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The Lawrence Investment Group


March 30, 2006 update: I look at the world and I notice its “GROWING”, while my guitar gently weeps.

Brief update:

As we end Q1, it is time to look again at my late Q4 suggestions and what has happened to them since:

Stock 21-Nov 30-Mar Change

slb 95.18 128.23 34.72% 4+ 52 wk hi 2 for 1 split inc div .25 div
cop 64.25 64.48 0.36% Bought a ton of reserves .36 div
unh 60.8 66.26 8.98% 4 - 52 wk hi .03 div
ba 69 78.42 13.65% 4 - 52 wk hi .30 div
wfc 63.21 64.13 1.46% 3 - 52 wk hi .52 div
amd 27 33.59 24.41% 4 - 52 wk hi

In my November 21, 2005 letter I said: “On August first, I talked about SLB and suggested a double down was in order; I hope you did because the next time this stock sees $70 (the 3 June entry price) will be after the 2 for 1 split in mid next year.” Since then SLB has announced a 2 for 1 split effective on 10 April and increased their dividend by 25%. I now believe the post split stock will exceed $70 in early Q2 giving us a greater than 100% return in 12 months. I was impressed by the Q4 conference call; and everything I heard indicates that this is the most investor friendly stock on the planet. BA is early in its seven year aircraft cycle and just announced a major expansion of its 787 Dream Liner family based on overwhelming demand. AMD will only get stronger. Recall I mentioned that Intel was an awesome marketing machine; they have convinced analysts that they are on the comeback but they are not. Intel has no competitive solutions in the next year but their numerous announcements of vaporware and price cuts have driven AMD’s price down. Look for AMD to take more market share in Q1 and beyond, and surprise on the upside. I will hang with UNH as a baby boomer, health care play and believe they are positioned to grow.

I look at the world and I notice its “GROWING”, while my guitar gently weeps.

Please excuse my paraphrase of the Beatles White Album but it seems appropriate as Apple, the Beatles company, is again in the news for suing Apple, the computer (and music) company. The statement, “I notice its GROWING”’ implies that the growth of wealth in the world is having a profound effect on our economy and presents investment opportunities that cannot be ignored. Look at my August 1 letter on the oil patch to refresh yourself on how this world wealth growth has impacted oil demand and, therefore, prices. It turns out that this same growth is what is keeping our bond prices down. In spite of 15 consecutive interest rate hikes by the Fed, long term rates do not rise because foreign investors are starving for the security of U.S. bonds to protect and grow their new found wealth. The Fed’s Chinese water torture of 15 consecutive increases has succeeded in creating an inverted yield curve and volatility in our stock markets as investors keep betting on what the Fed b will do next; when they will stop. They have not, and will not, succeed in increasing long term rates and, therefore, our housing markets will not crash and consumers will continue to pump our economy.

This world wealth growth is also fueling a tremendous growth in demand for commodities in general. These include things like oil, of course, but also gold, silver, platinum, copper, and many other metals. I recently gave a mini seminar on planning and surviving early retirement and we discussed these phenomena. My hosts asked me to put together a sample portfolio that would exploit this growth while providing a secure return. Their goal was to invest $300,000 in this portfolio and I sent it to them last week with the following commentary:

We recently discussed the role of commodities in future markets and how we could gain financially from investing in their growth in demand. I am taking the premise that we are interested in long term investments (paying only long term capital gain taxes) rather than short term investments which we must manage on a daily or weekly basis. Remember, for short term gains to equal long term gains on an after tax basis, you must earn 42% greater gains on the short term investments; thus my focus on long term.

I have discussed the role of oil in the future economy and will not repeat that here. I will restate that the demand will not diminish and I continue to like oil services for the long term. I believe you cannot beat Schlumberger Ltd., SLB, as the most stable and most investor friendly oil service company and expect greater then 25% returns for the rest of the decade.

I also think natural gas will continue to outperform the market and I especially like EnCana, ECA, for their huge reserves and conservative growth numbers.

We talked about gold and I do not like mining stocks because of the inherent geo-political and environmental issues that frequently come into play. Holding bullion is just too difficult so I again recommend Street Tracks Gold Shares, GLD, which tracks the bullion price within 1%.

For the other commodities we discussed, copper, silver, platinum, etc; I do not trust the markets on individual entities so I again go to the infrastructure companies for long term, stable growth and therefore would invest in Fluor Corp, FLR, for the play on other non-petroleum commodities. Think of Fluor as the Schlumberger of commodities.

My suggested commodities portfolio would be:

SLB 40%
ECA 15%
GLD 20%
FLR 25%


Recall this is the commodities portion of your portfolio and should be only a small percentage (30%) of your total portfolio. We launched this portfolio last weekend and it is up about 4% in the first four days. I would use special caution on the GLD portion of this investment and buy only on dips off of yesterdays historic highs. My last recommended entry was on 14 March at $54. Enter with caution and as always, good growth lies for those who do their homework.


Notes:

BUSINESS SUMMARY
EnCana Corporation engages in the exploration, production, and marketing of natural gas, crude oil, and natural gas liquids (NGLs). The company also involves in the power generation operations with two 106 megawatt power plants located in southern Alberta and the 80 megawatt Foster Creek cogeneration facility. Further, it markets its gas products to local distribution companies, industrials, and energy marketing companies; and sells and manages the transportation of its western Canadian crude oil to markets in Canada and the United States. EnCana operates in the United States, Canada, and Ecuador. As of December 31, 2005, the company’s net proved reserves of approximately 11.8 trillion cubic feet of natural gas, as well as 1.1 billion barrels of crude oil, bitumen, and NGLs. EnCana was founded in 1971 and is headquartered in Calgary, Canada.

http://yahoo.reuters.com/stocks/QuoteCompanyNewsArticle.aspx?storyID=urn:newsml:reuters.com:20060320:MTFH11557_2006-03-20_15-16-42_N20254474&symbol=SLB.N&rpc=44

http://online.barrons.com/article_search/SB114143780138189388.html?mod=search&KEYWORDS=fluor&COLLECTION=barrons/archive

http://online.barrons.com/article/SB113538646281931076.html?mod=9_0030_b_this_weeks_magazine_main


http://online.wsj.com/article/BT-CO-20060314-005610.html?mod=search&KEYWORDS=eca&COLLECTION=autowire/archive

The Lawrence Investment Group


August 21, 2006, Update: It has been a rocky road but good returns are waiting to be had.

Brief update:


It has been a rocky road largely because of the FED’s 17 consecutive interest rate hikes and the extreme volatility this has caused. Traders are always trying to get an edge; to get ahead of what the FED will do next, thus causing huge swings in stock futures. Even the geopolitical events that cause disruptions are small compared to this. With 17 rate hikes, the FED still cannot get long term rates above 5% because the world economy is just too strong. More later.

For those who have held onto the stocks I recommended in the November 21 letter, the road has been rocky but returns are still quite good. The portfolio of SLB, COP, UNH, BA and WFC has returned 10% year-to-date for an annualized return of 15%. All of these stocks are off of their YTD highs but most of us would feel pretty good about a 15% plus return. The disappointment, of course, is UNH which is down 20% but has recently come off of its lows. The major problem is that the senior management team has let us down with their unethical antics. I think the team will be replaced (including the CEO); and they will get back on track. I still like the call for health care cost containment which grows in importance as Boomer Land grows. But, I would not argue with those who pull out now and reenter after a new CEO is in place. There isn’t much to say about Wells Fargo except that it continues to grow and pays a 3.2% dividend. What’s not to like?

Boeing continues to shine as Airbus has all but admitted defeat in the battle for the next generation airliner. Congress has introduced bills to disallow the use of federal funds to expand runways to support the new Airbus that is larger than some countries. Airbus is scrambling to introduce a smaller aircraft, but is almost a full seven year cycle behind Boeing. I have some concern that BA has lost some anticipated C17 business but still see 20% growth in this stock in the next year. I would take some profit if gains are long term.

The CEOs of the major huge oil companies are traveling around the country explaining that profits will continue to set records and do not affect gasoline prices, a very hard sell indeed. What it all means to me is these stocks will continue to provide double digit returns; and, I remain long on COP (+15% YTD), SLB (+32% YTD), and XOM (+22% YTD). The market seems to be happy that oil has fallen to $70 a barrel. These stocks may not perform like last year, but will still outperform the market. Recall we have not had any hurricanes this year; and these stocks are still positioned for 30% annual growth.

The March 30, 2006, commodities portfolio has returned 6.1 % in the five months since for an annualized return of 16%. With a strong probability of hurricanes coming and winter following, the growth of natural gas prices, and therefore ECA, should accelerate this portfolio’s growth in the second half. The growing shortage of copper should drive FLR; so, I continue to recommend this portfolio.

I have not mentioned AMD and will be glad to discuss it in a separate correspondence. For those interested; please let me know. Recall I recommended you “enter with caution and use risk money” largely because of Intel’s massive marketing ability and FUD campaigns. Suffice it to say that AMD has not missed a step and Dell is now solidly on board. AMD should be a $40 stock.

It has been a rocky road but good returns are waiting to be had.

I mentioned earlier that the growth of the world economy is what is really driving this market. We may have a slow down in the U.S.; but my guess is we will still grow at above 3% which is strong by historical standards. China is still struggling to get their growth below 20% and have raised interest rates to slow it down. Boone Pickens recently stated that there are 6.5 billion people in the world and 3.5 billion of them are in economies growing at double digit rates. We must invest in that growth.

In Q2, U.S. companies posted an average 19% profit growth on a 12% revenue growth, a torrid pace by any measure and an increase of productivity growth leveraged by technology. Q3 and Q4 profit growth is now forecasted to come in at over 15%. Profits have been growing faster than revenues for some time and current PEs are very low based on the past five year history. This means that PE growth to the past five year average will drive significant valuation increases over the next two years. There are those who argue that PEs are not that far below the 50 year average. But in the dot com age, that is an eternity and not relevant. PEs will return to or exceed the past five year average.

So, let’s find some good companies that will excel in the above environment. Caterpillar, CAT, is a must as it is key to growing the BRICK infrastructure. CAT has had a good run YTD but still has PE of just 14 and a PEG of 1.05 which is significantly lower than any of its competitors. It is trading at 83% of its one year target price; and like SLB, the CEO says they are booked out for years. They are especially strong in China where infrastructure growth will last for decades.

I also like Cummins, CMI, for all of the same reasons and a PE of only 9.19 and a PEG of 0.46. They are very near a 52 week high; so, I am reluctant to jump in today but would be very tempted on a pull back below $110 with a must buy at $105.

This world infrastructure growth continues to drive commodities (especially copper which is five years behind the demand curve) higher and the commodity portfolio I recommend in March is a good way to play that. I especially like FLR in that portfolio.

And, we do all of this because?

On my web site I talk about preserving and growing wealth; and, we sometimes wonder why that is important. In my conversations and studies about this, I find there are really two main reasons people worry about wealth. The first is to provide funds for our children’s education which can be a formidable task. Most of you are beyond that. However, for a family with two preteen children, it is likely one should be saving $1,000 a month from now until college starts to have a hope of funding a four year, in-state education for those two children. Imagine what a private school or longer program would cost.

The second reason for concern about growing wealth is to provide for an adequate retirement with the secondary goal of leaving some sort of estate to heirs. Studies show that 80% of us are not investing enough to meet this goal. Having been there, I think you should be planning to live the same lifestyle, to maintain the same spending level, in retirement as you did in working. I also believe you must plan for 30 to 35 years of retirement which means many of us will have more retirement years than working years. Therefore, in addition to investing for children’s education, you must be investing for eventual retirement years.

Many find themselves in a serious dilemma. Having spent so many years saving for their children’s education, the parents are seriously behind in their retirement savings plan by the time the kids are out of school. Add to that the “sandwich generation effect” where about the time you are finished spending on your children, you find yourselves contributing to the financial support of your parents. You find yourself in a double dilemma where retirement planning comes in last. This cycle can only be broken by wealth management and growth.

When I retired, I went to my big box investment firm for advice. They recommended that I invest in annuities so I could have 70% of what I had when working and run out of money by age 86 leaving zero for my heirs. I fired them! I began an aggressive program that has allowed us to maintain our lifestyle for the past five years while increasing net worth in excess of 50%. That is a much better program. I plan to discuss my recommendations for retirement planning in a series of future letters but do not want to bore those who are not interested. I did a brief, private seminar on this topic earlier this year and have expanded upon it. If you would like to participate in this exercise, please let me know via email.

The future may be rocky and turbulent but good growth lies for those who do their homework.

The Lawrence Investment Group

 

 

November 17, 2006, update: Get on board for year end.

 

Brief update:

 

For those who invested in the stocks recommended in the November, 2005, letter with the same title, it has been a good year by all measures.  Looking at year to date total performance including dividends, Exxon Mobile, XOM, leads the way with a gain of 31.8% followed by Boeing, BA, with 29.9%; Schlumberger, SLB, at 29%; Wells Fargo, WFC, at 21.5%; and Conoco Philips, COP, at 10.5%.  The laggard in the group was United Health Care with a loss of 22.5%; with their worst times behind them with a new management team coming on board.  This basket of stocks has a year to date annualized return of 18% with every reason to believe it will close out the year slightly better. Three of the stocks, XOM, BA and WFC are essentially at all time highs with COP and SLB at 88% of the same.  Of course, we could have locked in bigger gains by selling COP and SLB at their highs but no one is that good of a market timer.  A better call would have to been to bail on UNH earlier.

 

Except for UNH, I would stay long on all of these stocks.  Oil prices are not going below $55 and these companies will continue with near record profits. The biggest risk is government intervention with a wind fall profits tax.  We must watch for that.  We were blessed with no hurricanes or other shortages; and energy stocks still continue to soar.  Airbus has fallen on their sword again and again leaving the aircraft acquisition field wide open to BA who just gets more good news every week.  WFC stays strong and pays an outstanding 3.62% dividend on the January 3 investment price which is better than their best savings account rate.

 

CAT caught me by surprise but I like it at today’s price; and CMI never retreated to my buy target.  Performance of my commodities portfolio has cooled but has still returned 8% on an annualized basis.

 

 

Get on board for year end:

 

In Q3, corporate profit growth again outpaced the expectations of 15% and I expect Q4 to stay on pace.  The bad news we are hearing is that our economy has slowed down to a growth rate of about 3%.  The good news is the 4.5% to 5% growth rate we saw earlier was both unsustainable and inflationary.  Where we are now is the best of both worlds with steady, long term growth with little inflation pressure other than that caused by near full employment.  I remain bullish well into 2007 while watching for government intervention in energy and health care segments.  I see the next Fed move as a cut in Q1 which should continue to fuel growth and help rekindle the housing market.  Even now, mortgage rates are extremely low by historical standards and are headed downward.

 

Building and Preserving Wealth through Sound Investment 101:

 

In my August 21, 2006, letter, I mentioned that we create and preserve wealth for our children’s education, care of aging parents, and our own retirement.  The dollar value of each and all of those needs can be calculated; and their accuracy is almost entirely dependant upon your assumptions.  Education and parental care are the simplest to compute with retirement the most difficult.  The safest way to ensure adequate retirement funds is to assume that post-retirement spending will be the same level as pre-retirement spending.  Then all you need to do is create and preserve the wealth it takes to achieve those goals.

 

In doing such, I like to break your investment money into three separate piles.  At the risk of sounding too technical, I will refer to them as pile one, pile two and pile three.  Pile one is your retirement fund and includes things like your 401k, 403k, SEP, or whatever other tax deferred plan in which you can participate.  Pile one is the most conservative of your investments where preserving capital is paramount as this money must last you the rest of your life.  Pile two is for wealth growth where you can afford to take more risk in exchange for a greater return.  Pile three is your risk or mad money fund where you can take maximum risk and not be hurt if you lose it all.  Pile one, your retirement fund, should be adequate to support your lifetime retirement needs if all other piles are lost.

 

For the most secure investing, greatest diversification, and the least number of sleepless nights, mutual funds are the way to go.  This is where you should put your pile one.  As you recall, that is the money you rely on for your minimum retirement account and, therefore, where you want the least risk. It is as important to diversify in your funds as it is in your individual stocks.  You could put all of your money in large cap growth fund and take a beating while the rest of the market roars.   Therefore, I like a blend that includes large growth; small caps; specialty real estate; bonds; moderate allocation; and foreign large growth as a start. You may also consider index funds and ETFs as good, diversified alternatives.  The allocation funds allow the fund manager to move between stocks and bonds as market conditions change.  In theory, they, therefore, make money in up and down markets depending on managers’ market timing skills.  It is important to know what holdings each of your funds owns.  For example, many funds hold GE and you would not want three funds that have the same stock as their top holding.  You would also want to know the top holdings to help make decisions on what individual stocks to own.  For example, as of June 30, last year, the Fidelity Contra Fund had ECA as its top holding and XOM as number five; and I had a major position in both individual stocks in my pile two investments.  That was a warning that I was not as diversified as I thought and it was time to reallocate.

 

To stay diversified, you need at least five different funds to encompass many market segments as well as positions in bonds.  It takes a finite amount of time and work to select and manage these funds; and therefore, I would suggest no more than ten funds.  It is also essential to rebalance your funds at least annually and perhaps quarterly, especially in fast moving markets.  If you started by allocating $50,000 across five funds ($10k or 20% in each) and one fund grows at 30% while another stays flat, your allocation will be out of balance at the end of a year with a greater than 20% of your assets in the best performing fund and less than that in some others.  You should reconsider coming back into balance at the end of a year or quarter; or you may believe the trend will continue and choose to stay unbalanced.  The point is it should be an intelligent and considered decision to accept the new allocation percentages and should not be left to happenstance.  It may be especially important to take a look at your bond allocation as bonds will often change in the opposite direction of equity funds.

 

You need to balance the risk in this fund as you must preserve the capital.  You could put all of this into CDs at fixed interest and never lose a cent; but, you then find yourself in purchasing power risk.   That is, if you plan to be retired for many years and the inflation rate is greater than your investment rate of return, you are losing purchasing power.  If your retirement growth rate were 3% less than the rate of inflation, your purchasing power would be cut in half after 24 years of retirement.  We cannot approach this fund with zero risk but instead must manage an acceptable risk.

 

As outlined above, my recommended allocation of mutual funds in a retirement account has yielded 19.3% YTD which is a great return for the low risk pile.  It does however, call into question all of the work mentioned in the first part of this letter, the management of pile two, only to achieve similar results. Again, the primary difference is the amount of capital risk you take in each strategy.

 

I wish you good luck in your investment strategy; and remember that good growth lies with those who do their homework.