Since the market is down a lot since the start of the year, I checked Archer Daniels Midland (ADM) to see how it was faring in comparison to the rest of the market. Indeed, ADM is the place to be. The other 4 companies mentioned in a previous post about ethanol are all down from their price 6 months ago. A lesson learned is not to pick companies with their eggs all in one basket. The question is now, whether to hold on to what you have or to sell and take your profits.
It has been just over a year since I’ve been investing seriously in stocks; and I’d like to recap how the market has treated me and what I’ve learned over the last year.
1) Know When to Take a Loss
Every informed investor should be aware of the overwhelming problem in the subprime mortgage market that has tumbled over into the prime mortgage sector, homebuilders, and consumer spending. For a little over 2-months, I owned Accredited Home Lenders Holding Company (LEND). LEND melted down to a low around $6/share but is currently still far from their 52-week high of $36.95. Luckily I saw the negative signs early and took a minor 10% loss. If I had held until today, I would have realized a 60% loss. Some people will not want to write down a loss, but sometimes you have to figure out why a stock is down and understand if it has the fundamentals to rebound or not. In the case of Accredited Home Lenders, I didn’t see any kind of foreseeable stabilization in the housing market and I got out.
2) Ride Momentum For Big Gains
In my Las Vegas Sands investment, I got a 72% gain in just under three months and I rode the stock to new yearly highs. Instead of pulling out with a 10-20% gain, I saw the positive signs of their Venetian Macau opening, Singapore hotel casino in the works, and other investment options. Of course, I would have been up 90% if I had held it, but another thing you have to do to be a good investor is be happy with your gains, and don’t let it affect other investments. Even when LVS dropped 20 points in mid August, I knew they had good fundamentals and global growth opportunities and I wasn’t in any rush to sell.
3) It’s Hard to go Wrong With Oil/Energy
I made a lot of trades with oil and coal companies, and those companies would have provided me with even better overall gains if I had held them longer. With oil at an all time high and staying in the $80/barrel range, it is only time that is standing in the way of $100/barrel oil. Unlike technology that can get outdated, oil is not being replaced soon by any other commodity.
4) Diversity is Difficult
I truly believe that it’s extremely difficult to have a completely diversified portfolio of stocks unless you have at least $30,000 to invest. That way, you can invest in $3,000 blocks and have no more than 10% of your portfolio in any one stock. If you only have $2,000, that can buy you 2 shares of Google and 7 shares of Apple. On top of that, each stock represents 50% of your investments. Never put all your eggs in one basket so even if you have less than $30,000, at least try to invest in different sectors. As you can see in my stock investments below, I had investments in oil, coal, retail, housing, casinos, ethanol, and technology.
5) Just Make Money
For young investors, go ahead and take those short-term capital gains. Don’t worry about saving taxes by holding your stocks for more than a year because who knows if you’ll even have a positive return later. If you make a 10-20% gain in a few months, I would take those gains so you have a cushion before dipping into another investment. It is also a very good psychological boost to know that you are making profit.
My investments dating back to as far as September 2006 are shown below. I have provided information on the short term capital gain or loss that I incurred. I also included the current gain or loss I would have if I had held the stock until today.
|Company||Ticker Symbol||Actual Gain/Loss||Current Gain/Loss|
|Peabody Energy Corporation||BTU||03.93%||35.80%|
|Peabody Energy Corporation||BTU||09.05%||42.48%|
|Peabody Energy Corporation||BTU||09.19%||38.91%|
|BJ Services Company||BJS||00.55%||-10.48%|
|Accredited Home Lenders||LEND||-10.17%||-60.34%|
|BJ Services Company||BJS||12.13%||00.90%|
|Las Vegas Sands||LVS||71.81%||90.07%|
|Archer Daniel Midlands||ADM||03.79%||03.79%|
So I have a position in Archer Daniels Midland, ADM (just bought last week actually), and I see them as the safest and best play if you want to get involved with the ethanol industry.
Reasons I like them:
- They’re not a pure play ethanol company like Aventine Renewable Energy (AVR)…696-million gallons of ethanol in 2006, Pacific Ethanol Inc. (PEIX)…..102-million gallons of ethanol in 2006, Verasun Energy Corporation (VSE)….226-million gallons of ethanol in 2006, and US BioEnergy Corporation (USBE)…250-millions gallons/year. Some of these pure play ethanol companies IPO’ed in 2006, went up initially and have been in a downward spiral to their current prices. These companies are more affected by the price of corn and news related to ethanol (like government bills on alternative energies, crop allocation to corn, price of related commodities, etc)
- ADM on the other hand does more than just produce ethanol. They have three different business sectors: oilseed processing, corn processing, and agricultural services. They process oilseeds, such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed into vegetable oils and meals that are geared toward usage for the food and feed industries. They have corn operations that produce syrup, starch, glucose, dextrose, and sweeteners. They also have wet corn milling plans with an international presence in Bulgaria, Hungary, Romania, Slovakia and Turkey. It also doesn’t hurt that they’re the largest US ethanol proiducer.
Reasons that would go against them:
- CORN PRICES. Corn prices were above $4/bushel earlier this year and right now they’re hovering around $3.50/bushel. These prices are more than double what corn has been per bushel a couple years ago and many people will say that as the demand for ethanol increases, corn prices will increase. Thus, making it harder to profit on ethanol when corn prices are so inflated. Does anybody know where I can find charts on the historic prices of corn?
- Corn can be used for other things like food, feeding chickens, and using grain to feed cows. When we have all these other uses for corn, it’s hard to dedicate a huge proportion toward corn-based ethanol development. That is one reason why the Bush administration plus many others are touting a huge push toward cellulosic ethanol (for another post) over corn-based ethanol. But right now, corn-based ethanol is our best form of carbon-neutral energy so that’s why we’re all so green right now.
ADM was recently upgraded to buy with a $40 price target and it seems like they face a resistance at $35 based on moving averages. Would you guys buy into it? Would you wait and see how we evolve in the development of ethanol into this country? Or maybe find “better” energy investments like oil, solar power, or wind energy?
Be aware that their next earnings release is July 30 and ADM missed analyst expectations of .61 per share compared with an EPS of .51 for the last quarter. That news coupled with higher corn prices and lower than expected profit in the agricultural services was what drove ADM’s stock price down from around 39 to as low as 33’ish last week. In the long run, a lot of companies trying to get into ethanol won’t make it, but ADM will be one that will survive due to their diversity in products and their current huge presence in ethanol development.
This year, 6-billion gallons of ethanol were produced, and there’s a bill in the Senate calling for 35-billion gallons of ethanol production in 2017. The U.S. Department of Agriculture estimates that a maximum of 15-billion gallons a year of corn ethanol could be produced in the United States without causing a significant increase in food prices. So what to do about that extra 20-billions gallons of ethanol? Well that’s for another posting. Regardless, any increase in ethanol production should suit ADM very favorably. And trust me, any presidential candidate to replace Bush would support ethanol. It would not be in their interest to not support it.