From the lows… The Nasdaq alone has rallied about 24% in just 2 months. Does that mean we’re out of the woods? I recorded a 3-minute FREE video (I do this every week) revealing what I see happening in the market. And, even better, I compare this rally to the 2000’s tech bubble and the …
Ever since the onset of the pandemic, one consistent characteristic of the global economy has come to the fore again and again: shortages of physical goods.
The latest shortage to rear its head is a worldwide shortage of fiber-optic cable, driving up prices and lengthened product delivery times and endangering telecommunications companies’ ambitious plans to roll out state-of-the art 5G telecommunications infrastructure.
Fiber-Optic Cable Shortage
The consultancy CRU Group says cable shortages are particularly acute in Europe, India, and China. In those locations, prices for fiber-optic cables have soared by up to 70% from the record lows in March 2021, from $3.70 to $6.30 per kilometer (1 kilometer = 0.621371 miles).
Overall, the price for fiber-optic cable has now reached its highest levels since July 2019. And lead times for some products have stretched out from just 20 weeks to nearly a year for many smaller customers.
As CRU analyst Michael Finch told the Financial Times: “Given that the cost of deployment has suddenly doubled, there are now questions around whether countries are going to be able to meet targets set for infrastructure build, and whether this could have an impact on global connectivity.”
CRU told the Financial Times that total cable consumption jumped by 8.1% in the first half of 2022 compared with the same time last year. China accounted for 46% of the total; North America came in as the fastest growing region, with a 15% year-over-year increase.
So why have the shortages occurred? The answer is the same as in the semiconductor industry: shortages and rising prices for many of the crucial components that go into making fiber-optic cables.
There is an ongoing shortage of helium, a key component in the manufacture of fiber-optic glass, thanks to plant outages in both Russia and the U.S. This has caused helium prices to spike by 135% over the past two years. In addition, CRU reports, prices of another key component in fiber production, silicon tetrachloride, have increased by up to 50%.
The CEO of Corning (GLW), Wendell Weeks, said to the Financial Times, “In my professional career I’ve never seen anything like this inflationary crunch.” Corning, which is the biggest producer of fiber-optic cable in the world and played a major role in inventing the technology in 1970, is ramping up production capabilities to meet soaring demand coming from governments, telecoms companies and big tech groups like Amazon, Google, Microsoft and Meta. The company is building new facilities in both the Europe and the U.S.
Let’s take a closer look at Corning.
Corning: Fiber Optics and More
Corning is much more than just a producer of fiber-optic cables: the company is a materials science giant with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. Corning is also the leading global supplier of precision glass for liquid crystal displays, and participates in the environmental business, with a focus on emission substrates for gasoline and diesel engines as well as producing polysilicon for the solar industry.
The company is also active in the life sciences business, producing vaccine vials. Its specialty materials operations produce Gorilla Glass, the fast-growing, tough-cover glass used in smartphones and tablets.
In its 170 years of operation, the company has always been an innovator, including inventing the aforementioned glass optical fibers and ceramic substrates for catalytic converters. That innovation is a direct result of Corning’s ability to use its scale to invest heavily in research and development—$1 billion or more per year—and spread these expenses across its five segments: optical communications, display technologies, environmental technologies, life sciences, and specialty materials.
Corning is a winner in many of these segments, with a leading market share in four distinct end markets: optical fiber, display glass, cover glass, and emissions substrates/filters.
But, most importantly, Corning, being a key enabler of 5G networks, has a product portfolio that’s nicely aligned toward the worldwide secular trends of increasing connectivity and efficiency.
Secular demand strength in this segment will offset any weakness in demand elsewhere. For example, in the second quarter, the optical fiber segment grew 22% year over year. That turned Corning’s results from just average to a good overall result.
Argus Research said this about Corning: “In our view, GLW shares appear to more than discount the challenges ahead, without fully reflecting the myriad opportunities in Corning’s varied end markets.”
I totally agree, making GLW a buy anywhere in the mid-to-upper $30s per share.
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Unusual options activity placed Energy Select Sector SPDR ETF (XLE) into the spotlight last week. It turns out a massive options trade of 150,000 contracts traded in a spread, with about $16 million of capital required. This one trade accounted for nearly half the options traded on the day. It appears the position may be …
Last week I spent two days on the road. While driving, I like to listen to business news from CNBC and Fox Business, via SiriusXM radio. I especially like listening to the opinions, and everyone sure has one.
My takeaway from listening is that we’re entering a great period for buy and hold investors – if you know where to look, that is…
Fox Business noted that a 40-year bull market that started with a bottom in August 1982 may have ended. At that time that it began, the Dow Jones Industrial Average bottomed at 776. It now stands at 32,774.
In other words, buy and hold works if your time frame is long enough.
Growth stock investors are facing a dilemma. The growth for profitable companies is slowing. The companies may continue to grow, but at slower growth rates year over year. What does that mean for stock values and valuations? It may take a few months to a few years for the market to figure out what multiples (P/E ratios) should be put on these stocks at lower growth rates.
Non-profitable growth stocks have a problem. Investors are no longer interested in putting in more money now to maybe reap big gains years down the road.
Reddit meme stocks are back in the news, and we’re seeing big price swings with Bed, Bath and Beyond (BBBY), AMC Entertainment (AMC), and GameStop (GME). The online bulletin board crowd watches the short interest in these stocks and then piles in to squeeze the shorts when the selling gets out of hand. One would think that the short sellers would get a clue. I love to see shorts lose their shirts.
One analyst on the radio discussed 3M Company (MMM). This stock has a 4% yield and 63 years of dividend growth. The five-year dividend growth rate isn’t terrible, at 5.4% per year. This is a stock that, if you have 20 years to lock it away, could slowly make you rich.
The big picture is that no one knows when the stock market will return to significant share price appreciation. I suspect we will have several years of the major indexes going nowhere, which will come with waves of 10% uptrends and similar downdrafts.
Investing for high-yield income makes more sense than ever. My Dividend Hunter recommendations list has an average yield greater than 8%. That yield is real cash flow that can fund a retirement or be reinvested to compound and to take advantage of the expected market volatility.
Out of the second quarter earnings, I want to put my money into the good (there is plenty of bad) finance REITs. Recently I made Starwood Property Trust (STWD) the Dividend Hunter Stock of the Week—you can count on an 8%-plus yield for years to come. And to get a high-yield, low-risk Stock of the Week every week, sign up for Dividend Hunter right here.
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Forget oil—the real money is in natural gas.
Or at least that’s the message coming from a pioneer of the U.S. shale revolution, Chesapeake Energy (CHK).
From Prince to Pauper to Prince Again?
Once upon a time—when its stock was valued at more than $35 billion and its CEO, Aubrey McClendon, had the biggest pay package of any CEO of a listed firm—Chesapeake Energy was America’s best-known fracker.
But those glory days disappeared quickly, and Chesapeake became the poster child for the shale sector’s excesses.
About a year and a half ago, in the autumn of 2020, Chesapeake was in the midst of bankruptcy proceedings after the coronavirus pandemic-led crash in energy demand proved to be the final straw in the company’s fall from grace.
And for the industry more broadly, the prospects for liquefied natural gas (LNG) exports were looking bleak after a $7 billion contract to supply the French utility Engie went down the tubes on concerns over the emissions profile of U.S. natural gas.
Fast forward to 2022 and the picture has changed dramatically. Natural gas exports are booming!
Thanks to the Russian invasion of Ukraine and subsequent sanctions, Europe is in the middle of an energy crisis. It is buying up as much American LNG as it can. Those concerns about emissions are long forgotten.
In the first four months of the year, the U.S. exported 11.5 billion cubic feet a day of gas in the form of LNG, an 18% increase from 2021. Three-quarters of those exports went to Europe. And European leaders have pledged to ratchet up their imports by the end of the decade. There is also a massive opportunity in Asia, where LNG demand is set to quadruple to 44 billion cubic feet a day by 2050, according to a recent report released by think-tank, the Progressive Policy Institute.
And even here in the U.S., natural gas supplies look set to be tight this winter. Hot summer weather and high demands for power generation are sucking up supplies and leaving storage precariously low.
The investment bank Piper Sandler believes U.S. storage is on pace to fill just 3.4 trillion cubic feet of gas by the time winter arrives. That would be short of the 3.8 trillion cubic feet buffer usually needed to heat the country through a cold winter season. That could send already-elevated natural gas prices even higher in the months ahead.
These factors combined were behind the decision by Chesapeake Energy management to ditch oil in favor of gas.
Chesapeake: All in on Gas
OnAugust 2, Chesapeake announced its plan to exit oil completely and return to its roots as a natural gas producer. The company said it would offload oil producing assets in south Texas’s Eagle Ford basin, allowing it to focus solely on gas production from Louisiana’s Haynesville basin and the Marcellus Shale in Appalachia.
Its CEO Nick Dell’Osso said the company made the decision because of better returns from its gas assets—it has had more success driving down costs and improving efficiency there when compared with oil.
Chesapeake emerged from bankruptcy in February 2021, vowing to shift from its previous model of growth at all costs to one of capital discipline and higher shareholder returns.
The company has expanded its natural gas portfolio of assets since its emergence from bankruptcy. It bought gas producer Vine Energy for $2.2 billion last August to bolster its position in the Haynesville, which sits close to gas-export facilities on the US Gulf Coast. And in January, it bought Chief Oil & Gas, a gas operator in north-eastern Pennsylvania’s section of the prolific Marcellus shale field, for $2.6 billion. Chesapeake also recently offloaded its Wyoming oil business to Continental Resources, the company controlled by shale billionaire Harold Hamm.
In summarizing Chesapeake Energy’s strategy, Dell’Osso said, “What’s different today than the past… is that we are allocating capital in a way that maximizes returns to shareholders, rather than maximizing [production] growth.”
Speaking with the Financial Times, Del’Osso added: “The industry was built on [oil and gas production] growth expectations, and company stocks were valued on growth expectations. That all had to get broken down.” The “reset” had been painful, but management teams would stick with the new model, the CEO said.
The strategy seems to be working. In May, Chesapeake reported record-high adjusted quarterly free cash flow of $532 million from the first three months of 2022.
Also in the second quarter, it announced an agreement to supply gas with the Golden Pass LNG facility. Golden Pass LNG is a joint venture company formed by affiliates of two of the world’s largest and most experienced oil and gas companies: QatarEnergy (70%) and ExxonMobil (30%).
The company now plans to pay $7 billion in dividends over the next five years. That is equivalent to well over half of its current market capitalization!
Chesapeake boasts of its best-in-class shareholder return program. It has completed about a third of its $2 billion share and warrant repurchase program, and it raised the base dividend by 10%, to $2.20 per share annually.
The company has a juicy variable dividend as well. Its next quarterly dividend will consist of the $0.55 per share base dividend and a variable dividend of $1.77. Management projects that, in the third quarter, it will pay out total dividends of $275 million to $285 million. The total dividend payout for 2022 should come in at between $1.3 billion and $1.5 billion.
Chesapeake’s yield is a very impressive 10% and I do not see that changing much as gas prices stay elevated. The stock is a buy anywhere in the $90s.
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“Trade with the trend” is a common phrase used by traders. Meaning, only trade in the direction of the current trend i.e. if stocks are going up, only trade long… if stocks are going down, make bearish trades. I agree for the most part. But, as you’ve noticed in the last couple weeks… bear market …
Hedging against downside protection can be expensive. Using options can alleviate some of the cost by utilizing a spread trade, such as a butterfly. A trader recently placed a large put butterfly on for August in SPDR S&P ETF (SPY) options. The trade only cost 20 cents in premium but could pay out significantly more …
Using covered calls on index ETFs is a popular way to produce additional cash flow from holding stocks. For instance, the SPDR S&P 500 ETF (SPY) is not only the most heavily traded ETF in the world, but it’s also commonly used for covered call trades. A large block of covered calls seemingly traded last …
I’ve come to think that while some companies strive to make Wall Street analysts and large portfolio managers happy, others put common investors like us first. A company’s dividend policy will be a telling factor about on which side a company’s management team and board of directors fall.
Small investor-friendly companies pay out a significant portion of profits or cash flow as dividends and continuously strive to grow their dividend rates. Investing in stocks like these, with attractive yields and growing dividends, is a proven strategy for building wealth.
Here are some clues that tell you a company is more focused on making the Wall Street analysts happy…
Companies refer to share buybacks as “returning capital to shareholders.” I don’t see it working that way. If my shares are repurchased, I am no longer a shareholder. The theory is that buying in shares reduces the share count, which will help increase earnings per share (EPS) for those who remain shareholders after the buyback. But as we all know, growing earnings don’t always boost the share price. Without a corresponding dividend increase, I see share buybacks as throwing money (sometimes a lot of money) down a hole.
Environmental, Social, and Governance (ESG)
Large pension and other fund managers put a lot of weight on ESG scores. These types of investment pools are so large that they have no potential to produce above-average returns, so fund managers can help themselves feel better by investing in companies that are working to save the planet.
Unfortunately, I doubt whether the ESG rules and scores, at least as they currently exist, do much good for the environment or investors. I know they can make a CEO feel better about keeping a corporate jet if they fund the seeding of the rainforest, but I have not noticed how an overly heavy focus on ESG helps my net worth grow.
In contrast to the Wall Street analysts and big money fund managers, we, as individual investors, most want to see our brokerage and retirement accounts grow with above-average total returns. How much you make depends on your risk tolerance and how aggressively you invest, but a significant portion of your returns should be in the form of cash dividends.
The shutdown of the economy due to the pandemic forced many companies to change their dividend policies. Now, two and a half years later, I am watching closely to see what companies continue their pandemic changes versus making a return to taking care of individual investors with great dividend policies.
Here are a couple of examples:
Last week, Main Street Capital (MAIN), a top-tier business development company (BDC), announced an increase in the monthly dividends the company will pay in the fourth quarter. The new dividend rate of $0.22 per share gives the third half-cent increase since the beginning of 2020. Main Street Capital also pays supplemental dividends when its profits allow, and a $0.10 bonus dividend will be paid in September. This is one of those conservative, investor-focused companies from which investors can count on stable, growing monthly dividends.
In early 2021, upstream oil and gas producer Devon Energy (DVN) announced a new dividend policy to pay out 50% of free cash flow as dividends to investors. The dividends are a combination of fixed and variable components. Since the start of 2021, the fixed dividend has grown from $0.11 per share to $0.16. Total (fixed-plus-variable) dividends paid for the last six quarters have been $0.34, $0.49, $0.84, $1.00, $1.27, and $1.55 sequentially. As the price of oil rose and Devon became more efficient, the company rewarded investors with rapidly growing dividends. Based on the $1.55 payout declared last week, DVN yields 10%.
The financial and stock market world is geared to the wants and wishes of Wall Street and the large money they advise. As individuals, we need to dig out those dividend-paying companies that want to help small investors grow their wealth and income.That’s exactly what I do with my “Diamond Dividends” strategy, which lets you increase your income by up to 108% in just 7 months, without any options or trading. See for yourself right here.
Yields on 10-year notes are dropping… Which has flipped the switch on one particular sector to turn pretty bullish almost overnight. As yields come down… Bond buyers are less interested and search for other sectors to find a healthy yield. I’ve found a conservative play to park some money in right now. It’s not going …