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  • Writer's pictureIshfaaq Peerally


August 2019 was a bad month for most stock investors with the S&P 500 so far being down by about 4.5%. This is something you should be expecting if you're a stock investor and there is not need to panic when the market is 5% down. I underperformed the market by about 1% during that time and it is mainly because of Concho Resources $CXO which lost around 25% of its market value on a single day. Concho Resources is the first stock I'm going to buy in September 2019. When a stock price goes down, it is time to buy.

Concho Resources is an upstream oil company with exclusive operations in the Permian Basin. The Permian Basin is the richest oil and gas $OIL $NATGAS region in the world right now. By 2025, Texas will be producing more oil than Saudi Arabia or Russia and most of this oil will be from the Permian Basin. Therefore, there is a lot of money to be made there. Why was the stock down by 25% in a single day? Bad earnings. They had really bad earnings and they have decided to cut productions. It is because oil prices are low. You may think that this is a bad thing but actually it doesn't make sense for the company to keep producing oil at the risk of losing money. Cutting productions will save money which will unable them to make new acquisitions, buy back shares and even increase dividends. When oil prices go higher, then they can increase productions and reap the benefits. With this 25% drop in the stock price, the risk on the stock is lower since the fundamentals of the company didn't really change. The company is now trading at about 80% book value. The last 5 years were not that great for the oil market with low oil prices. Big companies such as Chevron $CVX or ExxonMobil $XOM have been losing money. But Concho Resources had only one negative year in net income, 2016. They were able to more than triple book value during that period. Now is the time to invest in Concho Resources, not when oil prices go to $70 or $80. Then, it will be too late.

Second stock which I'm buying is insurance giant Travelers Companies $TRV . The main reason is for the portfolio that the company has. Warren Buffett $BRK.B likes buying insurance companies. Right now, Berkshire Hathaway owns Geico, Berkshire Hathaway Reinsurance and other insurance companies because these are great generators of cashflow or float. He then uses this float to invest in other companies. That's how he was able to buy 5% of Apple $AAPL . But Travelers companies invest their float in bonds, mostly corporate and municipal bonds. I don't really have exposure to this market and I can do this through Travelers Companies. They currently own $75 billions in investment assets, 93% of which is in bonds. And 97% of these bonds are investment graded, mostly Aaa. Travelers companies has a market cap of $38 billions and like I told you, an investment portfolio of $75 billions. Therefore, you are able to buy these bonds at a discount. Of course, we should not ignore the debt that they have. Even with the debt, the bonds are at a discount. With the volatile stock market that we have right now, bond prices are going to go up and Travelers companies book value will continue to appreciate in value.

Third stock which I'm buying is Diageo $DGE.L . Diageo is a British company. Over the last five years, Diageo stock gained more than 70% while the British Pound $GBPUSD lost 25%. There is reason for this massive negative correlation. Diageo is a net British exporter and, therefore, will make money with a weak currency. Because of Brexit, the British Pound is weakening, hence, creating a good environment for Diageo. Even if we ignore Brexit, Diageo is always making. Even during a recession, they are always to sell their alcohol.

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