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I try to get my summer reading done between my son’s American Legion baseball games. I sometimes call to the bullpen for lighter fare when I tire from reading books on markets and economics. Recently, the call went out to Jim Abbott’s autobiography "Imperfect" with help from his writer-closer Tim Brown.
Jim Abbott was born without a right hand but went on to overcome his personal adversity to become a talented major league pitcher. Along the way, he was an All-American at Michigan, won a gold medal with the 1988 Olympic baseball team and threw a no-hitter at Yankee Stadium in 1993. His is a story not about being imperfect, but rather about overcoming physical and emotional adversity and the odds against performing at a superior level of athletic competition.
While reading about Jim Abbott’s travails and accomplishments, his endurance, perseverance and balanced attitude through life’s cycles of failure and success, I was once again struck by the analogy to investors in the market, particularly the individual investor who day-in-day-out attempts to swim through the market’s cross-currents to higher gains, battling market peaks and troughs, and trying to avoid the rough seas created by institutional supertankers as they enter and exit positions.
The markets are imperfect, and information is asymmetrical, often favoring the big institutional players who can take big bets over longer durations and have better access to companies. However, if the small investor does his homework, is diligent, distinguishes between short-term trading cycles and the longer-term horizon, balances risk and reward in evaluating equity investments, and seeks to protect the downside, he can earn rewards that justify the risk.
While the playing field may be skewed at times, uneven playing fields can create opportunities. You just have to be vigilant in looking for them.
The small investor does have advantages; he can often enter and exit stocks more rapidly than large institutions, particularly when the institutions have large multi-million-share positions to unload. Smaller investors can focus on smaller-capitalized companies that institutional investors are precluded from investing in due to the smaller share float.
Historically, smaller investors have often sold at cycle bottoms and bought at cycle tops, but it doesn’t have to be the case if you properly evaluate the risk/reward tradeoffs and pay close attention to technical indicators that illuminate when markets are overbought.
Likewise, when everyone is selling, it behooves investors to take a critical eye to evaluate if the wholesale selling is warranted. Perhaps the best way to avoid these pitfalls is to keep investing guidelines simple and few, and stick to them. Here are seven guidelines that I follow:
1. Seek out sound companies where management has a track record with a strong balance sheet and reasonable growth prospects.
2. Have a long-term horizon—two to three years or longer.
3. NEVER fall in love with a stock.
4. Set strict stop loss limits.
5. Let your winners run.
6. Keep a close eye on your losers, always cut your losses, never throw good money after bad.
7. Always be unemotional.
Particularly in today’s tight trading market driven by headlines where the short-term rules, I emphasize to my Cabot Global Energy Investor readers that they should pay greater attention to minimizing downside risk and preserving capital. Right now, the energy market is biased to the downside, so I seek out companies with high dividend yields that provide downside support, have low short selling interest and strong balance sheets to weather the cycles.
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BreitBurn Energy Partners (BBEP) fits that bill. An MLP with a $1.3 billion market cap, BreitBern is an independent oil and gas limited partnership with crude oil and natural gas reserves in the Los Angeles Basin in California, the Wind River and Big Horn Basins in central Wyoming, the Powder River Basin in eastern Wyoming, the Evanston and Green River Basins in southwestern Wyoming, the Sunniland Trend in Florida, the Permian Basin in Texas, the Antrim Shale in Michigan and the New Albany Shale in Indiana and Kentucky.
I like this stock’s very high dividend yield of 9.80%, its very low short interest at 1% of float, its strong balance sheet with debt interest coverage at a 4.8 multiple, and its debt-to-capitalization ratio of 34%. BreitBurn Energy Partners’s production profile is weighted to natural gas at 58%, which is expected to fall to 53% in the second half of 2012. Oil-to-natural gas revenue was roughly two-to-one in 2Q12. The company’s operating cash flow after capital spending in 2Q12 and for the full-year 2011 was positive at $62 million and $64 million, respectively.
BreitBurn reported $1.29 EPS for the 2Q12 beating expectations by $1.09, and quarterly revenue was up 244.1% on a year-over-year basis. Total oil and gas production increased 18% year-over-year, with oil/natural gas liquids up 4.2% and natural gas up 29% year-over-year.
BBEP is trading above its 50-day and 200-day moving averages, with the 50-day above the 200-day. Immediate support is 18.16 at the 200-day, and longer-term support is 17.79 at the 200-day.
My price target for BBEP is 21.75 per share over the next six months. I recommend that you start with small purchases now and look to buy more on pullbacks toward support. Invest for the long-term, take the dividend at 9.8% and be patient. Place a firm stop loss order at 17.00. BUY.
Your guide to energy investing,
Editor of Cabot Global Energy Investor