Everywhere I go, people keep asking me for a war portfolio -- they ask me, How to get in shape for the coming war with Iran?
These people think we are whistling past an escalation of a long-simmering conflict, and they believe that there is something to worry about, something big to worry about.
So I will accede to the requests and give you my "the world is too dangerous a place" portfolio, which reflects imminent conflict including an attack by Iran on the U.S. followed by retaliation of some sort, including the 52 varieties of targets that President Donald Trump has selected if the Iranians do what they say they are going to do -- whatever that is. Perhaps it's the closure of the strait of Hormuz with its 21 million barrels going through every day. Perhaps it's a cyber attack. Perhaps its conventional weapons. This portfolio will work under any of those scenarios.
First up: cash.
You are not going to like what you are going to hear, but you are going to make next to nothing on your cash. When I look at the value of treasuries, I like going out three years. You most likely think that a war is not over too quickly. Going out three years covers you. I think the opportunity cost here is monstrous: You earn only 1.6%, when I can get you some very fine common stocks with much better yields (more in a moment). But cash is king in these kinds of situations.
If you want to avoid individual treasuries, and you trust money market funds, I see money funds getting a slightly better rate than that. I would put half of your money in cash, no matter what age you are, because that would be a true war-time allocation portfolio, within the context of what else there is to offer. With that big a position, you will be ready for anything.
Second, you need to own gold. I prefer buying the bullion or the exchange-traded fund, SPDR Gold Trust (GLD) , which gives you better liquidity. But it is, in the end, a stock, and those who fear a war would be better served by owning the bullion. This is tricky, however, so you should hold it outside the U.S. for true safety. You open a deposit box in a foreign country and put it there.
Too extreme for you? Not enough profit, even as I see gold going up as much as $500, to slightly over $2,000, from $1,564 if there is a true out and out war? Two options: a value play and a growth business. The value play? Barrick Gold (GOLD) , $18.55 down a buck and a half from its high with the symbol GOLD, which you might remember being the symbol for Randgold, fitting given that it is now run by Mark Bristow, the old CEO of Randgold.
I like the company, because the assets are tremendous. But the combined company has only just begun to really gel, having announced the share-for-share merger near the end of 2018. Excellent cash flow. Recently raised dividend. As the company said when it merged: "Our overriding measure of success will be the returns we generate and not the number of ounces we produce, balancing boldness and prudence to deliver consistent and growing returns to our fellow shareholders a truly simple but radical and achievable concept."
I have always been a huge fan of Bristow, one of the best in the business and at the time of the deal he said, "Our industry has been criticized for its short-term focus, undisciplined growth and poor returns on invested capital."
But, he said, "The merged company will be very different. Its goal will be to deliver sector leading returns and in order to achieve this we will need to take a very critical view of our asset base and how we run our business and be prepared to make tough decisions." He's sure doing that divesting -- what I thought were sacred-cow mines owned by Barrick. The divestitures have been so successful that its balance sheet is stunningly clean.
You want a growth gold? The best is Agnico Eagle (AEM) run by Sean Boyd. He, too, swears by the new gold model: making money for shareholders and returning it to them in the form of a growing dividend. Unlike Barrick, Agnico operates in relatively safe locations: Canada, Finland and Northern Mexico, making it a low-risk producer. Boyd, like Bristow, is a frequent guest on "Mad Money" and he, unfailingly, talks about the growth. It's been able to make a ton of money with gold at lower prices, I can't wait to see how much it can make now.
It, like Barrick, is off its high, in this case $4 from its $64.88.
You have to with American Electric Power (AEP) , the largest transmitter. Consolidated Edison, (ED) , which is an asset light play, does not produce any electricity and, instead just passes it on). Finally I would pick up Dominion (D) , with a 4.5% yield, high because it is completing a difficult merger last year at this time with SCANA Corp., a southern utility with lots of synergies. I like these three because I speak to the CEOs regularly and I like what I hear.
If the Straits of Hormuz is closed that would produce a huge spike in oil, even as it might be short lived, because of our production, which has kept the out years of oil's futures, around $52, dramatically lower than the $63 current West Texas Intermediate oil price. Let me offer you some options: First there's the best service company that should be plenty busy at much higher prices, because drilling might resume in places that haven't replenished in ages. Yields almost 5% with a CEO committed to the dividend.
Growth oil? That's Pioneer (PXD) , run by the great Scott Sheffield, who has been a huge exploiter of the Permian, and is a pure play on that prospect. It could also be taken over.
You want yield? That's BP (BP) with a solid dividend that gives you a 6.16% yield.
Value? ConocoPhillips (COP) , which reported a much better-than-expected quarter. It recently boosted its dividend by 38% after a fine quarter.
Finally, you need a defense stock. I like L3Harris Technologies (LHX) , which is the combination of the old L3 and Harris, now run by the excellent Bill Brown. L3Harris has an integrated mission system with intelligence, surveillance and reconnaissance. It has a space and airborne services, which has cyber, avionics, electrical warfare, and plenty of aviation training and precision engagement sensors and systems, including small unmanned aerial vehicle. If you had to design a vehicle for combat in the Middle East, it would be this one. At $210, it is down only seven from its high, but all these stocks have run a great deal. Remember, this is the "threatened war portfolio," so you have to expect to have run.
I can't, in good conscience, recommend Raytheon (RTN) , which is merging with United Technologies (UTX) , which itself is breaking up and Raytheon will be part of a pure play on defense. It's moved too much. Same with Lockheed Martin (LMT) and Northrop Grumman (NOC) and General Dynamics (GD) .
I know this sounds silly given the action in today's market, but I suspect that if we get the conflagration so many of you think must happen, this portfolio makes you money and yet also helps you to sleep at night -- or nocturnal threat of war, in a nighttime Twitter (TWTR) fest.
