First Picks

Well, I figure I might as well dive in feet first, since this is fake money after all. My first few picks may be lacking in research, but hopefully I will figure things out and people will tell me why I am silly and give me advice. Feel free to comment and tell me why my picks are horrible, and feel very free not to ever ever take my picks as good investing advice.

Now, to business. I am going to start this off by saying that I think the economy will recover, and so i may invest in less stable sectors like real estate, shipping, oil, and financial in hopes they will go back up. Today, I have in mind oil and metals.

My first pick for the fund is a stock I have been eying for a while, and that I have heard mostly good about. That is Kinder Morgan Energy Partners, a gas pipeline company. Now, they get their money from volume of fuel pumped, not from selling it, so hopefully they are somewhat insulated from the price crash in oil. Furthermore, KMP has a high dividend yield that has been rising for some 11 years, at a reasonable rate, at least that is what dividendinvestor.com tells me.

As for the ratios, it has a rather high Price/Earnings of 30ish, and a Price/Book of 3ish, so it isn't exactly a steal. However, If you look at the chart, it hasn't taken nearly as much of a beating as the S&P 500 of late. I am going to chalk the fact that is price hasn't fallen to dirt cheap levels as a good thing. Like I said, I'm not much of a value investor, I'm after dividends.

Now, to make sure I'm not being a total retard, I checked analyst buy/sell/hold ratings and saw that it has a mix of strong buy, buy, and holds. Overall, seems to be a buy, so say the mighty analysts. While I wouldn't expect everything analysts say to buy to actually be worth buying, it is comforting that there aren't any sell ratings.

Now, I should probably find some sort of hedge for this, but I want the fund to be mostly long. After I add a few more energy/oil positions I will figure out some sort of oil hedge, either an ultrashort fund or just plain short selling some oil company that I think is garbage.


Next up, commodities, in specific, steel. If you are some sort of day trader, you might look at MTL, or if you have great faith in the Russian economy recovering. However, I am not going to touch that thing with a nine foot pole. So, what do I have to look at?

What I see as far as dividend yielding steel stocks is Nucor (NUE), U.S. Steel (X), and ArcelorMittal (MT). From my cursory reading, NUE and X have about 3% dividend yields and MT is beaten down and yields about 6%. NUE is a mainly North American firm, X has a European side, and MT is global. Nue does mostly recycling rather than ore processing it looks like, and I someone on Seeking Alpha claimed that keeps costs down, but I'd rather not buy something just because I read about it on SA.

First off, dividends. Who has paid them the longest and who's has grown the fastest. NUE has grown its dividend a lot, although it pulled back a bit from 2007 highs. Not a dividend achiever, but the history looks rather solid. X has raised its dividend for three or four years, and had a constant dividend before that- not bad. MT has raised its dividend a lot in the last two years, but hasn't had a high dividend for too long it looks like.

Ratios?
X PE ~2 PB ~1
NUE PE ~6 PB ~2.5
MT PE ~2.5 PB ~.8

If you look at the chart, you see that in the crash NUE came out smelling like a rose compared to X and MT, which explains the difference in ratios. On teh one year chart, X looked good until the crash, while on the 2 & 5 year charts we see that MT has done some serious growing.

So, I don't know what to make of U.S. Steel's low ratios and poor performance relative to NUE and MT during the recent crash. Since I don't, I'm going to chalk that up as Mr. Market voting against it. It might mean its a great value and the dumb money has dumped it, but I don't have any evidence to support that. But before I say anything final, I'll look at what the analysts say.

Analysts Rating: NUE 1.93 no sells X 2.07 one sell MT 1.92 no sells

Now, I am a bit scared of X and MT as they suffered a lot recently, but I'm going to take a risk with MT and add it to the portfolio because of its high yield and no sell ratings. I will also add NUE as I feel it will add some stability that MT lacks. As before, I will get to a hedge later. I don't think X is so bad as to short it for my hedge, although MTL might just be a good candidate for that.


Lastly, how much of each do I want to add? Lets say I want to end up with about 10k each of MT and NUE, and maybe 20k of KMP as I love that solid dividend. With the market how it is, I should probably cost average in over a week or a month. However, UpDown, where I am modeling the portfolio, has a 100$ trade fee, and I don't want to lose too much to fees. I'll start by placing 5k (maybe 10k on KMP) limit buy orders at a few percent below closing price and hope they come to me. If they execute I will note that in the next post, hopefully.




Notes: Most data from a combination of dividendinvestor.com (for dividend info), reuters (for the ratios), and yahoo finance (for the charts), with a bit from google finance (random history, I like to read the comments, etc).

Disclaimer/Disclosure: As always, i am a poor college student with no positions in any stocks, so don't treat this as an advice page for god sakes. Do your own research!

Edit: I just recalled something I heard somewhere, probably from Cramer- the stock is not the company. Next time when I look at company history I will try to look at balance sheets and earnings as well as stock charts, which don't indicate company performance, only company popularity with Mr. Market, who isn't always rational.