The markets have rocketed in anticipation of the passage of a Republican tax plan, but, shockingly, things in Washington are not moving as fast as Wall Street would like. I am not going to handicap the chances of meaningful tax reform -- affecting 2018 returns -- passing by year-end. That's not what I do. However, let's identify three safe-haven stocks to buy with tax reform possibly delayed.
What I do do is actively manage stock portfolios for individuals, and that job is harder in a runaway market. The term "safe havens" implies safe from not only the machinations of Congress, but also the impact of an orderly pullback. Really, if Amazon (AMZN) dropped back to the high-$900s would anybody be calling the coming Apocalypse? Jeff Bezos certainly wouldn't and corrections are a part of equity investing.
So I am looking for groups that have underperformed, and in terms of size, that is clearly small- and micro-caps. The year-to-date numbers do not lie:
Nasdaq 100: +29.6%
S&P 500: +15.3%
Russell 2000: +8.8%
Russell Microcap: +7.8%
It is hard to criticize the performance of a group that has posted 8%-9% gains, but in a FAANG-addled stock market, it is clear that midcap (the main holdings of the Russell 2000) and small and microcap stocks have lagged significantly this year. So, in a world in which (as I noted in my last column) Caterpillar CAT is being accorded a premium to the S&P 500 and in a world in which Tesla (TSLA) is still -- after yet another disastrous quarter -- valued at $50 billion, one has to look to the little guys for value.
I always measure value in terms of real economic return, so these the names have well-above-market yields in addition to low valuations on forward earnings.
Evolution Petroleum (EPM) . Evolution is the rarest breed among energy independents in that it has no debt. EPM has one asset, a non-operated position in the Delhi field in Louisiana, a tertiary recovery project operated by Denbury Resources (DNR) . Oil's recent rebound has eased concerns on Denbury's creditworthiness (I thought those were overblown) and DNR shares have doubled in the past 2 1/2 months.
So with no innate credit risk and its partner looking much healthier with WTI oil prices near $57 a barrel, I just don't see the risk in EPM shares. The company's management is completely committed to returning capital to shareholders, and thus EPM's 4.1% yield offers a safe-haven play with some upside if crude prices rise through $60, which I believe will happen by year-end.
Navios Maritime Midstream Partners (NAP) . As with EPM, I have mentioned NAP in many Real Money columns, so I won't belabor the fundamentals. Remember, though, unlike parent company Navios Maritime Holdings (NM) (the performance of NM's preferreds still places me #1 on Real Money's Best Ideas list) NAP operates in the oil tanker market, not in the market for dry bulk cargoes.
Dry bulk and its key index, the Baltic Dry Index, are consolidating after hitting multi-year highs, but the rates for Very Large Crude Carriers (VLCC) have only recently begun to rise from multi-year lows. There is a lot of noise in the VLCC segment due to seasonality, but I believe supply-demand imbalances are being rectified after years of overbuilding, and tanker rates are poised for the same type of rally dry bulk rates posted this summer.
The market ignores the fact that NAP's entire fleet is on long-term charters backstopped by another entity in the Navios Group, an implicit guarantee. Hence NAP's $0.4425 quarterly payout is actually safe relative to those from other, larger entities -- General Electric GE comes to mind -- and NAP's eye-popping 20.5% yield is not a mirage.
Acme United (ACU) . A soft back-to-school season dented ACU's third-quarter results and caused the world's leading scissors manufacturer to reduce guidance for 2017 EPS. That also caused a sharp pullback in the stock, and ACU shares are now trading at only 15.0x management's guidance for 2017 earnings and yielding 2.0%.
I am a big fan of ACU management, led by CEO Walter Johnsen, and I believe they will manage ACU through the transitory soft patch shown in Q3 results. I'm buying ACU shares at these levels.
--This article was originally published on Nov. 10.
