Insights from Tom Sudyka
Tom Sudyka: The recent decline in oil prices has put a damper on the near term outlook for oil company earnings and growth. Texas Pacific is in a somewhat better position than most because oil production on their owned properties is growing at a faster rate than oil prices are falling. Longer-term we believe the eventual stabilization of oil prices and/or potential price increases will allow TPL to regain the momentum seen earlier this year.
MutualFunds.com: Speaking of tumbling oil prices, do you see the sell-off offering opportunities in the major oils? As well, what is your take on MLPs?
Tom Sudyka: We believe major oils are well positioned to continue their historical record of growth. Keep in mind most of the major oils managed to deliver positive earnings and stock performance when oil traded in the $20 per barrel range. For them it is a matter of selling at levels above their finding and production costs. Improvements in technology have had the effect of lowering the major’s finding and production costs, a trend we don’t see decelerating.
We have never been a big proponent of MLPs at Lawson Kroeker. While MLPs may have been an effective way for the energy sector to divide the more stable part of the industry from the more growth oriented parts, we favor investing in companies where management has the ability to decide what is the best use of the cash flow generated (whether reinvestment or distribution through dividends) rather than being tied to a 90% required payout.
MutualFunds.com: Bonds are part of your fund’s allocation. Do you expect to hold the line on the fund’s bond allocation or are we ultimately going to see the end of the bond bull market?
Tom Sudyka: We believe bonds will remain an integral part of the LK Balanced Fund. Predicting short term movement in interest rates is probably more precarious to your financial well-being than trying to predict where the stock market will be tomorrow, next week, or next month. The consensus for the past few years has been that rates will rise, ending the 30+ year bond bull market. Yet rates have yet to rise. Historically, bonds have been a stabilizing force in a diversified investment portfolio, we expect they will remain so in the future.
MutualFunds.com: With commodities in free fall, is there any interest in building positions in the precious metals space?
Tom Sudyka: The commodity free fall as you term it has been largely driven by a slowdown in Chinese demand for most all industrial commodities. Precious metals have suffered along side, yet there may be a case for the recovery in that space as worldwide wealth expands. We expect long-term precious metal pricing to be driven by underlying supply and demand for the metals, not by the hedge fund speculation that seems to have been in the driver’s seat recently.
MutualFunds.com: Back to equities, your holdings in Disney (DIS) express confidence in the media-related space. Do you think we’ll see a pickup in consolidation chatter following the big Time Warner (TWX)/News Corp (NWSA) merger that never came to fruition.
Tom Sudyka: We think Disney is a great way to play the always changing Media space. With a broad base of investments, their market strength puts them in a strong position when contract negotiation time rolls around. In addition, their extensive library appears to be a constant source of renewable revenues. We suspect the trend in media consolidation continues, although strategic tuck-in acquisitions are somewhat more likely than mega mergers like the TWX/NWSA.
MutualFunds.com: What are the main themes investors should pay attention to as we head into 2015?
Tom Sudyka: Heading in to 2015, investors should continue to focus on the long term fundamentals driving the companies in which they are investing. We remain alert to shifting economic conditions, but expect the U.S. economy to continue its slow growth trajectory, which should be positive for the equity markets.
The Bottom Line
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.