Tuesday, November 27, 2007

Hedging Your Investments

I blogged about my holdings in Conoco Phillips (COP) back on September 6th, and felt compelled to discuss oil with you again after reading an article today by Robert Kiyosaki.

He makes the argument that higher fuel prices are cause for alarm in all parts of the world—which I agree with wholeheartedly because ultimately oil drives economies. Moreover, prices across the board will continue to rise. According to Kiyosaki, “Not only will fuel costs continue to go up, so will food costs. As our dollar drops in value, countries like India and China import more food from the United States.”

The reason why I am a huge advocate for energy (oil) and commodities is because even in troubled times, the inelastic nature of these sectors makes them extremely resilient to market swings—not to mention hedging your portfolio when things go south. Consumers still need transportation to Target (TGT) and Wal-Mart (WMT) for the bare essentials—no matter how bad the economy gets.

I like Conoco Phillips because of their long term growth prospects: PEG ratio, profit margins, etc. Although they are primarily an oil company, they have devoted more time and money for R&D that targets renewable energy sources.

I don’t particularly like Wal-Mart as a long term investment. Same store sales growth has been stagnant for years, which concerns me because they operate in a relatively mature market. The stock market rewards growth potential. Target, on the other hand, with a lower PEG ratio (1.13 compared with Wal-Mart’s 1.22) and higher profit margins may outpace industry growth averages—making them a more attractive investment.

Troubled times calls for……..rational investments—it never hurts to invest in the very things you think are on the rise: oil, food, etc.