Buy the Leaders, Buy the Brand Name

One of the most important things I’ve learned about investing over my career…

Sometimes it’s best not to over-think things.

I mean, you can spend hours, days, or weeks researching companies with the best fundamentals in a particular industry.

But at the end of the day, your most profitable stock picks are going to be the ones most other people are going to pick, too.

Here’s a great example that just happened to me…

Back in December, I liked the way copper was looking, so I researched several different producers, developers, and explorers of the red metal.

Among some of the larger copper producers, I found a lot of debt. Companies like Freeport-McMoRan (NYSE: FCX) had racked up billions in debt due to the sharp decrease in copper prices last year.

And after looking through dozens of copper companies, I eventually decided that Nevsun Resources (NYSE: NSU) — a lesser-known mid-tier miner — was one of the companies that would be best leveraged for rising prices due to its operational scale and low production costs.

So back in January, I bought NSU at $2.94. I’ve long since taken a profit from the investment.

But let’s compare the investment return between Nevsun — the company I spent weeks researching looking for the best fundamentals — and Freeport-McMoRan, which, despite having one of the highest debt-to-equity ratios in the mining industry at the time, is the most well-known copper miner in the world.

Now, I’ll never complain about taking a profit. But come on!

I would have done more than three times better if I had just bought the “brand name” company, Freeport-McMoRan.

Hell, I’m not embarrassed to admit it. Back in December, I even wrote to you saying, “I’m staying away from FCX for now.”

But could you blame me?

Freeport-McMoRan shot itself in the foot when it got into the oil and gas market back in 2013. As a result, the company was still $19 billion in debt.

Think about that number for a minute…

$19 BILLION!

Think about how many companies will simply never have a total valuation of $19 billion.

It’s the equivalent of the total GDP of the 25 smallest nations in the world.

And Freeport-McMoRan has to pay that back somehow.

But take a look at its stock price since the price of copper turned around back in mid-January…

The point is, the most profitable stock picks are going to be the ones most other people are going to pick, too.

And in this case, it was Freeport-McMoRan because, as mentioned, it’s the most well-known copper miner in the world.

The takeaway here is that in a booming market like commodities right now…

Buy the leaders. Buy the brand name.

Let’s take a look at another company with massive debt that is also the “brand name” of its industry: Barrick Gold (NYSE: ABX).

With $10 billion in debt — $10 BILLION — Barrick also had one of the highest debt-to-equity ratios in the mining industry back in December. Nevertheless, the rally in gold prices has taken the stock over 90% higher. Take a look…

So if you like gold…

Own Barrick Gold (NYSE: ABX).

If you like silver…

Own Silver Wheaton (NYSE: SLW) or Pan American Silver (NASDAQ: PAAS).

But let’s even take a look at a market in decline: crude oil.

Since the summer of 2014, the price of crude oil has fallen about 75%, as measured by both spot prices and the PowerShares DB Oil ETF (NYSEArca: DBO). Meanwhile, two of the most well-known crude oil producers — Exxon Mobil (NYSE: XOM) and BP (NYSE: BP) — haven’t seen losses nearly as bad.

XOM is only down 17%. That’s not even that bad.

I think the truth is that even though we know the market acts mostly on emotion, it’s still not as logical or rational as we think.

Maybe it’s herd mentality? Maybe it’s the result of an unsophisticated market?

I don’t think it matters.

Owning the leaders seems to have great upside in a rally and limited downside in a market’s sharp decline.

Keep it simple…

Buy the leaders. Buy the brand name.

Luke Burgess
Energy and Capital