Recession Investing: Spam, Guns and Gold
Stock-Markets / Investing 2009 Mar 04, 2009 - 10:11 AM
Sean Brodrick writes: In these tough times, a good investment is hard to find. In fact, the S&P 500 was down 18.2 percent year-to-date through Friday. And the Dow Jones Industrial Average dropped more than 19 percent at the same time — so good investments are pretty scarce indeed.
Here, I'll give you three investments that are doing well … and more importantly, should continue to do well.
Pick #1: Spam
I'm talking about the canned meat — “Shoulder of Pork and hAM” made by Hormel Foods Corp (HRL). You might say Spam is saving Hormel's bacon and turning the food manufacturer into a solid pick for your portfolio.
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| Rising Spam sales helped boost Hormel's profits above analysts' expectations. |
Hormel's net earnings fell 8 percent in the most recent quarter … but it still delivered 60 cents a share, which was better than the 51 cents a share that analysts had expected. This was mainly due to sales of Spam and Hormel's Dinty Moore Stew, another product that is greater than the sum of its parts.
What's more … Hormel affirmed its 2009 earnings outlook, saying it still expected to earn $2.15 to $2.25 per share. And while other companies are ducking for cover from the recession, Hormel plans to spend more on advertising this year than it spent last year, in part to market new products.
So Hormel is obviously optimistic about its future, despite a worsening recession.
Pick #2: Guns
Exchange-traded examples include Sturm, Ruger & Company (RGR) and Smith & Wesson (SWHC). Smith & Wesson has been a doormat until recently. But both it and Ruger enjoyed nice moves in the past couple weeks.
While Smith & Wesson has announced big plans for future growth, I prefer Ruger. Its revenues and earnings are increasing, and the company's backlog in orders jumped 72 percent from the 3rd quarter to the 4th quarter.
Why is the outlook improving for gun manufacturers?
Maybe because while other industries are sliding down a slippery slope of lower demand, the output of U.S. small arms manufacturing is forecast to grow at an annual compounded rate of 2 percent between 2008 and 2013, as seen on the following chart …
Output Forecast for U.S. Small Arms Manufacturers
The sales of both guns and ammo are flying partly due to worries about economic calamity and partly because the National Rifle Association is fanning the flames of rumors that President Obama wants to confiscate guns and raise ammunition taxes by 500 percent.
Will President Obama tighten the rules on gun sales? I have my doubts. With the economy collapsing, he has bigger fish to fry. Nonetheless, if history is any guide, the NRA will constantly ring the alarm bell for the next four or eight years … and gun manufacturers will reap the benefits.
Pick #3: Gold
If you're a regular reader of my Money and Markets columns, you probably aren't surprised that I'm recommending gold …
I firmly believe that the long-term fundamentals for gold are strong and seem to be getting stronger. And to make it even more appealing, gold looks like it could go lower for a bit — a pullback that would give traders a great buying opportunity.
There's a pile of reasons for liking gold right now —
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| I see a pullback coming in the price of gold, which could give investors one heck of a buying opportunity. |
- ETFs are adding to their holdings at an enormous rate — the SPDR Gold Trust (GLD) saw its gold holdings jump 14 percent in one month to nearly 1,000 metric tonnes. Much of this is fueled by investors who look at gold as a refuge of safety in an uncertain world.
- Despite growing global demand, gold mine production just isn't keeping up. Precious metals consultants at GFMS, believe that supply in 2008 has dropped by about 4 percent to 2,385 tonnes, the lowest in 13 years.
- Another source of supply — producer hedging — is also drying up. With an eye on higher prices, producers have dehedged (squared their forward positions) to the tune of 346 tonnes (or 14.5 percent of world production of 2,385 tonnes) in 2008.
- While the U.S. dollar is the world's reserve currency, gold is fast becoming a second reserve currency.
- Russia has recently stated its intent to raise total gold holdings to 10 percent of total reserves. According to the World Gold Council, Russia held 495.9 tonnes of gold as of December ‘08 — accounting for just 2.2 percent of reserves.
- China has a mere 0.9 percent of its reserves in gold (600 metric tonnes). That's the lowest of any industrialized economy. In contrast, the U.S. has 77.3 percent of its foreign reserves in gold. Just to raise its gold reserves to 5 percent, Beijing would have to purchase nearly $100 billion worth of bullion. I think that's going to happen, and it will light a fire under gold prices.
Spam, Guns, and Gold Are About to Hit the Fan
We'll probably see $1,500 gold in the next 12 to 18 months. And that's based on my “optimistic” outlook for our society. In the worst-case scenario, the global financial system could run off the rails. If that happens, you'll want plenty of gold … and Spam and guns, too.
Let's hope it doesn't come to that. But even without a worst-case scenario, you may want to consider putting Ruger, Hormel and gold in your portfolio.
Look at their year-to-date performance compared to the S&P 500 …
Consumer confidence falls to lowest since data began in 1967
Consumer confidence is the blue line on the bottom of my chart. It plunged more than expected in February, falling to a new low of 25 — the worst level since the index began in 1967. And it's dragging the S&P 500 down with it.
… and that makes Hormel, Ruger and gold look all the better.
Yours for trading profits,
Sean
P.S. Traders can't live on Spam alone. If you'd like to invest with someone who is putting their money where their mouth is, check out Martin's new “ Million-Dollar Contrarian Portfolio “. To find out more about it, click here .
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