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Ask the expert — a question and answer session on the stock market

The editor of a leading U.S. advisory fields questions from his readers and offers frank answers on stocks, gold and the future of the market.

Investors are always full of questions — or ought to be. No doubt you should ask as many questions in good markets as in bad, but times like these do seem to lend themselves to a multitude of inquiries.

Today, we have questions and the answers to go with them.

We’ll sit in as investors fire questions at the editor of a leading U.S. advisory, Richard C. Young’s Intelligence Report. In his latest issue, Mr. Young publishes a series of queries from his readers along with his detailed answers. We’ve selected the Q & A exchanges that should bear the greatest interest for Canadian investors.

While some of the questions deal with the most obvious concern — what the heck is going on and what can we do about it? — others are content to deal with very specific investments. They cover everything from Canadian income trusts to Chinese gold coins to Coca-Cola.

And as we do each time we visit Mr. Young, we’ll review this advisory’s Top 10 Common Stock Countdown.

Hold the coal

The first question that Mr. Young publishes captured our interest right away. It’s about income trusts.

Mr. Young believes that dividends are fundamental to the success of an investment portfolio. Thus the first questioner reckons he is one of many subscribers who invests for dividends in income trusts, specifically Enerplus Resources (NYSE-ERF; TSX-ERF.UN), Penn West Energy (NYSE-PWE; TSX-PWT.UN) and Fording Canadian Coal (NYSE-FDG; TSX-FDG.UN). Does Mr. Young have any thoughts to share on Canadian income trusts in light of the tax changes?

Mr. Young does, and they are not favourable to income trusts. He advised selling Enerplus and Penn West when the government first announced the tax ruling in October 2006. But he did keep Fording on his Monster Master List, “because I viewed (and still view) the company as a takeover target.” He advises those who own Fording to hold it. Otherwise, he has covered no Canadian income trusts since the tax announcement. Take that, Jim Flaherty.

Jets are the future

Jets are the next subject. Mr. Young has written that the future of airlines and aircraft manufacturers lies with the Very Light Jet (VLJ) market. How then, asks the next questioner, does the editor reconcile that belief with his high recommendation for Boeing (NYSE-BA), which makes no such jets?

Mr. Young has three answers for this one. First, VLJs will certainly expand air travel by going to remote locations whose airfields aren’t equipped to handle commercial aircraft.

Second, Boeing is a huge exporter of aircraft. In emerging economies, the demand for air travel will be met through commercial aircraft, not VLJs. There’s still not enough private income for private jets.

Third, if VLJs begin to steal market share from big commercial aircraft manufacturers, Boeing will get into the market, probably through an acquisition.

We will make a fourth point about Mr. Young’s enthusiasm for jet travel that is not directly covered in the Q & A. He has had Bombardier Inc. (TSX-BBD.B) on his Monster Master List of stocks for some time.

Does Coke go nowhere?

Let’s deal with one more individual stock before we move on to questions on precious metals and the markets in general. This questioner wants to know if both Mr. Young and the world’s most famous investor are full of it.

“You (and Warren Buffett) are big fans of Coca-Cola (NYSE-KOK), but the stock price does nothing,” says this exasperated reader. “If you plot the stock versus the S&P 500, the plot shows that the stock goes nowhere.”

Not so, replies Mr. Young. “Coke is an outstanding business, with one of the most valuable brands in the world.” Pay attention to the dividends, he adds. Add them in and Coke has kept pace with the market since mid-1999. Last year, Coke was up 30 per cent including dividends, the S&P 500 only 5 per cent.

Platinum and gold

Canadians know exactly where to go to cash in on rising prices for most metals, but what about platinum? The world’s largest producer is Anglo-American (NASDQ-AAUK), headquartered in London. Still, asks one reader, does it have enough to rival the Vanguard Precious Metals and Mining Fund (VGMPX)?

The short answer from Mr. Young is yes. In addition to platinum, Anglo-American has a wealth of other resources — diamonds, coal, gold, ferrous metals and more. This means that a gap between the price of platinum and other resources could open a gap between the price of platinum and the share price of Anglo-American. But usually they move together.

“My chart on Anglo-American versus platinum futures shows that historically over long periods Anglo American and platinum have moved in tandem.” So if platinum prices rise (as they are expected to do in the short term), you know where to go.

But what about the precious metal of choice in times like these? “Is it too late in the gold cycle to buy now?” asks one reader. And do you ever sell?

“There may come a time when I will sell gold,” replies the editor, “but that time is not now. Gold is a guardian of wealth.” Mind you, he adds, if you have waited until now to buy, you have missed out on big gains. But there is still time to buy. “There are many reasons for gold to move higher.” His favourite investment at the moment is streetTRACKS Gold Shares (AMEX-GLD).

Don’t sell your Pandas

Here’s a buy in precious metals you won’t hear your broker talking about — China Panda gold coins. One puzzled reader followed Mr. Young’s advice several years ago and bought a set. But he can’t find a market for them.

They can be sold, replies the editor, “but I did not recommend these coins as a short-term holding. I have owned Gold Pandas since 1982 and I have never sold a single coin, nor will I ever. My Gold Panda collection is an anchor in my estate. You should view your coins as a permanent long-term holding to be passed on to future generations.”

If you want to trade gold, look to a more liquid investment, like the aforementioned streetTRACKS Gold Shares.

The American president and the global economy

We conclude this session with two questions on the big picture. One is the much-talked-about presidential election cycle. If a presidential election year is supposed to be so great for the market, asks a reader, what happens this year?

Well, the best year of the cycle is actually the year before a presidential election, says Mr. Young. The second best year is the election year itself. “My chart on election year returns on the S&P 500 shows that since 1960, stocks have only declined twice during an election year.”

He doesn’t think it will happen this year, either. The mortgage meltdown, he says, “is easy bait for candidates. If the meltdown worsens, the call for a full-blown bailout of irresponsible borrowers will grow louder. Stocks will likely perform well in this environment.”

Finally, there is the inevitable question: if the U.S. goes into recession, will the global economy follow?

“Probably,” replies Mr. Young. The idea that foreign economies have decoupled from the U.S. does not make sense. “As globalization increases, international trade grows, capital flows between countries increase, and economic growth among world economies becomes more interdependent — not less so. If there is a U.S. recession, some economies should stay strong; but most should slow along with the U.S.”

In the meantime, Mr. Young’s Top 10 Common Stock Countdown includes several foreign stocks — one at the top of the list.

February’s Top 10

Here are the ten best stocks for American investors today, in the opinion of Mr. Young.

1) Xstrata (LSE-XTA.L), the Swiss company that gobbled up Falconbridge.

2) United Technologies (NYSE-UTX), which has just signed a major helicopter contract with the U.S. military.

3) Unilever (NYSE-UL), the great British soap company, gone multinational.

4) PepsiCo (NYSE-PEP).

5) Royal Dutch Petroleum (NYSE-RDS.A).

6) Southwest Water Company (NYSE-SWWC), as delivering clean water becomes ever more important.

7) St. Joe (NYSE-JOE), owner of prime Florida coastal property waiting for retired baby boomers to arrive.

8) Sysco (NYSE-SYY), a food products distributor to restaurants, healthcare facilities and other lodging establishments.

9) General Electric (NYSE-GE).

10) Newmont Mining (NYSE-NEM), which has closed its hedge book and should track the price of gold closely.

While these stocks are listed as the best buys now, several — Southwest and St. Joe — are recommended for their long-term potential. The message is, get ‘em now before they break out of a downtrend.

Buy? Hold? Sell? As investors look for answers in a market that lunges madly off in all directions, one thing seems clear. The best way to become a smart investor is to ask the right questions of the right people.