The recent selloff in high-yield bonds is something Stansberry Research has been warning about for months.
In short, high-yield bonds (aka "junk bonds") are the riskiest of corporate credits... And until recently, they were trading at record-high prices. Yet investors continued to leverage up and buy record amounts of junk.
In addition, energy companies have become larger and larger issuers of junk bonds. So when oil began its selloff recently, it was partly responsible for sparking the trouble in the high-yield market.
Earlier this week, Bloomberg published an interview with billionaire activist investor Carl Icahn – one of the best investors alive today. (He holds a $5 billion-plus stake in Apple in his hedge fund.) Like us, Icahn is still concerned with high yield. When asked what investors' biggest risk is today, he replied...
Icahn also agreed the selloff in oil is proof of the risk in the high-yield market... Prices have plunged in the face of a single economic shock. Icahn believes the energy sector will offer huge upside... just not today...
We don't agree with Icahn's belief that oil supplies will diminish. We don't buy into the "Peak Oil" argument. We're long human ingenuity. But he's right that the cost of finding oil is growing.
Steve Schwarzman – cofounder and CEO of private-equity giant Blackstone Group – is also looking for good deals in energy.
Blackstone is nearly finished raising a new fund for energy investments, which should be larger than $4 billion. As he recently noted at the DealBook economic conference in Manhattan...
Oil is down to around $57 a barrel today, down nearly 50% from its highs in June. As Icahn and Schwarzman suggest, low prices will crush some producers. Supply will come offline. As supply dwindles (and demand potentially increases), prices will start to rise again. It's the definition of a commodities cycle.
We aren't predicting an oil recovery around the corner. But we do believe natural gas prices should bottom soon...
In the December 3 Growth Stock Wire, titled "How to Profit From Oil's Price Collapse," Stansberry Resource Report research analyst Brian Weepie explained how to profit from oil's price collapse. Like oil, natural gas prices had also gotten crushed. But Brian said natural gas was close to a rebound.
He also shared a chart of five natural gas producers that had been crushed this year. (Note that we've updated it as the price of oil has continued to fall since that essay was published.)
Shares of Talisman Energy – one of the most beaten-down natural gas companies on the list – jumped nearly 20% on Monday on word that the Canada Pension Plan Investment Board was considering buying the company. That's on top of an 18% jump the previous Friday after news broke that Spanish energy company Repsol was considering buying Talisman.
While we're not going to waste our time speculating on the specific price movements of oil and natural gas, we are certain we'll see more deals like this...
Institutional investors with plenty of cash (like Blackstone) are scouring the beaten-down energy sector in search of great assets at low prices.
But one sector of commodity stocks is actually outperforming the market: royalty companies. Royalty companies have one of our favorite business models, particularly when it comes to oil and gold.
Stansberry Resource Report editor Matt Badiali explained the gold-royalty business model in a Growth Stock Wire essay last year...
As you can see, gold royalty firms Franco-Nevada Corp. (TSX: FNV, Stock Forum) and Royal Gold Inc. (TSX: T.RGL, Stock Forum) consistently outperform gold and the Market Vectors Gold Miners Fund (NYSE: GDX, Stock Forum), which holds a basket of major gold stocks...
The strength in royalties isn't limited to gold. The chart below shows oil royalties Mesa Royalty Trust (NYSE: MTR, Stock Forum) and Dorchester Minerals LP (NASDAQ: DMLP, Stock Forum) plotted against West Texas Intermediate crude oil (the domestic benchmark) and the Energy Select Sector SPDR Fund (NYSE: XLE, Stock Forum), which holds a basket of major oil stocks...
As we've long said, royalty companies are some of the best you can own. And their recent strength versus the rest of the commodity market only further proves that.
Dan Ferris just recommended a brand-new royalty company to his Extreme Value portfolio. This company owns a rare 7% gross royalty. Over the past five years, it has earned an average of nearly $110 million per year in royalty payments.
This company has also received nearly $90 million in dividends off its equity since the fourth quarter of 2013. And it earns millions of dollars in commission through all of the production, sales, and shipping of its commodity.
As Dan summed up in the December issue...
In an internal e-mail this week, Dan told us why "right now is a golden moment for any capital provider in the mining space today, including royalty companies, private-equity firms, and other deep-value investors." As he explained...
Right now, these companies' share prices are getting clobbered as the cyclical commodity market continues to pull back. But people are also rushing to the exits to sell so that they can report tax-deductible losses for 2014...
As Dan continued to explain, if small-cap mining stocks are your thing – and we realize they aren't for everyone – now is the time to start buying...
The tax-loss selling that happens this time of year is adding more pressure to beaten-up commodities.
And while Dan isn't a fan of trying to time the market, the tax-loss selling and pullback in commodities has created a terrific opportunity to pick up high-quality stocks at massive discounts. As he explained in the November issue of
Extreme Value, "I've been preparing for this moment for 20 years."