It didn’t take a crystal ball to know that the oil services and equipment industry was facing huge headwinds.
Last December, I told you there’s simply too much oil and not enough demand.
Why the heck would someone want to own companies that sell equipment to oil drillers — especially with oil drillers cutting back supply?
Anyone who took my advice and avoided this industry also avoided huge losses. Today, I have a new recommendation … one that will put money in your pocket.
But before I share it with you, I want to reveal a secret for making big gains in a volatile market. It’s the same secret that allowed me to avoid making a lousy investment in oil last December.
And here it is: Buy financially sound companies when they’re trading at bargain prices.
If you’ve been following my Winning Investor Daily updates, you already know this is the same message I’ve had all along.
That’s because the future, by definition, is uncertain. Anyone who tells you they can predict the future is either a liar or a fool.
No one has any idea when the coronavirus lockdown will end, or how many people it will kill.
That’s why we want to invest in financially sound companies that will grow regardless of the coronavirus outbreak.
In my latest video, I explain why the oil services and equipment industry was doomed before anyone knew about the coronavirus. I also recommend one tech stock that everyone should have in their portfolio.
Check it out below.
The Healthcare Stock Worked
About four months ago, I did a YouTube video covering “Stocks to Buy in 2020“. I did it on December 12, 2019 — the end of the year. And at that time, I told you I liked health care.
I said, “Avoid the oil field services and equipment industry.”
Now, I’m not here to take a victory lap … but I do want to show you something which is going to be really important, because it’s going to hone in on the one company that I happen to like. It’s trading at an attractive price which you just don’t get every day of the week.
I told you at the time that the key to making money in the stock market is pretty simple: Buy financially sound companies when the trading at bargain prices. That’s really it.
How I Pick Stocks
At the time, I wasn’t really making a prediction. I didn’t know where oil was going. I had no insight into Saudi Arabia and Russia deals, I didn’t have any insight into looking at supply or demand … I just had the same stuff that everyone else could find on the Internet.
I just saw that the oilfield service industry was having a really tough time. Now, the oil field service industry are the companies that sell equipment to the oil drillers.
You didn’t need to be a genius to see, at the time, that the companies in this industry were not financially sound, and were not trading at bargain prices.
There was an energy slow down. We had a mild winter. There was too much supply. People were conserving more by buying cars that, back in the day, used to do 10 miles to the gallon and now do 50 or 60 miles to the gallon. There are electric vehicles also!
So, I saw that there was less demand, and I saw that these companies were really in trouble based on their balance sheets and based on what they were trading for.
You were looking at stocks that were dollar bills, trading for $4 or $5. It made no sense in the world to me that they should be so valued.
Drilling Into Manufacturing
So, I looked at the equipment industry, which are the people who sell stuff to the oil drillers. There was a glut, and selling equipment to people who have to dig stuff out when supply is rampant is really not a good business.
It was a weak industry at the time — financially shaky companies trading at high prices. And it had all the ingredients for a disaster.
Now, in my 30-plus years of doing this, I’ve learned that when you have weak industries with companies that are trading at extreme valuations and the financials are pretty shaky, any surprise tends to be to the downside.
And that’s why I told you in that video to stay away. Huge headwinds, too many oil wells and slowing demand equals disaster.
Well, I didn’t realize what the surprise was, but I knew there was going to be some type of surprise because there always is in a weak industry. And a little more than four weeks ago, we had it.
Unfortunately, it was a pandemic.
The Black Swan Event
It shut down the economies of the world. People are staying in, economies are shut down, there’s lower demand … Then, Saudi Arabia got into a pissing contest with Russia and cut prices.
So it had all the ingredients for a disaster to happen. And boom — this was it.
At the time, I told you to avoid three stocks in that industry: Diamond Offshore Drilling, Halliburton and Schlumberger. They were all in this industry which was trying to sell to oil drillers to get more supply during a glut.
You don’t have to be a genius to see that that’s really a problem. Even after rallying a bit in the most recent days, these stocks have gotten clobbered.
When I told you about this back in December, Diamond Offshore Drilling was trading at $6. Now, it’s trading at $1.60 — down 75%.
Halliburton was trading at $24. Now, it’s trading at $8.50 — down 64%.
Schlumberger was trading at around $38.50. Now, it’s trading less than half than that. It’s at $17.50 — down 55%.
Now, that’s really where things were four months ago. You didn’t have to make any major predictions. All you really had to do was find companies that were financially unsound, trading at terrible valuations in an industry that had a headwind instead of a tailwind.
So, if we want to find companies next six to 12 months is going to do really well, just invert it. Let’s find companies that are going to be in industries that should do well once the economy gets back to normal — companies that are financially sound, trading at bargain prices.
That’s what I did … and it took me right to the software industry.
Software Stocks
Unlike movie theaters, travel cruise ships, restaurants, hotels and airlines, all the companies that are in the software industry deal with customers that are remote. You work from home, from your computer — from anywhere!
These companies pay on a subscription basis for the services of this particular company and many other software companies. And they have revenue that’s reoccurring. You sign a contract in every month, you keep paying.
So, here you have a company that doesn’t have to really spend a lot of money, doesn’t rely on street traffic like a restaurant, doesn’t rely on the country starting up again … Because, regardless, people are still using their services, and they’re financially sound.
So these companies have strong balance sheets and will survive. In fact, they’ll not only survive this — they’ll thrive.
The software industry has a huge tailwind, and one stock just jumps off the page at me. You don’t really need to think much about this. This company stands head and shoulders above the rest.
You ready? Pretty simple: Microsoft Corporation (Nasdaq: MSFT).
Microsoft is the largest software company in the world. They have strong margins. They were a huge player in the cloud industry. All that’s going on is still happening regardless of people going out the streets, social distancing and even business slowing down.
People are working remotely. They’re still using Microsoft’s cloud service. They’re still in the contract, paying subscription fees every single month.
But here’s what just jumps off the page: Microsoft has $134 billion in cash on their balance sheet. Even when you subtract the debt, you’re left with $65 billion net after debt.
What’s Next?
Now, no one knows how long this economic shutdown is going to be and how long this pandemic will last … But if any company is going to survive, it’s going to be a company like Microsoft. Their solutions are vital to productivity in almost every business.
And guess what? You have a financially sound company in an industry with a tailwind trading at a pretty attractive price. This doesn’t happen every day of the week. And I don’t remember the last time that Microsoft was trading at this kind of valuation.
But keep this in mind: Not only will this company survive the shutdown, but they’re going to thrive when the economy kicks back.
You don’t have too many chances to pick up a great company in an industry with a tailwind that’s trading an attractive price. When it does happen, don’t go out with a thimble — go out with a bucket and buy as much as you can! That’s what you should be doing.
Now, I’m not saying to put all your money into Microsoft. But an 8% to 10% position in a company like Microsoft, over the next five years or so, should just give you absolutely fantastic returns. A lot can happen, but you have all the odds in your favor…
An industry that is thriving and moving forward with a tailwind of a company that’s financially sound, trading an attractive price with huge cash piles to survive any type of prolonged downturn.
There you have it! Just do the opposite of what I did in December.
Instead of finding companies that are financially weak trading in lousy industries, you find financially sound companies trading in great industries, and you buy them at great bargains instead of overvalued stock prices. That’s not the way to go.
But investing is not complicated. It’s basically finding great companies trading at discount prices, buying them when they’re trading at those prices and then sitting on your ass and letting the company make the money for you.
Regards,
Editor, Alpha Investor Report
