Favourite stock update

In this column, Andy Sirski explains how stocks often rise during U.S. election years, and mentions some of his new favourite stocks

History shows that industrial and financial stocks generally do well during U.S. election years like this year. One reason for this is that economic performance statistics seem to improve during election years. Statistics like the number of jobs added to the labor force and number of cars sold may go up. We might even see house prices stop falling.

We’ve seen bank stocks go up in price. The U.S. published the results of its stress tests on banks, and enough banks passed. Shares of beaten up Bank of America (BAC) are up from $6 to about $10 as I write this.

With rising bank stocks and more jobs it sounds like the U.S. economy is improving. Very little is said about how the U.S. is adding billions and billions of new debt to its total debt picture. I guess the media is saving that for after the election.

These improving statistics tend to push up the U.S. dollar, which usually pushes down the price of gold and silver.

Financial and industrial stocks generally rally during the summer of election years.

World elections

There will be elections in seven major countries around the world in 2012. Many governments might be busy pumping up their economies as the months go by. Russia already had its election. Greece and France will hold elections this spring, Mexico votes in July, and Venezuela, the U.S. and China go to the polls in October and November.

Watch out world. In 2013, all these new governments will be putting out all of their bad news early in their new term.

If all the newly elected parties start to try shrinking debt and cutting entitlements, I would expect stocks to suffer. I’ll try to avoid losses.

Pressure on gold prices

India has doubled its import tax on gold, from two to four per cent.

Farmers in India buy a lot of gold. They do not pay taxes on farm production, so after harvest they sell their crops, pay their bills, keep some money for expenses and spend the rest on gold. And, many weddings are held in the fall so jewelers buy a lot of gold after July.

The increased tax might help to hold down the price of gold and silver for a few months. But as wedding season approaches and harvest ends, there could be some pent up demand for gold. We could see a nice rally in spite of the politics and high U.S. dollar.

The Australian government wanted to raise taxes on mining profits by 40 to help balance budgets. Companies objected, so the government raised taxes by only 30 per cent. We’ll see if this works, then if other world governments try to raise mining taxes after their elections.

New favourite stocks

I’ve added a couple of new favourite stocks to my list this winter. One is Westport Innovations (WPT). The company designs and promotes engines that burn natural gas. As you likely have heard, natural gas is cheap and there’s lots of it coming to the surface so it could be cheap for some time.

With so many trucks on North American roads, this could be a big market. WPT doesn’t build engines, but it has agreements with most major engine makers around the world.

GM says it will start to take orders for natural gas engines in April for some of its trucks, so it looks to me like WPT has potential. I am up 600 shares at an average cost of $45.84.

The premiums on covered calls are quite generous for this stock. For example, on March 20, the shares are trading at $47 and the premium for an April strike price of $50 is $1.05. That’s over two per cent for a month on the value of the shares, and the stock has $3 of room to run up. I have not sold calls on my shares yet. If I did, it would likely be at the $50 strike price.

Less work more money

This year I started to sell calls four to six months out. Many readers worry that selling calls would take too much time so I decided to test selling only twice a year. On my silver stocks I was taking in about 11 per cent on our stocks, selling five months out. That would mean two transactions a year which should not make anyone too busy.

I try really hard to buy stocks at the low end of their trading range. By buying shares at the right time, I reduce price risk, and if I collect 11 per cent by selling calls for half a year, I should make some good profit.

My shares of Taseko (TK) got exercised in early March so I locked in 12 per cent on that batch of money for four to six weeks. I bought more shares and sold calls on them for another nine per cent, so I’ve locked in 21 per cent on that batch of shares and it certainly did not take a lot of work.

Sandstorm Gold (SSL.v)

Sandstorm Gold is a baby version of Silver Wheaton (SLW), which I’ve written about before. Both companies are called streamers. SLW lends money to gold miners and takes the byproduct silver as payment at a value of about $4.25 per ounce.

SSL lends money to gold miners and takes a cut of the gold produced at a value of $350 to $400 an ounce.

I really like this business model, but the earnings outlook for SSL is still quite low. And since no options are traded for this stock, there is no income to be made by selling calls. I bought 7,000 shares at a cost of around $1.43 —the shares are $1.88 as I write.

I purchased 1,000 shares of SLW at around $36, then sold a call on them for June for over $3 at a strike price of $34. The shares are $32.10 as I write, so I might buy the calls back and sell calls at a strike price of $30. That would drop my break even cost and I could wait out the summer without losing value.

The key to making money with SLW is to buy it right, preferably near the support price which has been around $29 to $30 per share. I’m ready to buy more SLW just after the price forms a bottom.

Tourmaline (TOU)

This is what is called a wet natural gas company. “Wet” means the well spews by-products that are worth a lot more than the natural gas. My average cost is over $24, but I have picked up some cash from selling calls and will continue to do that. TOU is operated by a smart management team so this one should work out eventually. But natural gas is cheap, so I doubt the price will run away anytime soon.

Cameco (CCO)

I owned 1,000 shares of CCO when Japan got whacked with its tidal wave. My cost was around $38 and I sold out at $28 plus some profits from selling calls. The shares dropped to near $17 and I started buying at $22. I’m up to 1,000 shares now, at an average cost of $22.89 and I expect to stop there.

Russia is scheduled to stop selling nuclear uranium from warheads at the end of 2012, so there will be about 10 million pounds less uranium on the market. I plan to sell calls above the price of the day to bring in cash, yet give the shares room to run up. CCO plans to open its other mine, Cigar Lake, about the time Russia stops selling. I certainly expect to make back the money I lost on CCO last year.

I’m admiring another Uranium company UEC based in Texas. It just opened last year. It’s cash cost for uranium is $18 per pound, and it has been selling uranium for $52 a pound. That stock is trading at under $4 as I write.

Silver Standard (SSO)

This silver producer used to trade for $35 but its mill broke down last November and didn’t start up again until January. Shares are down to a near support price of just under $15. I expect this stock will start to go up as soon as some earnings reports come out, but it might take another quarter or two to get investors confident in the stock. I would think that as earnings return, this stock could fight a low price for silver.

Trimel (TRL)

This stock is new to me. Eugene Melnyk, past owner of Biovail is starting up this drug — a nasal spray hormone for women that he claims has lots of potential. The results look promising but tests will take time and cost money. I bought 1,000 shares at $3.50 but they are down 50 cents and I’m down $500 so I think I will sell half and keep my losses small.

I can recover losses with stocks that have calls on them but this one does not. I often buy in stages and sell in stages so I will sell half until I can establish what the support price might be.

Sell in the money

Quite often I find I can pick up $200 to $300 per transaction for two or three weeks worth of time. For example, as I write, a decent stock — Athabasca Oil (ATH) — is selling for $11.35. But an investor could sell a call for April strike price $11 and collect $0.67 per share, netting 32 cents per share, or 2.9 per cent for a month. This is called selling “in the money” because we are selling below the price of the day. This also buys some downside protection, since the shares would have to drop 67 cents from $11.32 before we would lose money.

A personal note

On March 12, with deep appreciation I will receive an honorary life membership to the Manitoba Farm Writers at a meeting where I will be honoured for “years of work promoting agricultural issues and serving farmers through the media.”

Thank you, readers, for making this possible. I’d also like to thank John Clark, the original editor of Grainews for teaching me how to write clearly, and my wife Pat for putting up with me during the many hours I wrote for a living. It’s hard to believe I’m getting an award for doing something I really love to do. †

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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