. There is something to learn if you have closely followed the pathway of TGT in the past year or so. When Target got crashed, I was among the few who was against the herd and advocated to buy, not sell. TGT bottomed around $55 and since then it was largely trading in the side way fluctuating between $55-65 in the past year (the red lines). For those who wanted to make quick money with TGT, they would certainly have been very disappointed but for the long-term investors like me, I have just been very happy to buy and hold to enjoy good dividends. Even more, TGT has been an ATM machine for me over the past year because I have literally extracted thousands of dollars from it, taking advantage of its low valuation and good prices. Since May of this year, TGT started to shown a bullish uptrend: higher highs and higher lows (green). This was an early sign that TGT had recovered and was gaining energy to jump. Then 2 days ago, it finally fiercely broke out beyond its resistance. It jumped 8% in one day to as high as $72 due to an unexpectedly strong earning report. But be aware, this kind of price action with such a forceful move within hours (yellow) is a text-book short squeeze. It is often the case that when a stock is out of favor and hated by the Street, the herd investors will brainlessly just follow each other to short the stock. They have been brain-washed to think that such a stock has no way to go but down.Unfortunately things are not always go as they would expect, especially for quality stocks. When the trend suddenly changes, those who short heavily get caught up and often are forced to buy back the stock to close their short positions to avoid even larger losses. The cumulative effect of such forced buying will push the stock price to go up unbelievably fast. That's called short squeeze! Short squeeze for a moving up stock often creates a short-term "bubble", i.e. an extremely overbought condition, which is usually followed by a mini crash. Therefore, for quick traders, this is an opportunity to short the stock at this level to make some quick money. But this is only for very experienced traders and for a super short-term.

So what's the learning?

• Herd behavior is often the contrary indicator: when everyone wants to buy, you should avoid or sell; when everyone wants to dump, you should consider to buy
• Buying good quality stocks with track record of paying increasing dividends is the safest wealth-building strategy. The trick is to buy at good prices. Hope my blog can help to identify such stocks and timing. You can sleep well at night by buying such stocks when the herd is dumping. Soon or later, the share price will come back to normal and more.

For now, I guess you know what I'm going to say: don't immediately buy TGT as I expect it will "crash" before moving further up. But buying IBM at its current level is great to me. The sentiment for IBM is extremely low and the herd is dumping.

If she can be a millionnaire, you certainly can be as well

Barrons, the famous investment magazine, recently featured Mrs Stephanie Mucha who donated $6 million. You may ask what’s special for her as there are so many philanthropists in the US who have donated billions of dollars. Six millions may not sound a lot for rich people, it is not a small amount for the majority of people who earn their income pay check by pay check. It is even unthinkable for this lady when you know how much money she earned during her life: she had never earned more than $23K per year during her entire life! What’s your reaction now? Unbelievable  to me when I first heard this but when I learnt how she made this much of money, everything became very reasonable and made a lot of sense. So what’s her money-making magic? Very simply. Just buy good quality dividend paying stocks and hold them forever! This is a sure stress-free way to make you very rich. The time will make the magic to work for you. The only thing you need is to be patient. One example for this lady was that she bought Medtronic (MDT) in 1964 with an initial cost of mere $255. In 2007, 43 years later, it has grown to $459K. You see, as soon as Mrs Mucha and her husband bought a stock, they did not care about what was happening in the world. Think about it, during their life time, they had experienced several earth-shaking events that could make people feel like end of world:

-          Oil shock in 1970s

-          Black Monday in 1987

-          Asian financial crisis in 1990s

-          Tech bubble in 2001/2002

-          Financial crisis in 2008/2009

 

I’m pretty sure that for majority of so-called investors, they would sell and run when such events occurred. But Mrs Mucha never bothered to care and they simply kept all the stocks and let the dividends reinvested. That’s why they ended up with so much money even though they had very little money to invest.

I hope this article can inspire you and change to some extent your approach how to invest your money!

This stupid policy will crash the country but can make you a lot of money

If you follow the world economic news, you probably have heard "Abenomics". It is about the Japanese fiscal and monetary policy spearheaded by the Japanese Prime Minister Shinzo Abe since 2 years ago that they would print as much money as possible to bring up their inflation levels. This is a Japanese version of QE but in a much large scale, considering the size of their economy. I firmly believe this is a futile effort and the start of the end of their hopeless economy! In the long run, it is a suicidal attempt!

Through this J-QE, the Bank of Japan would buy up to $610 billion in bonds a year. But they just announced last month that they will add more to the purchase up to almost $700 billion. I feel sorry for the Japanese people as eventually the country will crash under the ever increasing debt load. But in the short and intermittent terms in the next few years, 2 things will happen. The immediate impact is the weakening J-Yen. I suggested to short Yen in Apr 2013 via YCS when it was around $40. Now YCS is over $80, almost doubled. In other words, in the past 2 years, Yen has significantly weakened due to this QE policy. On the contrary, a weakening Yen and flooding cheap money will boost the stock market in a big way. To ride this trend, one good means is via Wisdom Tree Japan Hedged Equity ETF (DXJ). The beauty of this ETF, as its name implies, is that it is actively hedging against the fluctuation of Yen. In other words, you can enjoy the booming stock market in Japan while the risk of depreciation of Yen is minimized. I think this is a good deal for those who want to diversify their portfolio with more exposure to international stocks.

How can risky option trading wipe you out

A couple of weeks ago, a friend forwarded me this CNBC posting regarding an option trade for Alibaba (BABA) that was claimed to guarantee to make $2 million within 6 weeks by some followers. Here is what I said: This to me is just a gambling that if the trading goes through as expected, he/she can make max $2 million but it dose not, the total lose is unlimited.

This option strategy is so-called strangle that will make money if the underlying stock is only trading within a set boundary of prices prior to the option expiration. It may be a good way to make some quick money for slow-moving stocks but it is extremely risky for high-flying stocks for which their share prices can jump around significantly.  It can easily wipe out one's account if no pre-defined exist strategy is set up. In this case, the guy is betting with really big money, 3000 contracts (equal to 300,000 shares). As I'm writing now, BABA is trading at $114. It means for each dollar beyond $102, the trader is loosing $300,000. At this moment of my writing, the paper loss for this guy is over $3 million already. Of course, it is hard to say this guy will definitely lose money as there are still 2 weeks to go before the option expiration on Nov 21. However, I think the odds are definitely against him/her. Since BABA has only started being traded for a few weeks, it is very difficult to do technical analysis. However, given how much euphoria around the stock lately and its price is above the Bollinger Bands with RSI over 80 (an overbought indicator), there is a good chance that BABA may decline a bit in the next 2 weeks. How much will it come down? No one knows for sure but I'd bet it is likely coming down towards its 10 day moving average around $104. If it happens, I'd think people who have not bought BABA yet will likely jump in to bid up its price again. It now all depends how lucky this guy will be in the next 2 weeks. I'm sure this guy will have many sleepless nights in the next 10 trading days.

The lesson? Do not play fire with options without sound exist strategy and pre-defining how much max money you can lose with a trade. It is exciting to make some quick money if everything goes well as expected but it can also easily wipe you out if you are not knowing what you are doing and the option trade goes against you.

Is Apple still cheap?

Not many people believe in Apple (APPL) as a stock because when I mention Apple as a cheap stock, I always get a suspicious stare as if I was out of mind. This is good sign that Apple has a lot more room to go up. Last year, when Apple dropped like a stone to low $400s, I made a bold call that Apple was likely at the bottom. It did. Since then I also made several technical calls regarding its good entry points. If you acted as I recommended, you should be really happy. Apple would have been way over $700 if not split (it is trading $108 after 7:1 split). I become more confident that Apple will march up beyond $200 (or over $1000 pre-split) in 1-2 years time. Fundamentally Apple is just very cheap and can go a lot higher, period!

The Chinese stock market is quite bullish

Just a quick note that my gut feeling is quite bullish for the Chinese market in terms of the long term, given what I have been seeing how it is behaving at the moment. FXI is still my favorable means to ride for the Chinese market bull run in the next few years.

Christmas gifts coming earlier

We are at the last count-down moment for an important FDA advisory meeting next week for the drug I'm involved in. So super busy at the moment, including evenings and weekends. Just a quick note on something I think you should think about.

Right now anything related to energy is on huge sale. People just dumped whatever they have blindly. This has created a huge opportunity for good oil stocks. I consider them as Christmas gifts for those who know how to invest. One of them is my loved oil company, ConocoPhillips (COP). Briefly, below is the 10 year chart for COP from 2005. It has experienced 4 times of such similar panic selling in the past 10 years but each time it simply comes back. At the moment, it is actually sitting on the 5 year support line. It is paying growing dividends (4% yield as of now), which has increased 400% since 2005 from $0.19 to $0.73 (quarterly). Is this the bottom for COP now? I don't know but do I care? I'm simply buying more when someone is sending me an earlier Christmas gift like that.