Monday Mailbag: Aviation’s Rise, Energy’s Slump, Retail’s Woes… and More

Welcome to the Monday Mailbag. I have some fun stuff to talk about today.

Fun but also informative. Founding father Benjamin Franklin once said: “An investment in knowledge pays the best interest.” Those words could serve as a motto for this newsletter.

Every day, my email inbox is brimming with letters from readers seeking not just investment recommendations but also wider knowledge about the world of money. That’s why, in addition to specific picks, I give you wealth-building tools to last a lifetime.

Perhaps the following answers can put more “Benjamins” in your pocket. Let’s get started.

Rolls-Royce: on a roll…

“Your June 23 issue gives a lot of coverage to this year’s Paris Air Show and the companies that you think will benefit. But you didn’t mention Rolls-Royce, which always has a big presence at the show. What about this stock?” — Doug R.

One company with excellent prospects is British blue-chip Rolls-Royce Holdings (OTC: RYCEY), the world’s second-largest maker of aircraft engines behind rival General Electric (NYSE: GE). Rolls-Royce picked up a slew of new orders at the show, including a huge £1.2 billion contract for aircraft engines from Ethiopian Airlines.

One of the big investment stories of 2017 is likely to be the revival of Europe. The previous year on the Continent was characterized by Brexit, political turmoil and fears of recession.

But now the European Central Bank and federal governments are overtly embracing more stimulus, backing away from growth-choking austerity and implementing business-friendly policies. At the same time, anti-establishment political parties that were making investors and corporate managers nervous are in retreat.

These trends make European-based multinationals such as Rolls-Royce a good bet for investors seeking new areas of equity growth (see my June 14 issue, Bet on the “Cashless King” of Europe).

A global operator, Rolls-Royce is based in London and should get a boost from continued economic recovery in markets around the world and especially in its home turf of Europe. A developer and marketer of both military and civilian engines, this respected company with the well-known brand name spun off its eponymous luxury car making unit in 1973.

Not only will Rolls-Royce benefit from jump-started growth in Europe and from overall global recovery, but its “green” environmentally friendly engines will be in greater demand as governments clamp down on emissions to combat global warming.

Rolls-Royce’s stock is up nearly 45% year to date, with room for further upside as aerospace/defense embarks on a sustained boom. The company’s engine innovations show that by going green, aircraft suppliers can make green.

Pipeline stocks take a hit…

Two readers asked about the recent slump in energy prices and how it’s hurting midstream players:

“I bought Energy Transfer Partners LLP and since then it has dropped 11%. I know oil prices are also dropping, but should I take the loss and get out now or hold it?” —  H.E.

“Is the dropping price of oil totally the reason that pipeline stocks are dropping, too? I’ve noticed a substantial drop in prices in pipeline stocks. Or are there other causes that I’m not aware of? The drop of pipeline stocks has blown through support areas. Should we buy these stocks to achieve a price that may not be available again?” — Ronald R.

Energy Transfer Partners (NYSE: ETP) is a high-yielding master limited partnership (MLP) that’s a holding in the Maximum Income for Retirees Portfolio of our flagship publication, Personal Finance.

Jim Pearce, chief investment strategist of Personal Finance, asserts:

“I can tell you that I am not overly concerned about the MLPs in our Maximum Income for Retirees Portfolio, because price weakness in the energy sector stems from too much supply.

If the problem were not enough demand, then I’d be much more concerned, but too much supply means a lot of oil and gas is being transported and stored by the midstream MLPs we own in our portfolio so they should be okay. And yes, I view current price weakness in midstream MLPs as a long-term buying opportunity.”

Robert Rapier, chief investment strategist of The Energy Strategist, also weighs in:

“The hangover from OPEC’s price war on oil lingers on, as it helped push global crude inventories to record levels. The thesis that oil demand growth will remain strong is intact, but oil production growth has kept pace, keeping oil prices in check…

However, there are no signs of peak demand anywhere.”

Battered Big Boxes…

“I bought Walgreens and it’s really dropping. I neglected to put in a stop loss when I bought. Anyway, should I think about selling? Or have I already taken the brunt of the loss and selling would just lock in that loss?” — James S.

Now’s not the time to sell this intrinsically sound stock. In my June 21 issue (Drone-Delivered Granola? Dissecting the Amazon-Whole Foods Deal), I explained that several Big Box retailers have taken an unfair hit in the wake of Amazon’s (NSDQ: AMZN) announcement that it intended to buy health food purveyor Whole Foods Market (NSDQ: WMT) for $13.7 billion.

PF Growth Portfolio holdings Walgreens Boots Alliance (NSDQ: WBA) and Target (NYSE: TGT) have fallen in recent days. However, by clobbering legacy retailers and grocery chains, I think investors are overreacting to the Amazon/Whole Foods news.

The impersonal and generic retailers, such as discount warehouse chain Costco Wholesale (NSDQ: COST), could indeed see erosion of market share from an Amazon/Whole Foods merger. E-commerce juggernaut Amazon is likely to pressure the already razor-thin margins of grocery store rivals, while at the same time leveraging the upscale cachet of the Whole Foods label. But Walgreens and Target are savvy marketers with effective branding strategies that differentiate them from the crowd. You should view Wall Street’s unwarranted punishment of WBA and TGT as buying opportunities.

Planting the first seeds…

The investing sophistication of my readers runs the gamut, from seasoned pros to complete beginners. I got this email from a reader who wonders how to get started:

“I’m older so I don’t have lots of time. I’ve been getting your info for a while now and I want to be rich with the rest of you. I don’t mind holding stocks for a long time, but is it possible to make a few extra dollars with a small investment on these stocks that have high expectations?” — Kyle F.

Here’s the catch for inexperienced investors such as Kyle: with only a modest deposit, it’s nearly impossible to create a well-diversified portfolio. Investors who are just starting out may need to buy the shares of only one or two companies to begin with and then diversify as their portfolio grows in value.

The PF Growth, Income and Fund portfolios are good places to find rock-solid investments, with accompanying advice from our team of experts. For anyone new to investing, plant your first seeds with a few shares of the least expensive stocks, while observing our buy limits.

Sunset for GE?

The following letter is in response to my June 15 issue, The Real Reason to Buy GE (Hint: It’s Not Immelt’s Departure).

“What would be the negative side of GE?” — I.V.

It’s difficult for a sprawling industrial conglomerate such as General Electric, which manufactures everything from kitchen appliances to aircraft engines, to remain relevant in the digital age. Silicon Valley’s innovators dominate the early 21st century, whereas a company founded in the late 19th century to make light bulbs lacks the “cool factor” that gets a stock praised on CNBC.

It’s also a challenge for GE to create synergies among its diverse divisions. Health care, for example, has little in common with engines for combat jet fighters. However, GE’s strengths include engineering know-how and experience, as well as an aviation unit that’s tapped into booming growth in the commercial and military sectors. I wouldn’t bet against this colossus.

Got a question? Send me a letter: mailbag@investingdaily.com — John Persinos

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