Last week I told you about my colleague and friend, Tom Essaye, and his favorite contrarian investing ideas. The response to that column was so overwhelming that today I’ve asked Tom to share another one of his favorite investment ideas with you. I think you’re going to find it fits very well with my view on income investing. — Best wishes, Nilus |
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Whether they come from Washington or Europe, it seems like news headlines (and rumors) are now influencing the stock market more than anything else. And there is no better evidence of this than trading over the past two weeks.
During the week of Thanksgiving, the market was sharply lower because of the failed Super Committee and a continued lack of resolution in Europe.
Then, just last week, the market recouped virtually all of the previous week’s losses because of central bank coordination and new, upbeat headlines out of Europe!
So what we’re left with is simply extreme — and apparently random — ups and downs.
But please don’t let this action discourage you from investing! If there’s one thing I learned while running my own hedge fund, it’s that extreme volatility also creates extreme opportunity!
The key to investing now is to insulate your research from the random noise and daily market movements, and to focus instead on finding undervalued sectors and specific niche investments that are packed with potential.
For example …
Heating Oil Is One Niche Investment Area that I Like Right Now!
It should come as no surprise that as we enter winter, we are also entering the strongest period for heating oil and distillate fuel demand.
Yet in addition to the typical seasonal demand, heating oil supplies, especially in the northeastern United States where heating oil is a major source of energy, are well below levels seen just two years ago.
So just based on those two simple facts, we have a fundamentally attractive investment opportunity … especially if we experience a colder-than-expected winter!
Regardless of next week’s headlines from Europe or Washington, those fundamentals will not change.
These positive supply/demand fundamentals have been represented in the return of heating oil year to date. UHN, a heating oil ETF, is up 14 percent this year compared to -1 percent for the S&P 500 and .006 percent for DBC, a broad based commodity ETF.
And that’s just on the surface. When I look a bit deeper into the fundamentals of the heating oil and distillate market, I see some additional opportunities …
Nationally and in the Northeast heating oil and distillate inventories are down 16.4 percent and 24 percent, respectively, from two years ago. Meanwhile, inventories are down in the Midwest and Gulf Coast regions, but less so than in the Northeast.
Considering that homes in the Midwest and Gulf Coast regions are predominantly heated by natural gas, we could see more heating oil flowing from these areas to the thirstier ones!
Who stands to profit from this trend?
Certain pipeline operators who will have the ability to charge energy companies higher rates to move fuels from one place to another!
I know Nilus has discussed some of these companies in the past — especially because they tend to produce tremendous income — but at the very least this current heating oil story is just one more reason to investigate some of these companies if you haven’t already done so.
Two that have strong pipelines in the northeast are Buckeye Partners L.P. (Symbol: BPL) and Kinder Morgan Energy Partners L.P. (Symbol: KMP).
And no matter what you decide to do, please remember that over time, the unrelated headlines will fade away but the fundamentals will still be in place. So those investors with the foresight to use short-term reactions as a way to invest in sectors and companies with strong fundamentals will end up smiling down the line.
Best wishes,
Tom
P.S. In addition to the heating oil story I just described, I also see a HUGE opportunity in a special class of investments that Nilus and I are calling “government bailout contracts.” To understand why these special niche plays are literally a once-in-a-lifetime opportunity — I encourage you to read the full story here.
