Monday Mailbag: Bullish Buffett, Bearish Soros, Risky Pot Stocks… and More
As I answer your correspondence this week, the most influential missive in the investment realm comes to mind: Warren Buffett’s annual letter to shareholders.
Last year was prosperous for Buffett’s Berkshire Hathaway (NYSE: BRK.A), which saw its stock rise by 23.4%. Buffett now has an estimated net worth of $76.3 billion.
Fear of a market correction is a recurring theme in the letters that I get from readers. In his latest shareholder letter, Buffett offers this perspective:
“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively financed American businesses will almost certainly do well.”
Buffett doesn’t even think that the stock market is in a bubble right now, which certainly makes him an outlier among analysts. With that reassuring context in mind, let’s get to your letters.
Soros takes a bearish turn…
“George Soros is predicting a market correction this year. Is he right?” — James H.
With deference to the eternal optimism of Warren Buffett, the consensus of most analysts, including our own team, is that this overvalued market will at some point experience a much-needed correction in 2017.
In addition to the Oracle of Omaha, it’s also worth heeding the views of George Soros. Hungarian-born Soros, the founder of the $4.5 billion Soros Fund Management LLC, currently has a net worth of $25.2 billion.
This uncannily prescient billionaire is known as “The Man Who Broke The Bank of England” because of his short sale of $10 billion worth of British pounds, generating him a profit of $1 billion during the 1992 “Black Wednesday” currency crisis in the U.K.
Soros maintains that stocks will soon slump for a variety of reasons, including the indebtedness of the global banking system, the financial shakiness of China, and political uncertainty in the United States.
As Jim Pearce, chief investment strategist of Personal Finance, puts it: “Don’t let the stock market’s seeming indifference to recent events fool you; there is a lot more risk present than its recent record high levels might suggest.”
It’s prudent to take proactive measures to protect your portfolio. Jim has set the current PF portfolio allocations at 35% stocks, 30% hedges, 25% cash, and 10% bonds. Keep your powder dry, for the buying opportunities that are sure to come.
High profits and pot shots…
I get more letters about canna-business stocks than any other topic. Here are the two latest queries:
“Looking for high profits and don’t want to just take a pot shot. Wondering what the top marijuana stocks are to help my portfolio grow.” — Larry S.
“Which will be the next hot IPO for pot stocks?” — John C.
I’ll overlook Larry’s bad puns and steer both of you to previous issues dedicated to the always-popular topic of marijuana stocks: Looking To Score? Join the “Green Rush” in Pot Stocks (January 12) and This Pot Stock Isn’t Afraid of America’s Top Cop (May 5).
As for marijuana company Initial Public Offerings (IPOs), I’d steer clear of them right now. There’s considerable froth among the small-cap players and IPO investors are likely to get burned. Ballyhooed IPOs such as Canada-based MedReleaf (TSE: LEAF) have taken it on the chin lately, as investor fatigue sets in with overly hyped pot stocks.
Tears of the sun…
“Will Suntech be a player in the future solar market?” — Richard C.
In a word, no.
Suntech Power Holdings, a China-based producer of photovoltaic cells and panels, went bankrupt in 2013 and was promptly delisted. It now trades over the counter as STPFQ. I wouldn’t touch this stock with a 10-foot pole.
Solar energy is indeed thriving, but you shouldn’t indiscriminately pile into the sector. Do your homework and pick quality companies with strong balance sheets.
I’ve long been a proponent of investing in solar power, but with that said, a sector shakeout appears imminent. Year to date, we’ve already witnessed a slew of solar bankruptcies.
Residential solar power provider Sungevity and commercial solar supplier Beamreach both filed for bankruptcy in 2017, following a year when Verengo Solar and SunEdison went belly up. More solar crashes are likely on the way, as thinly capitalized players pay the price for expanding too aggressively.
SunEdison is a case study of this folly. Since 2014, SunEdison had embarked on a reckless acquisition spree, spending $3.1 billion on takeovers that the parent company never fully digested. Growing debt and poor liquidity plagued the company until in April 2016 it filed for Chapter 11.
Nonetheless, solar remains an exciting investment opportunity. Several leading solar stocks have slumped due to fears that the fossil fuel-friendly policies of Donald Trump will adversely affect renewable energy companies, but I think those fears are overblown.
My colleague Robert Rapier, chief investment strategist of The Energy Strategist, has this to say about solar stocks:
“It’s hard to argue that President Trump’s decisions help renewables like solar power, but the industry has momentum and has reached the point of no return. The solar revolution is now unstoppable.”
If you’re looking for solar energy winners, see my June 6 issue, Forget Paris: Solar Will Shine Despite Trump’s Climate Decision.
Gathering gloom for National Grid?
“Is it time to sell National Grid? In the midst of the general election campaign in Great Britain, conservatives promise to cap consumer utility prices, while Labour threatens to nationalize energy companies. Regardless of which party wins the election, this seems like bad news for NGG in the British market. Will other NGG markets pick up the slack?” — Russell P.
National Grid (NYSE: GRID) is a member of the Personal Finance Income Portfolio. Ari Charney, chief investment strategist of Utility Forecaster and income expert with PF, answers Russell’s question:
“In the event of a Labour victory, we would expect Grid and other utilities to sell off. Even so, it would still take considerable arm-pulling and substantial funding to nationalize these companies. It’s possible that a half-measure, such as building up toward a controlling stake in the public markets, could be done instead.
A Tory victory, on the other hand, is far less risky for Grid. Meanwhile, we would expect Grid to continue looking for further investment opportunities in the U.S., in addition to upgrading and expanding its existing infrastructure there. The holding company’s U.S. operations accounted for about 38% of operating income over the trailing 12-month period that ended March 31. With Grid’s divestiture of its controlling interest in its U.K. gas-distribution business, this proportion will only grow as the year progresses.
The bottom line is that even with the political risks that Grid faces, we’re still willing to hold. However, we would certainly understand if you’d rather watch the drama from the sidelines.”
Stephen Leeb and the free market…
It’s an occupational hazard for editors to occasionally receive angry letters from readers. Over the years, I’ve gotten my share. Not all of them are publishable in a PG-rated newsletter.
But in the interest of keeping Investing Daily accountable, some of these reader broadsides are worth addressing. I’ve decided to publish one such letter. It’s not so much a question as a downright scolding.
Here’s the letter in its entirety, unedited:
“Why don’t you, or anyone else there, acknowledge that Steven Leeb headed up Personal Finance for several years, a number of years ago? Isn’t that what you call honesty and transparency? What are you afraid of? That you don’t want today’s readers to know that Personal Finance dumped him back then and brought in a new team, only to dump that new team a few years later?
Professional athletes acknowledge that sports is a business, and that most of them may be traded at any time, so team allegiances can change quickly. Why cannot you or the rest of the current ‘team’ with Personal Finance at least be as upfront and honest as major league baseball players?” — Edward G.
Edward, to continue with your sports metaphor, financial analysts often pursue new opportunities as free agents in a free market.
Stephen Leeb’s previous tenure with Personal Finance is a matter of public record and quite obvious to our long-time subscribers, which is why we didn’t belabor the point. We assumed everyone already knows. We weren’t trying to hide anything, because doing so would be futile. A simple Google search, or cursory look through our web site’s search engine, would turn up ample evidence of Dr. Leeb’s prior association with us.
Dr. Leeb now serves on the Investing Daily team as chief investment strategist of The Complete Investor, Real World Investing, and Aggressive Trader. The quality of his advice speaks for itself. If we unintentionally gave the impression of being less than forthright, we apologize. Regardless, keep the feedback coming; we always strive for transparency.
Want to get something off your chest? Send your letters to: firstname.lastname@example.org. — John Persinos