All the talented Real Money contributors regularly meet with their "cabals" for stock market ideas, and I do this often as well, reporting back under the heading "Brush With Brilliance." Last year, I described an idea lunch I have regularly at a Hot Wings restaurant in Pasadena with a group of the smartest stock pickers I know. I christened this group the Stock PICkers, and they never fail to arrive with impressive insights. We sat down last week to trade ideas, and these are the thoughts that caught my attention.
One surprise was that two of the group, "John the Eldest" and "The Pearl", are speculating in real estate (which I mentioned in this post on the housing market). One is buying land in the Hamptons with a business partner, the other is arranging a deal to develop townhouses in southern California with an experienced developer friend.
Although I voiced my concern that the housing market feels like one of the outlets for the Federal Reserve's excess liquidity, they patiently explained why the risk in these deals was lower than average. They emphasized the comparison with nearby market conditions, the prevailing rental rates, and so forth. The lesson here is that a macro view may be worrisome, but that does not mean you cannot find good individual deals on a case by case basis.
As for liquidity, I said that I thought Japan is the controlling factor in world markets now, and I questioned the willingness of investors to loan to the Japanese government at 50 basis points when inflation there was 2%.
The Pearl made the great point that if what you want is a name with revenue in dollars but costs in yen, you should look at SanDisk (SNDK). SanDisk has a joint venture with Toshiba for the production of its ubiquitous flash memory cards, and is well-positioned against this currency cross. The stock is up 31% year to date so the market has noticed, but if yen depreciation is a long term play SNDK could work for a while.
"Swiss Sean" is enamored of opportunities in frack water treatment, recognizing that although natural gas prices are low, the environmental needs are high. Thus, fracking is here to stay in the US and will expand overseas. He likes Nuverra Environmental Solutions (NES), formerly known as Heckmann Corp. Nuverra has a number of business segments related to water transportation and treatment. The stock was crushed when natural gas exploration and production slowed down in the face of low prices, but the stock seems to have stabilized and he likes the long-term outlook.
"The Donald" is itching to short Sanderson Farms (SAFM), the giant chicken producer. Chicken pricing is in an up cycle at the moment, and the stock is reacting accordingly - up 90% in the last year. While he is not critical of the company or management per se, he points out that chicken prices are highly cyclical, and a downturn is inevitable as the supply response induces softer pricing in the months ahead. The chart is definitely in dangerous territory, but he points out the need to be careful because shorting momentum is always a challenge until the momentum breaks, which it hasn't yet.
John the Eldest is a fan of Hertz Global Holdings (HTZ), due to the consolidation in the rental car business that has left a few oligopoly players with far greater pricing power. Hertz is a marquee name with the best ability to raise prices, and is diversified across price points/market segments with the acquisition of the Dollar and Thrifty brands. The stock is at all-time highs, but the Eldest notes that it is still cheap, trading at only 3x cash flow.