What's wet, shiny and black, and could make you rich?
Filed under: Investing
What's wet, shiny and black? You've got it, water, gold and oil. They are three of the most valuable commodities on the planet and their value has soared recently, as demand outstrips supply.
Water, gold and oil don't mix, but should you combine them in your portfolio?
The wet stuff
Water, water everywhere, but nowhere near enough in the over-populated south-east and East Anglia. Per head of population, Sudan gets more rain than these parched parts of rainy England.
The Brits have been grumbling about our wet climate for years. As the hosepipe ban comes into force, keen gardeners and investors may finally appreciate its value.
Water companies are solid, defensive, low-risk stocks offering a steady drip-trip of dividends. Many Fools will hold utilities such as Severn Trent and Pennon Group in their portfolio, mainly for the yield.
Severn Trent is a water utility company serving millions of customers in the UK, and is currently on a thirst-quenching forecast yield of 4.5%, covered 1.2 times. Its share price has risen steadily from £9.50 in October 2009 to around £15 today, which may look mouth-watering, but only returns it to its 2008 level. It is trading on a forecast p/e of 17.7, which looks pricey to me.
Water and waste treatment utility Pennon Group has followed a similar trajectory, rising steadily since the 2008 crash, but again, only recently recovering its value. It is on a forecast yield of 3.7%, covered 1.6 times. Pennon is trading at a p/e of 14.8. There is nothing exciting about these two stocks. I guess that's the point.
At times I have been tempted by investment trust Ecofin Water & Power Opportunities, but I don't regret my failure to buy as it is down 24% over the last five years. A brief spurt at the start of this year has now evaporated. The trust trades at a massive discount of 29%, which may tempt you (or deter you). This global trust is nearly 50% invested in the US and is definitely one for contrarians, who will no doubt like its 4.2% yield.
Water is the world's most precious commodity, but investors aren't lapping it up yet.
The shiny stuff
Gold has few practical uses, but people have lusted after it for thousands of years, and rarely more so than in the last five. Gold has been the glory boy of the financial crisis, but its crown has slipped lately.
Last August, the gold price hit an all-time high of around $1,900 an ounce, up 140% over five years. It has lost some of its shine lately, falling 5% over the last month to $1,630.
Gold does well when the dollar weakens. It does well when central bankers debauch their currencies or investors panic about global economic meltdown. No wonder it has done so well since 2008.
But can this continue? With the Federal Reserve playing down the chances of QE3, and some green shoots of recovery appearing, gold could lose its Midas touch. It could still recapture it, if, say, things turn nasty in Iran, or the euro finally faces its Waterloo.
Gold is famously known as a safe haven, but right now, it looks incredibly speculative to me. Where it goes next is anybody's guess. Rather like the global economy.
The black stuff
The soaring oil price hits you in the pocket every time you fill up. Can you claw back some of your losses by investing in oil companies?
Investors in BP and Shell haven't, but there are plenty of small and oily opportunities out there. Angelos Damaskos, who manages the Junior Oils Trust, is currently buying Amerisur Resources , an oil explorer in Paraguay and Columbia, Caza Oil & Gas, which operates in Texas, Louisiana and New Mexico, and Circle Oil, based in North Africa. In my view, these are strictly for the brave.
Like gold, the price of oil will soar if Israel attacks Iran. That could mean fireworks in September. Even if it doesn't, supply is clearly struggling to keep up with demand. The Saudis can't pump much faster, and won't let the price fall below $100 a barrel, because they need to fund costly social programmes to contain their restive population.
I reckon oil is a great long-term buy and hold. Water and gold? Forget them. Oil looks the wettest, blackest and shiniest prospect to me.
- The private investor's advantage
- Big winners and losers of the year so far
- A beginner's guide to diversification