Monday Mailbag: Bad Burritos, Nuclear Disasters, Pounding Sand… and More

With the vast amount of information available on the Internet, it’s increasingly difficult to tell what’s valuable or worthless, real or bogus. That’s why the judgment of human editors is more important than ever.

Two-time U.S. presidential nominee Adlai E. Stevenson once said: “An editor is someone who separates the wheat from the chaff and then prints the chaff.” That’s a funny line from a 1950s-era Democratic politician renowned for his wit. However, I see it as my job to point hungry readers toward the wheat.

Let’s see what’s in the hopper this week.

Chipotle: the burrito stops here…

Speaking of food, I got a lot of mail regarding my July 21 issue, Chipotle Again Makes Diners (and Investors) Sick to Their Stomachs. Notably, a fan of Chipotle Mexican Grill (NYSE: CMG) took issue with my harsh assessment of the company’s prospects in the wake of its latest outbreak of food poisoning:

“If I had the cash to invest, I’d buy Chipotle stock. As a former worker within a perishable department, I can tell you that norovirus outbreaks are caused by the mishandling of food for consumption by someone who doesn’t follow food safety procedures, especially the hand washing ones.

There are a lot of people around who don’t wash their hands as frequently as they should. I blame the problem at that local Chipotle on the staff not properly handling food. Don’t blame the whole company for some fool’s irresponsibility.” —Maria R.

Maria, I appreciate your feedback, but I must respectfully disagree. To quote a contemporary of Adlai Stevenson, former President Harry Truman: “The buck stops here.” In Chipotle’s case, the buck stops at the company’s headquarters in Denver, not at the infected restaurant in Sterling, Virginia.

If diners are getting violently ill at a Chipotle restaurant, the blame must be assigned to corporate headquarters — especially when there has been a pattern of food poisoning that goes back to 2015. Part of of my negative view of Chipotle is that the company’s highly paid executives have learned nothing. They seem more concerned with marketing gimmicks and the stock price than the safety of the food. My Greek grandfather (a wise man) used to say: the fish stinks from the head.

Going nuclear…

“I am retired with a sizable stake in Scana. The problems facing Westinghouse’s bankruptcy and Toshiba raise questions. The nuclear production tax credit was not included in the recent tax bill passed by Congress. All of this makes me wonder if I should sell Scana?” — Richard S.

Richard, nuclear projects are infamous for being behind schedule and over-budget. U.S.-based nuclear developer Westinghouse Electric is the lead contractor on Southern Company’s (NYSE: SO) Vogtle nuclear project and Income Portfolio holding Scana’s (NYSE: SCG) V.C. Summer nuclear project. Southern belongs to the Growth Portfolio and Scana to the Income Portfolio of Utility Forecaster.

These projects continue to surpass budgets and miss deadlines, boosting liability for Westinghouse and eventually threatening its parent company, Japan-based conglomerate Toshiba (OTC: TOSBF). To cap potential liability, Toshiba compelled Westinghouse to declare bankruptcy in March, a move that adds additional uncertainty to both utilities’ nuclear projects. But there’s still hope for Southern and Scana.

Ari Charney, chief investment strategist of Utility Forecaster, explains:

“One potential concern regarding the projects’ now-longer timelines has been alleviated. In late June, the House approved legislation that lifts the deadline for new nuclear plants to receive federal tax credits for power generation.

Even before Westinghouse’s bankruptcy, Southern and Scana’s estimated completion dates were pushing up against the former deadline for the plants to commence operation by the end of 2020.

These tax credits are worth billions and were a key part of the original rationale for undertaking these projects.”

Ari also serves as the income expert at Personal Finance. He advises that patient investors should consider waiting out the storm.

Valuation yardsticks…

“In anticipation of a market correction, you recommended investing in SPDR Gold Trust (GLD). You also recommended selling overvalued stocks. My question is: how do you define overvalued stocks? I sense that the classic P/E or PEG ratios aren’t enough. What other financial metrics should be looked at?” — John M.

By almost every valuation measure, this bull market is overpriced.

Key valuation metrics include the price-to-book ratio (P/B), which indicates what investors are willing to pay for each dollar of a company’s assets; price-to-sales ratio (P/S), which indicates the value placed on each dollar of a company’s sales; and enterprise value-to-EBITDA, which is determined by dividing a company’s enterprise value (EV) by its earnings before interest, taxes, depreciation and amortization. The latter allows investors to compare the value of a company, debt included, to the company’s cash earnings less non-cash expenses. All of these measurements are flashing red.

The nitty-gritty on Smart Sand…

“SND has been falling significantly, especially since the news that a new and better source of drilling sand has been found. Any thoughts?” — Robert B.

I still like frac sand producer Smart Sand (NSDQ: SND), since recommending it in my June 21 issue An Energy Empire… Built on Sand. Our other analysts like it, too. The stock belongs to the portfolios of The Energy Strategist and Profit Catalyst Alert.

As Jim Pearce, chief investment strategist of Personal Finance, points out:

“The only ‘news’ has been analysts’ downgrades which can have the effect of being a self-fulfilling prophecy in a momentum-driven market like this one. But our energy analysts still like SND, and believe it has become oversold. The company is due to report quarterly earnings next month, so speculative investors may want to buy it before then in case the outlook is better/less bad than feared.”

Treated sand is a “proppant” designed to keep an induced hydraulic fracture open, during or following a fracturing treatment. As the North American shale production boom continues, demand for SND should take off. Nonetheless, imbalances in the energy markets have weighed on SND and frustrated investors.

Linda McDonough, chief investment strategist of Profit Catalyst Alert, explains:

“Smart Sand will report its next quarter mid-August. My expectation is that the stock will rebound when those numbers are reported. Unfortunately, between now and then the stock is correlated tightly to the price of oil. I do think oil is oversold so these two events should send the stock higher.”

Robert Rapier, chief investment strategist of The Energy Strategist, adds:

“Smart Sand has been a victim of concern that lower oil prices will reduce demand for its hydraulic fracturing sand, but I think such concerns are overblown. The very reason oil prices could remain low is due to high U.S. oil production, and that is enabled by high sand usage.”

Homebuying calculations…

Regarding my July 26 issue, Unlocking Home Ownership During Today’s Housing Boom, a seasoned real estate agent weighs in:

“As an experienced real estate agent for over 25 years, I have a couple of suggestions. Choosing the right lender is every bit as important as choosing the best real estate agent. Incompetent loan agents abound and can lead to chaos and/or major disappointment. I suggest choosing your agent first and then speaking to three lenders recommended by the agent.

Also, instead of ‘pre-qualification’ as suggested, buyers will be in a much stronger negotiating position if they go through the process to the ‘pre-approval’ status. Typically, this means that the borrower has submitted all of the documentation you list, including tax returns, etc. and gone through underwriting, up to the property appraisal process.” — Michelle L.

Got any questions or comments? Send me an email: — John Persinos

Jim Fink’s worry-free trading method…

There’s a common denominator in many Mailbag letters lately: fear about the overvalued stock market’s direction.

However, Jim Fink, chief investment strategist of our premium trading service Velocity Trader, has taken the worry out of investing. He has developed a trading system that leverages small stock movements into huge gains, regardless of the gyrations of the broader markets.

By following just a few simple steps, Jim’s method allows you to take regular stock movements of 8%, 17%, or 34% and amplify them to generate profits of 100%, 300%, even 800%.

As Jim explains: “I share my trades with a small group of investors who follow me step-by-step on each trade. Obviously, I’ve kept this to a small number of people so that these trades aren’t ruined by an entire crowd rushing into each trade.

But the most interesting thing is that many of these investors are just everyday people who have never done something like this before, but that hasn’t kept them from learning my technique and using it to collect safe, outsized returns.”

By trading this way, Jim became a millionaire. Click here now for his latest presentation.







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