3 Great Companies I Want to Buy, Just Not At These Prices
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ve been on the receiving end of more than my share of exceptional investing advice over the years. When a smart investor is speaking, I’m all ears. I know that if I can gleam just a little bit of what they have to say I’ll have an outside shot at developing into an above average investor.
Few investors have given more freely of their pearls of wisdom than the Oracle of Omaha. One of my favorite's is, “it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In my search of wonderful companies I’ve stumbled across a few of them that are selling at about as fair a price as you’ll find. However, I know how fickle the market can be and I think that with a little patience I can get more than a fair price for each.
In an effort to get my more than fair price, instead of just waiting around on a limit order to hit, I’m using options to build a virtual portfolio I call the “No Drip, No Mess” portfolio. I like the strategy of using options to generate income that’ll be reinvested in the great growth companies of tomorrow. That strategy if applied to underlying business that are not worth owning would be for naught. I have three businesses that I think are well worth owning at the right price, here’s why.
Commodities tend to be fairly volatile ebbing and flowing with the global economy. Investors don’t need to be adding operational volatility to the mix by investing in a poor operator. That’s why I want to be an investor in BHP Billiton (NYSE: BHP) and their strategy to own and operate large, long-life, expandable, upstream assets diversified by commodity, geography and market.
While I like that strategy it still doesn’t delineate that they’re not just digging up base metals like their peer Rio Tinto (NYSE: RIO) but instead have extended their strategy to include commodities necessary for both energy and food production. It’s their focus on these two additional commodities that sets BHP apart from Rio Tinto and gives them a long term competitive advantage that I want to own. What I won’t be doing is digging too deep in my pockets to hand over the $70+ a share to add BHP to my portfolio. That’s why I opportunistically wrote November $50 puts thinking that if the global economy falters I could get this wonderful company at a great price. Unfortunately it looks like the Federal Reserve has turned back on the “risk on” trade taking BHP much higher.
Another ticket to a company's shares heading higher is by having a key component in the development of a competitive advantage which is to own irreplaceable assets. Enterprise Products (NYSE: EPD) owns more than 50k miles of natural gas, NGL, crude oil and refined product and petrochemical pipelines which is enough to circle the globe twice. Add to that enough storage capacity to satisfy the energy needs of a small city for a full year and they’ve got assets that would take decades to replace and assets that they’re continuing to grow with more than $8 billion worth of projects in the pipeline.
However, as much as I want to have Enterprise piping more cash into my portfolio, I’m not willing to pay any price for it. That’s why I wrote December $50 puts in an effort to nab shares a bit cheaper. With shares more than 10% higher those puts are likely to die of natural causes. I’ll likely keep trying to get shares below fifty through writing puts as long as the income is worth it.
Not only does our economy need pipes to transport energy from the production basins to markets, but we need someone to get that energy out of the ground. That's why if I could own just one energy company it would be Linn Energy (NASDAQ: LINE). Their smart management team has been picking up onshore natural gas and oil assets that are being sold off by their larger peers. A great example of this happened twice this year as they picked off assets from BP (NYSE: BP). Each time the deal has been for about a billion dollars and these were assets that wouldn’t likely to have been available if BP didn’t need the money to repair their balance sheet. These are long life, low decline assets that have upside from additional drilling locations but more importantly are strong cash flow producers. Most of that cash is distributed back to unit holders as Linn’s set up in a structure similar to an MLP.
Still, as much as I want to own Linn, I’d much rather pay less than $35 a share for that privilege. That’s one reason I wrote October $35 puts which at today’s $40+ share price it appears that I’ll have drilled a dry hole. Maybe I am being a little too greedy but I was thinking that it’s about time the market got a little fearful and I’d be there to take advantage of that.
I’m sure you must be thinking that I started off this article reminding us that Warren’s said it was ok to buy wonderful companies at fair prices. Well, I’m obviously no Buffett so I need a little help making sure I’m getting a fair price. I find that using options strategically help me buy stocks cheaper by patiently awaiting my preferred buy price. They are just one of the tools I’ve learned to use in order to invest better.
latimerburned owns shares of Linn Energy, LLC, Enterprise Products Partners L.P., and BHP Billiton Limited (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.