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More Good News on Current Holdings: China Deal, A Consolidation, And Small Caps

We’ve had more very positive moves in three of our current holdings, and there are reasons to believe these upward trends will continue. In particular, the evolving trade deal with China could be very beneficial to one of our industrial stock holdings, one of our energy sector stocks just received a nice upward bump following consolidation news subsequent to new FERC regulations, and a certain small cap play is poised for a continued strong rally.

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Union Pacific (UNP), Yield: 2.1%

The industrial stock we are talking about is railroad company Union Pacific, which we own in our Blue Harbinger Disciplined Growth portfolio. As shown in the following chart, UNP has been performing well lately, and there are new reasons why this could continue.

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Specifically, if you haven’t heard, China has agreed to bolster purchases of US goods, in a move to substantially reduce the trade gap with the US. For example, Beijing and Washington agreed to meaningful increases in United States agriculture and energy exports. This could be a windfall to Union Pacific for two reasons. First, Union Pacific has strategic access to key west coast ports that other railroads do not. And these ports are the passageway to trade with China (goods are unloaded from UNP trains and put onto ships at these ports). Second, a large portion of UNP’s business is related specifically to agricultural and energy products.

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This is a strong incremental positive for UNP’s business, and it gives the stock more room to run, in our view.

Williams Partners (WPZ), Yield: 6.5%

We own energy infrastructure MLP WPZ in our Blue Harbinger Income Equity Portfolio, and in case you didn’t notice, the shares jumped 7.5% higher last week on news that parent Williams Companies (WMB) would be buying the 26% of WPZ that it doesn't already own (see: Williams buys rest of Williams Partners for $10.5B). Here is a look at the performance:

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Under terms of the deal, Williams will exchange 1.494 of its shares for each Williams Partners share. This deal will modestly reduce the dividend for legacy WPZ unit holders, and will also likely trigger a taxable event for unit holders. However, the result will be a financially stronger entity, with better aligned interests, and it will solidify WMB as a premier midstream (natural gas) company. We continue to hold the shares.

Small Cap Value ETF (IWN)

If you don’t know, Small Cap stocks (Small Cap Value stocks, in particular) have a long history of repeatedly outperforming the market over market cycles (dating back since before the 1930s):

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However, they have been significantly underperforming the market in recent years, as shown in the following chart.

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However, this next chart shows that trend has recently started to change...

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And there are reasons to believe small caps could continue to outperform significantly. For example, according to this article, Small cap stocks are in the 'early innings' of a record run:

B. Riley FBR's Art Hogan predicted recently that trend will dominate in the coming months. He has a year-end price target of 1800 on the Russell 2000, a 16 percent surge from where the index began the year.

"We're in early innings of this run," the firm's chief market strategist said recently on CNBC's "Trading Nation." He added: "This is a trade that's got legs."

We agree small cap stocks (small value in particular) have a lot of room to run, and may outperform the market significantly in the months and years ahead. A couple things we like about small cap stocks is: (1) they tend to have more domestic exposure than large cap stocks, a characteristic that could benefit them well given the current administration’s focus on the US, in particular, and (2) It's often easier, on average, for small caps to grow more than large caps because small caps are starting from a much smaller base (i.e it's much harder for a company to go from a $300 billion market cap to a $600 billion market cap, than it is to go from $300 million $600 million, in terms of absolute dollars.

We own the Russell 2000 Small Cap Value ETF (IWN) in our Blue Harbinger Disciplined Growth portfolio because we believe it has the potential to significantly outperform the rest of the market in the months and years ahead, and this particular ETF is a very low cost and highly efficient way to play the space.

Conclusion:

Overall, we are having a very strong month of May so far in terms of our current holdings, and WPZ, UNP and IWN are three more examples of current holdings that we believe have more upside ahead. You can view all of our current holdings here.

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