by Michael Tarsala
Patience is a virtue.
Stubbornness is not.
It rarely, if ever benefits an investment manager to be stubborn when it comes to stock selection — especially when it comes to stocks that might run the risk of underperforming when markets become volatile.
That’s why Tyler Kocon swapped out some well-known names in his Equity Rotation model, as well as a lesser-known one in his Bakken Shale model, making room for two gas-related stocks he thinks might fare better going forward.
Here are the details on his latest moves:
Equity Rotation model: Sold GE and CLF, proceeds used to purchase UGI
We like General Electric (GE) and Cliffs Natural Resources (CLF) , especially from a dividend point of view. However we are concerned about each company’s exposure to both Europe and China.
GE garners around 20% of its sales from Europe. And CLF is highly levered to China. In our opinion, both companies would perform adversely in a global slowdown.
We purchased gas utility UGI Corp. (UGI) on the premise that there is a fairly predictable seasonal trade that takes place in natural gas between July and December.
UGI is fairly correlated to natural gas prices and offers a attractive yield in order to protect against any downside pressure.
In addition, UGI will benefit from the recent warm spell that has gripped the nation from coast to coast. They also are a power producer, which is tied to air conditioning) use, and a natural gas marketer. Gas is increasingly being used as a source of power generation.
Bakken Shale model: Sold TRN and purchased SE
We like Trinity Industries (TRN) for its exposure to the railcar industry and the opportunity that it has in selling additional cars to mid-continent shale marketers in order to extract oil from areas including North Dakota and the Gulf Coast for refining. They offer a pipeline-on-rails alternative, and aid in offering a solution to the overused pipeline system.
But we chose to sell it because only about a third of its business is railcar leasing and sales. The other two-thirds is barge construction and storage tanks. We are concerned mostly about the “other two-thirds” in light of a global slowdown. Although oil-car sales represent a large part of their leasing and car sales, they do sell other cars. So any of the gains they may make in oil-car sales may be offset in the potential decrease in coal hopper- car sales due to suppressed coal prices and demand.
We purchased Spectra Energy (SE) as a natural gas trade for many of the same reasons I mentioned above in the Equity Rotation trade rationale. SE is one of the largest transporters and storage centers for natural gas and could benefit greatly from the domestic gas-shale boom.
