Monday Mailbag: “Neutron Jack,” Construction Stocks, Frac Sand… and More
One of my favorite science fiction writers, the wise and prophetic Isaac Asimov, once said: “Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won’t come in.”
At Investing Daily, we continually try to scrub off your assumptions about investing. By the same token, your reader letters are valuable in challenging our assumptions. As the shout-fests on cable television prove every night, anyone can spout opinions. But how you think is just as important as what you think.
Interacting with readers helps sharpen our critical thinking, to prevent intellectual laziness. Let’s see how your latest letters challenged the conventional wisdom.
Jack Welch: The cult of personality…
I received the following letter regarding my June 15 issue: The Real Reason to Buy GE (Hint: It’s Not Immelt’s Departure):
“It’s good to see plain, straight forward commentary, which is what I like about Investing Daily. Your commentary on GE also is plain and simple. As a GE stockholder for 15 years, I’ve seen a lot going on at GE and I am surprised they are not selling shoes today!
I would like to clarify that the stock’s slumber should have ended with CEO Jack Welch’s expulsion, after he ruined and put in question GE’s legacy. And yet still today, the news media seem to acclaim Welch as ‘Mr. GE.’ What has to happen is for Welch’s cronies to be sought out and removed for younger, more product-directed management.” — Pablo M.
Pablo, it’s true that a cult of personality grew around Jack Welch, fueled by fawning press coverage. When Welch took over in 1981, GE’s traditional businesses, such as lighting and home appliances, weren’t growing fast enough to suit him. He diverted resources away from manufacturing and into services, notably the company’s GE Capital financing arm.
Welch combined his strategic redirection with consistent layoffs, earning him the nickname “Neutron Jack” (for eliminating employees while leaving the office buildings intact). It all worked like a charm and boosted the stock price, until the financial collapse of 2008 laid bare the weaknesses of GE Capital. Much of GE’s success under Welch, and its subsequent problems, derived from a heavy reliance on the company’s huge and leveraged financial services business.
Welch was replaced in 2001 by Jeffrey Immelt, who dismantled Welch’s legacy by selling off NBCUniversal and big chunks of GE Capital. Last week, it was announced that Immelt would be replaced by John Flannery.
We’ll see how the incoming Flannery fares in streamlining this colossus and lifting the stagnant stock price. I’m betting that GE’s return to its industrial roots will pay off.
A construction stock in Dutch…
“The stock of Chicago Bridge & Iron has really tanked recently. Is it still a viable investment at this time or has there been a fundamental change in its parameters? I am considering making an investment in the company but wouldn’t want to be getting in when it’s really time to get out.” — Anthony P.
Chicago Bridge & Iron (NYSE: CBI) is indeed struggling. The Netherlands-based engineering and construction firm followed its fourth quarter’s huge earnings miss with an even worse one in the first quarter of fiscal 2017.
CBI’s first-quarter adjusted earnings per share came in at 24 cents, far below the consensus estimate of 95 cents. Earnings plunged 76.2% from the same period a year ago. The main culprit: higher costs due to overruns on union construction projects. Diminished activity in the company’s large liquefied natural gas projects in the Asia-Pacific region also hurt the bottom line.
Cash flow took a hit as well. Chicago Bridge & Iron’s cash on hand in the first quarter came in at $420.1 million, down from $641.5 million during the same year-ago quarter. The average analyst expectation is that CBI’s year-over-year earnings growth will come in at -20.5% in the current quarter, -10% next quarter, and -21% in the current year. The upshot: I’d avoid the stock.
If you’re looking for a solid engineering and construction stock, instead consider Fluor (NYSE: FLR). With a market cap of $6.2 billion and an extensive client roster around the world, Fluor is poised to thrive from accelerating global economic growth.
The Texas-based company also stands to benefit if President Trump fulfills his promise to boost infrastructure spending, although in light of Trump’s worsening political scandals, the verdict is still out as to whether he can get his domestic agenda through a bitterly divided Congress.
Sandbagged on Smart Sand…
The recent slump in the oil and gas sector is exerting a ripple effect on secondary energy plays, as reflected by this reader question:
“Smart Sand’s stock is down, but I can’t find any news that I thought indicated a changed investment thesis. Is the stock still a good buy? I’m new to most Investing Daily services and, hence, to this stock recommendation. Any thoughts?” — F.O.
I wrote extensively about Smart Sand (NSDQ: SND) in my June 1 issue: An Energy Empire… Built on Sand. The company is a key producer of “frac sand,” which is a proppant designed to keep an induced hydraulic fracture open.
Smart Sand is a holding in The Energy Strategist portfolio, so I’ll let Robert Rapier, the publication’s chief investment strategist, answer the question:
“This has been one of the most frustrating investments I have ever owned. I have yet to find any bad news about the company that would warrant a decline. It has declined in sympathy with oil, but the very reason oil prices are declining is that everyone is worried that the U.S. is going to produce too much oil. How do they do that? By using more and more sand.
I think this is an irrational reaction to high crude oil inventories, but you know what they say about irrational markets and solvency. I am still holding it. As I said, it reminds me of the action in SolarEdge, which I added last year. I watched SolarEdge go through a steep decline, and now it’s the #1 portfolio performer in 2017 with a YTD gain of 51%.”
We’re Number One!
At its 38th annual award ceremony held in June, the Specialized Information Publishers Association (SIPA) bestowed on Personal Finance “first place” in the highly competitive category of Best Financial/Investing Newsletter or Ezine (non-daily).
Pictured is PF Chief Investment Strategist Jim Pearce accepting the award from SIPA. Personal Finance is our flagship publication and we’re proud of its consistently high quality.
But we never rest on our laurels. If you have any questions or suggestions, email me at: firstname.lastname@example.org — John Persinos
The frac sand revolution…
As mentioned above, frac sand is vital to the fracking industry. Without this specially treated sand, fracking would be impossible. That makes the right sand producers a good investment now, despite the current ups and downs of energy prices.
But we’ve gone a step further. We’ve pinpointed an advanced, high-purity frac sand called Augmented SiO2 and it’s about to make early investors wealthy.
Certain companies mine and process this tiny “wonder compound” and they’re positioned for triple-digit gains. But don’t look for the well-coiffed pundits on CNBC to mention these under-the-radar investments. As usual, these supposed experts are in the dark.
For the real scoop, turn to Robert Rapier, chief investment strategist of The Energy Strategist. In his latest presentation, he reveals the details.