Oxstones Food for Thought – July 2015 – How to Invest in America’s Economic Revival

13-Jul-2015

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A banker turned social finance entrepreneur. Liu-Yue built and managed two social enterprises. Liu-Yue founded Oxstones Investment Club a searchable cloud-based content platform for knowledge sharing and financial education. Oxstones.com also provides global investors with direct access to U.S. commercial real estate investment opportunities and other alternative strategies. In addition, Liu-Yue also co-founded Cute Brands, Inc. Cute Brands is a cause-oriented character-based brand licensing and social impact fund that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising ultra high net worth clients on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in emerging markets bonds and Latin American equities investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities and special situation investing at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Liu-Yue (Louie) Lam, Global Investment Strategist, Oxstones Investment Club

Warren Buffett wrote in his annual report – “Though we invest abroad as well, the mother lode of opportunity resides in America.” On the U.S. as a long-term bet – “Charlie and I have always considered a ‘bet’ on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.”

In my previous investment commentary titled – “Food for Thought – America’s Return as a Manufacturing Super Power is just Beginning” (http://oxstones.com/food-for-thought-august-2013-americas-return-as-a-manufacturing-super-power-is-just-beginning/) – many people have asked – How can I invest in America’s economic revival?  This is a continuation of the previous discussion.

Slow and Steady Wins the Race  
Miraculously, America’s economic revival is still just beginning and there’s plenty of time to invest in this emerging theme.  After 6 years, the U.S. economy still appears to be in the early stages of an economic recovery.  There’s plenty of slack in the economy.  Capacity utilization rate is nowhere near critical inflation producing levels.  The current unemployment rate masks the fact that we’re at a generational low in workforce participation.  Our economy can continue to benefit from historically low interest rates to grow slow and steady without the threat of overheating or igniting inflation for some time.

1 Step Back, 2 Steps Forward
The USA is the new emerging market.  We can take a page out of emerging markets growth by focusing on fixed asset investments because our infrastructure is outdated and needs to be remodeled for the new millennium.

Companies involved in infrastructure development such as pipelines, refineries, and energy storage facilities will benefit from America’s economic revival and energy renaissance.  Other related areas include natural gas infrastructure such as LNG and NGL logistics.  Warehouses will also be needed for U.S. manufacturing and global e-commerce.  Material producers such as cement and steel companies stand to benefit from greater demand for basic raw materials used in infrastructure development projects.

Lastly, companies that use natural gas as a major cost input such as chemical and fertilizer companies will benefit from lower cost energy resources.  Utilities should also benefit not only from stronger economic activity but also from greater electricity usage from alternative sources such as electric cars, telecommuting, and e-commerce.  An often overlooked area of infrastructure in need of repairs and upgrade include water treatment plants and sewage services due to increase usage from increasing urbanization and population trends.

Follow the Leader and Invest like Warren Buffett
Not many people can invest like Warren Buffett but we can be successful by following the leader.  Warren Buffett has repeatedly endorsed America’s bright future, and he is putting his money where his mouth is by investing in America’s infrastructure. You can follow Warren Buffett’s lead and invest in America’s infrastructure development by buying publicly traded companies involved in infrastructure development.  One of the stocks in Warren Buffett’s portfolio is an engineering infrastructure company called Chicago Bridge and Iron (CBI).

Other engineering and construction companies will also benefit from America’s infrastructure development in energy and transportation logistics too.  One top engineering and construction company is Babcock & Wilcox (BWC) a spin-off from McDermott.  The former parent company is also an attractive investment with a specialty in offshore energy construction.  McDermott (MDR) is currently selling at fire-sale prices and could be a potential takeover target due to temporarily project management issues.  A post-bankruptcy company I like a lot is Calpine (CPN).  Calpine is a terrific clean energy play and owns a fleet of natural gas-fired and geothermal power plants.

Investing in Inflation Protected, Cash Flowing Real Assets
Patient long term capital from sovereign wealth funds, pension funds, and endowments are all investing directly in U.S. private real estate investments and in U.S. infrastructure development.  Warren Buffett has been building a large infrastructure portfolio through acquisitions in public utilities, railways, and alternative energy projects.  Mr. Buffett is also betting heavily that future household formations will be no different than previous generations.   He is investing in U.S. real estate through multiple Berkshire Hathaway subsidiaries involved in mortgage lending, real estate brokerage services, and other housing activities.

You can also invest in infrastructure and private commercial real estate through publicly traded REITs that are focused on infrastructure development such as industrial properties such as storage facilities operator – Prologis (PLD) or Brookfield Asset Management (BAM).  Brookfield Asset Management (BAM) is managed by Bruce Flatt also considered the Warren Buffett of Canada (http://oxstones.com/buffett-of-canada-says-hes-a-big-bull-on-the-us/).  Commercial real estate especially office buildings will benefit from America’s economic recovery and lower unemployment rates as American workers get back into the work force.  Hotels are very cyclically sensitive and tied directly with U.S. economic recovery and will also benefit from the growing income and travel habits of emerging market consumers like Chinese tourists.

MLPs can also be good investments; offering high income and a focus on energy infrastructure such as pipelines and energy storage and transport logistics.  Semgroup (SEMG) is a post-bankruptcy pipeline company with valuable assets in the strategically important U.S. oil storage hub located at Cushing, Oklahoma.

Due to environmental constraints it’s increasingly difficult to build a new refinery or a new paper mill.  Therefore high barriers to entry make investing in existing large refinery firms like (VLO) Valero or paper companies like International Paper (IP) very attractive.   Another attractive investment is Owens-Illinois (OI); a firm involved in building glass containers for shipping food and beverages.

Blue Gold
Water infrastructure and sewage is one of my favorite big investment themes due to the projected scarcity of water resources.  Continued urbanization and population growth trends will strain water and sewage systems.  As manufacturing, agriculture, and energy compete for limited water supply it becomes even more important to build and update water infrastructure.  Veolia (VE) and Mueller (MWA) are two very attractive water infrastructure investment plays.

Steel and Cement are still important
Steel and cement companies will benefit from America’s infrastructure development. Whether it’s for energy logistics or for housing projects, they require basic materials like cement and steel for construction.  Cemex (CX) is the largest cement company in North America and a direct beneficiary in the housing and construction boom.  Although Gerdau (GGB) is a Brazil steel giant it is also one of North America’s largest steel companies.

Natural Gas Companies and LNG exporting business
The increase use of natural gas as a cheap clean energy alternative to bridge the eventual transition to other alternatives like solar, geothermal, wind, and wave powered energy bodes well for the largest natural gas company in North America – EnCana (ECA).  Many oil majors have already been preparing for the natural gas boom by acquiring natural gas companies over the past few years.  Perhaps the biggest natural gas opportunity involves exporting surplus natural gas to higher priced overseas markets.  Golar (GLNG) is one of the few companies that are involved in LNG export terminal business.

Advanced Technologies (3-D Printing, Advanced Robotics, Cloud Computing, and Nanotech)
Investing in new technology is always difficult and risky.  The most promising new technologies are 3-D printing and nanotech.  Some of the top 3-D Printing firms are Stratasys (SSYS) and 3D System (DDD).   Recently most of the 3-D printing companies and nanotech firms have experienced a significant decline which provides a perfect opportunity to buy low.  Investing in industry sector ETFs may be one way to diversify company-specific risks.  One top nanotech firm I like is Harris & Harris Group (TINY), a VC firm that invest in a portfolio of nanotechnology companies.  Investing in (TINY) provides the opportunity to invest in nanotech companies with portfolio diversification benefits.  A positive indicator for (TINY) is the huge amount of insider buying activity.  (TINY) also has (SZYM) a company focused on bio-agriculture for clean energy.

Jeff Bezos is someone many consider the new Steve Jobs.  By investing in Amazon (AMZN) you’re investing in a company at the forefront of many mega themes including American manufacturing, global e-commerce, cloud computing, big data analytics, robotic warehousing, and America’s infrastructure development (warehouses).  Another terrific company to consider for global e-commerce and American entrepreneurship is eBay (eBay).  Many American entrepreneurs continue to create their store fronts on eBay and Amazon.  For cloud software VMware (VMW) is a company to keep an eye on.  Companies I consider on the frontier of advanced robotics for consumers and healthcare are iRobot (IRBT) and Intuitive Surgical (ISRG).

Investing in America for My Family
I write this latest investment commentary in honor of my baby boy and our one year anniversary since we return home to NYC.  As I survey the global economic landscape the greatest opportunities still reside in the USA and therefore America still offers the best place to raise a child to one day become a potential future leader.  No other place in the world can offer the unparallel breadth of educational and career opportunities and lifestyle choices that America can offer.  Although I chose to have my son born abroad that was more a strategic decision to provide him with dual citizenship in order to provide him the advantages of global citizenship where he can live, work, and study across two different continents as well as provide him with that global perspective and rich cultural heritage from two different family trees.

Warren Buffett is betting on a bright future for America because he is really betting on America’s children and the future generations of Americans!  Just as it is the employees that make or break a company and determines the success of a company, it is the people that will determine a country’s future prospects and the people who make America great.  No other nation in the world has America’s unique system that can instill and hone the same level of intangible traits of creativity, perseverance, and entrepreneurial spirit that you can only gain by growing up in this system.  It is the reason why we relocated back home for my son and also to continue my own career ambitions.  I believe my own story still has much left to be written.  I’m now old enough to have acquired some wisdom, but still young enough to continue learning and developing to be the best man, professional, husband, and father I can become.

 

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