Time to Back Up the Truck?

Ever heard the phrase “Back up the truck”? It’s a slang term among professional investors referring to the purchase of a large position in a stock or other financial asset. Typically this is a way of saying an investor is extremely bullish on a particular investment, using imagery that conveys the truck backing up to the warehouse to be loaded with goods.

Looking back on my career there are times when I would have liked to back up the truck. While hindsight is 20-20 and not a very good investment strategy, I believe we have two scenarios right now worthy of this designation, the first being the comparative rates of dividends and treasury bonds, and the second being recent developments in the energy sector.

First is the area of interest rates and dividends. Consider where interest rates are today and ask yourself this question: With the 10-year US Treasury Bond yielding under 2%, and the dividend rate of the Standard & Poor’s 500 also around 2%, where should an investor allocate their capital if income and protecting the purchasing power of that income are their top priorities? Seems like a no-brainer to me.

Without a concrete strategy to repay almost $18 trillion in debt, who in their right mind would make a loan to US government, especially for 10 years at a rate lower than the average long-term inflation rate? Yet that is the exact behavior we’re seeing with investors dumping cash into the US Treasuries.

Consider the alternative: an investment that tracks the S&P 500, a broad index of 500 of the largest US companies that represent all major industries. Companies who are globally diversified and offer a wide range of products and services. Companies who collectively have grown their annual dividend yield 19 times over the past 38 years, by more than 7% (which is more than twice the average inflation rate.)

Few investors remember the 1930s when companies sold for less than their breakup or liquidation value. Graham and Dodd’s Security Analysis textbook is dotted with examples of companies selling for less than their net cash positions. Now imagine how our parents or grandparents were able to miss such an incredible opportunity. Why didn’t they “back up the truck” and set their families on a path of long-term prosperity?

Could today be our opportunity to do the same for our families? Could today, when interest rates are below the dividend rate in the 10 year, be a similar point in time? I don’t know.

As you know, we are not market timers at Prosperion. We do not have the crystal ball that so many of the guys on Wall Street seem to think they have. But I have a hunch we will look back at this point in the future with amazement – that stocks were trading at a level where the dividend was the same as the 10-year treasury. Furthermore these dividends have historically gone up and bond yields have marched to new lows, meaning bond carry a good deal of price risk. I have to think this could this be one of those very rare times when we need to “back up the truck”.

The other area worth considering is energy. In the summer of 2014, with oil over $100/barrel, only liars and maniacs would have claimed a fall below $40/bbl in less than six months. Today, with oil about half of where it was last summer, I believe we have an opportunity to buy energy assets at very low prices.

Could oil go lower? Yes. Do I think it will go lower? I don’t know. I do know we consume more than we produce. I know we use the equivalent of about 20M bbl/day and produce the equivalent of about 14M bbl/day. I know 8 years ago we were producing about 10M bbl/day. That’s a 40% improvement in eight years due to the application of innovation and technology. I wonder what that means for the next 8 years.

Middle Eastern countries may be acting nonchalant about these developments, but I think they realize they are losing their largest customer, the USA. I think we need to do everything in our power to expand our energy production in a move toward energy independence, especially now when prices are down.

Oil is low. I believe this could be one of those times when we look back and realize what an opportunity we had. I do not know when it will rise or for what duration, but I am willing to wager that energy is a very good investment at these levels.

Is this the time to back up the truck? I don’t know, but we welcome a conversation about this if you would like to visit further.