Question: I own this stock: Provident Energy (PVX). It pays dividends monthly at about 10% per year. What do you think? — Harry (Hardyston, NJ)
Jonathan Hoenig: Like almost everything energy-related, Provident Energy has been a huge winner in 2005, rising from $9.50 in January to over $12 in October. The stock currently rests at about $11.50.
The catalyst for such outstanding growth has been higher prices for crude and natural gas, which Provident holds in abundance. Like other energy trusts, the company pays monthly dividends, making the stock attractive to income investors looking for high yields not directly affected by changes in interest rates. The goal is to maintain a stable distribution which, as you point out, currently sits north of 10%.
Unlike similar companies, however, Provident follows a balanced strategy that pairs investment in oil and gas production with infrastructure assets, such as pipelines and storage facilities. Even so, the stock tends to trade along with SJT, BPT and other commodity-sensitive names. Meaning that, Provident's success will be closely tied to the price of oil and natural gas.
The good news? Both appear to be exhibiting bullish signs. Assuming the stock doesn't represent a large portion of your overall portfolio, I think a position is appropriate. But I'll also admit that my hedge fund has no position in the stock at this time.
Question: Regarding the volatility of stock prices, sometimes I see a price of a stock go up or down by a large amount, even without any news or market conditions that may explain the change. For example, Nokia (NOK) went up 2.5% on Friday, September 30 without any news of note on a day that the overall market was otherwise flat. What causes such volatility without any apparent explanation? — Tom (MCSD)
Jonathan Hoenig: There is no "right" price for a stock. Investors, from Ma and Pa Kettle with 100 shares of GE (GE) to huge mutual funds with 100,000 shares of IBM (IBM) are constantly evaluating a company's prospects.
We buy and sell based on our own individual outlook. Some trade for fundamental reasons, such as buying the stock because they foresee the company's hot new product boosting sales. Others trade for strictly personal reasons, such as selling shares of Cisco (CSCO) to pay for the down payment on a new home. It is that constant shift in the supply and demand for shares that prompts a company's stock to move. A big investor deciding to trade a large amount of shares can easily push the price around, at least for a short period of time.
Over time, however, a company's stock always ends up reflecting its fundamental outlook, which is why short-term volatility — especially as minor as +/- 2.5% — shouldn't have much of an impact on your decision-making process. Stocks aren't savings accounts or bank CDs. They fluctuate — they always have and they always will. If you can't sleep at night because you are worried about your portfolio, I'd consider reducing the size of your positions.
Question: Is gold a good investment at this time? Thanks. — Robert
Jonathan Hoenig: To quote the Bible (and the Byrds), "'To everything there is a season, and a time to every purpose under the heaven." No matter what you think of the "barbarous relic", the fact is that gold and most other precious metals are very much "in season" right now. Both copper and platinum have recently traded at all-time highs, and gold prices have climbed to levels not seen since 1982.
Why invest in gold? The best-articulated case for gold I've read was written by none other than Alan Greenspan more than 35 years ago. In an essay later reprinted in Ayn Rand's "Capitalism: The Unknown Ideal," Greenspan outlined how, "in the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."
It is easy to understand gold's appeal. While the value has fluctuated over time, the fact that it has value hasn't changed for 5,000 years. In all practical terms, gold is money. It has no board of directors or debt. It will never rust, decay or file Chapter 11. Gold boasts no Ebitda, nonexpensed stock options, conflicts of interest or accounting tricks. Gold is beholden to no one. It doesn't do anything...it is simply owned.
In recent years, trading gold has become much easier thanks to the successful introduction of two exchange-traded-funds (ETF) that track the price of the metal nearly tick for tick.
StreetTracks Gold Shares (GLD), which started trading on the New York Stock Exchange last November, and the iShares Comex Gold Trust (IAU), are designed to track the spot price of physical gold, with a share representing one-tenth of a troy ounce of gold, less expenses. And while the big moves take time, I believe gold will eventually surpass its early 1980s highs of $800/ounce. To that end, I'm putting my money where my mouth is: My hedge fund currently holds positions in both gold bullion and gold-related securities.
Question: Is Wal-Mart a good stock pick for the mid-to long-term? Should one consider this a contrarian stock and buy now? The company always makes more money than it did the year before. Thanks. — Steve
Jonathan Hoenig: As economist John Maynard Keynes pointed out, "in the long run, we are all dead." In my experience, you can't look too far out into the future when it comes to evaluating stocks. The best indicator of how a stock might act is how it is acting in the here and now.
Wal-Mart is a terrific, inspiring American success story. And as you point out, they company remains resoundingly profitable. But a company and its stock are two different things altogether. We don't trade revenue, sales or earnings — we trade the stock. That should be the focus of our analysis.
During the 1990s bull market, this was one of the "must-own" names that dotted almost every portfolio. Unfortunately, Wal-Mart's shares have lost much of their luster in recent years. While sectors such as real estate and energy have skyrocketed, Wal-Mart's shares have stalled, currently sitting not far off from where they traded back in 2000. While the company will continue to make money, I don't foresee the valuation expansion experienced in the 1990s to be repeated anytime soon. Shortly put, the story is "out." It's not cheap enough to be a value stock, yet not growing fast enough to be considered a growth play. Not my type of investment.
Finally, the fact that the company has been so sheepish in addressing its numerous detractors on issues such as benefits and hiring practices doesn't help either. Wal-Mart's great success has been predicated on low prices, excellent service and high customer satisfaction, not ruining small-town America and screwing its employees, as naysayers would have you believe. The company's first step to boost the stock price is silencing its critics by reaffirming a moral right to profit through lawful, voluntary, unregulated trade. That's the American way!
Question: What do you foresee for LSI Logic (LSI) in the coming year? Will it perform in tandem with the chips, or turn in a better performance? Any guess as to what it will sell for in October, 2006? — JT in Idaho
Jonathan Hoenig: Hard to imagine that LSI Logic, now at roughly $9/share, traded up at $90 during the 2000 tech boom. But it did — and given the recent developments in semiconductor stocks, I'm prone to believe that shares are well-positioned to continue their bullish trend.
Like birds flying south for the winter, stocks tend to move in groups. A rising tide tends to lift all boats, so if chip stocks continue to rise, LSI Logic should come along for the ride. While my hedge fund doesn't currently own names in the sector, my top choices among semiconductors include KLA-Tencor Corporation (KLAC), Lam Research (LRCX) and Texas Instruments (TXN). Assuming the strength in technology stocks continues, it's quite easy to imagine LSI Logic, which traded over $11 back in 2004, might be able to again eclipse that peak. As always, I encourage you to trade prudently and in accordance with your own portfolio goals and tolerance for risk.
Folks, this market is keeping everyone guessing at what comes next! Here at the FOX Biz Team, it is our honor to help you navigate the ride.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and is a markets columnist for Smartmoney.com. He appears regularly on FNC's business program Cashin' In.