Bengt Saelensminde, who writes the free newsletter The Right Side, has “been pretty much bowled over by Google”.
He’s impressed by its “sophisticated user-friendly technology” and its role in “all the cloud-based services that bring the wonders of the web alive”.
At the same time he’s bearish on Apple as it doesn’t seem to be keeping up. What’s more he’s found a way to make money that is “elegant in its simplicity: short Apple, long Google”.
Of course, this is not to say that Apple hasn’t “been a fantastic business”. Indeed, it’s a company that has “set the rules for what a PC should be”, and “went on to revolutionise not just the way we listen to music, but also the way the industry itself makes its money”.
It has also “showed the world how a mobile phone should work, and then, of course, the tablet too”. The problem is that “Apple’s fantastic growth is starting to taper off”.
In contrast, “forecasters are looking at 35% growth for Google this year”. Even in the coming years, “the guys in the suits are suggesting something like 20%”.
In Bengt’s view “these forecasts may even be a little conservative”. At the very least, he believes that “over the long run, there’s certainly room for upside revisions”. This means that while Apple is the largest firm in the world, “there’s no reason why Google won’t be able to snatch the crown from Apple’s head pretty soon”.
The fact that Apple and Google operate in the same area, while having different prospects means that, “you’ve got the opportunity for an interesting trade”.
In his view, “selling the underachiever short – while going long the stronger candidate – offers us a useful hedge”. This is because “the outcome of your trade isn’t dependent on the performance of the markets”.
Overall, “this long-short pairs strategy would have made a killing over recent months, and it is my contention that it will do so more and more over the coming months and years”.
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Keep an eye on Venezeula
This week, Venezuela has been convulsed by protests. On Tuesday, I explained why time is running out for the ‘Bolivarian revolution’. In turn, this could possibly lead to lower energy prices – and even create opportunities for the oil industry.
Hugo Chavez, who was president until his death last year, “greatly expanded the role of the state in the economy”. Large sums of money were also wasted on buying political support, or on foreign policy gestures.
Chavez’s policies towards the oil industry mean that production is below the level when he took over and US exports are down to levels last seen in 1985.”
Chavez has been succeeded by his former vice-president, Nicolas Maduro. He faces an economic crisis that is now hitting the regime’s natural supporters.
As a result, “protests have been gathering pace, with students setting up blockades in Caracas, the capital”.
“A change of government could have major implications for the global oil market”. This is due to the “huge amounts of oil and gas are contained in the waters off the Venezuelan coast”. Indeed, “one estimate suggests the country’s oil reserves are the largest in the world, bigger than those in Saudi Arabia”.
This means that “an efficient oil industry, run on commercial lines and working in partnership with the private sector, could reverse the downward trend in production” and pushing oil prices downward.
While “Maduro could ride these problems out and remain in power for the near future”, it is clear that “the regime is facing its biggest challenge in years”. This is “certainly something to keep an eye on”, if you are investing in energy-related stock.
One company that could benefit from a relaxation on foreign investment rules is Petrobas (NYSE: PBR). Indeed, “it was one of the few major foreign companies to be granted a (very small) lease in the Orinoco Belt last year”. It trades at a price/earnings ratio of just six.
Why Glencore looks attractive
On Thursday, my colleague Ed Bowsher had a look at the mining industry.
2013 was clearly a “rotten year” for miners with gold, and other metals taking a “battering”. However, “2014 has been a very different story so far”.
Indeed, things seem to be “picking up” so much that “one of the City’s top fund managers is buying mining shares for the first time in ten years”. Specifically, Adrian Frost of Artemis thinks that their cash flow and yield “looks attractive”.
Frost particularly likes the fact that there are also “a lot of new chief executives in place”. Indeed, the fact that “many folk are still writing off miners”, means that “you can get them at attractive valuations”. Ed thinks that turnover at the top is “important”.
In his view, the new CEOs “are focused on cutting costs and sweating existing assets as much as possible”. This should “enable the mining majors to maintain their dividends and hopefully increase them”.
Of course, “the mining industry’s problems are far from solved”. The tapering of quantitative easing (QE) by the Federal Reserve has made “investors start to move away from riskier assets”.
There is also “little doubt that infrastructure spending in China will slow for the rest of this decade”. However, the fact remains that “we’re still going to see plenty of Chinese peasants moving into cities and leading a middle-class lifestyle for the first time”.
All these consumer goods will require metals. Economies are also “picking up across the developed world”.
Overall, Ed thinks that, “valuations for mining companies are pretty attractive at the moment”.
Indeed, “Frost himself has invested in two mining majors – Glencore Xstrata (LSE: GLEN) and Rio Tinto (LSE: RIO)”. The only downside to Rio is that ‘it’s very exposed to just one commodity’, with “around 80% of its profits are generated by iron ore”.
In contrast, Glencore “has a more diversified business”. While it’s a bit more expensive than Rio, it has “a substantial trading business which should allow it to pick up trends ahead of its competitors”.
Next week’s MoneyWeek contains a roundtable of some top mining experts. To get it, sign up for subscribe to MoneyWeek magazine now.
Buy gold miners
Another person who’s bullish on miners is Simon Popple, who runs the Metals and Miners newsletter.
At the moment, Simon particularly likes gold mining shares. He’s not worried by the recent volatility. In his view, “booms and bear markets are just a fact of life in precious metals investing”. He also thinks that, “knowing your history helps to deal with them”, since “it teaches you not to be too elated in the good times or depressed in the bad”.
He admits that 2013 “was terrible for gold by any standards”. Indeed, “it was its first annual loss in 12 years, and it fell by 27.3%”. However, according to the World Gold Council, “the gold price has had 12 periods with pullbacks of 20% or more since 1971”.
The good news is that “there’s always been a nice bounce, and sometimes even an explosion, after the fall”. Even better, during these retracements, “the gold price has typically more than recovered its losses before the next significant pullback occurs”.
The bad news is that “although we’ve been through a lot of pain, there could still be several more months before we get the uplift in the gold price we’re looking for”.
However, the upside is that “when the gold ‘take off’ does happen, our stocks could see explosive gains”. Of course, when gold stocks start to rise, “we need to be very careful”. In his view, “selling too early could leave us on the sidelines watching the bull market roar away from us”, while “going too late could wipe out all our profits.
To read more the specific gold stocks that Simon is tipping, subscribe to his newsletter.
Think again about VCTs
Our editor-in-chief, Merryn Somerset Webb, wrote about venture capital trusts (VCTs) this week.
She dislikes the trusts, because the managers of VCTs are “in a better position than most fund managers to fleece you”. That’s due to the tax breaks and the requirement for investors to stay invested for five years.
As a result, “most VCTs come with management fees of 2-3% a year”. In addition, “they also have initial charges of about 5%”. Throw in other costs, and fees will end up “eating up close to the 30% you saved on income tax”. Indeed, “the running costs alone will do over half the job”.
What’s more, their performance “isn’t madly impressive”. Of course, if the funds end up doing well, you’ll end up paying “the performance fees that are the icing on your manager’s cash-take cake”.
Indeed, one fund recently said that it would take 20% of any performance that was better than RPI (retail price index) plus 2%. Of course, it goes without saying that “for an investment as risky and volatile as a VCT, 2% over inflation isn’t superior. It isn’t even acceptable”.
Hopefully, “one day someone will set up a good VCT”. In her view, such a scheme “won’t justify high and complicated fees by blathering on about ‘industry norms’ and ‘normal VCT practice’, but will be set out in a clear and comparable way”.
There also “won’t be a performance fee based on matching cash Isas”. Ideally, such an investment “will be sold on the basis that the investments are exciting, rather than on the basis that it will save you tax”. Until then, Merryn will “steer clear” of the whole sector.
Merryn’s article has generated a lot of reaction from readers. ‘mr clyde’ agrees that “VCT charges are excessive and managers ‘get away with it’ because investors are blinded by the tax relief on offer”.
However, he is “very comfortable with my overall compound return of ~18% pa (tax free) on the capital invested over the last decade”.
Similarly, ‘DiggerBarney’ thinks she is “tarring all VCT providers with the same brush”. He thinks that, “whilst many or all may charge highly for their service, some provide good value for money”.
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