Reader Question 1

Several great questions came in over the weekend. I'll tackle one the first one today.

First up, a reader asked a follow up about shipping stocks (mentioned in passing in this past weekend's video). I mentioned in the video that one of the names in this group, Dry Ships (DRYS) as being nuclear hot. I made a joke about seeing the name in the $60's a few months back and ten minutes later it was trading at par ($100).

The reader stumbled across Frontline (FRO) and asked for my take on what to make of the 18% yield. He wonders if buying the name would be considered chasing yield. That he is asking the question means he realizes a crucial point. We are in a 3%, or maybe 4% world. Something that yields 7% or 10% or 12% or as high as you want to go has some sort of risk to it. In the last year FRO has been as high as $72, as low as $34 and is pretty close to the mid point right here.

I don't know the stock but you can glean a fair bit by looking at a chart comparing it to the Energy Sector SPDR (XLE). Yeah yeah it only carries oil and shouldn't move with oil stocks but look back over any decent period of time and you'll see multiple instances of the broader sector getting a cold and FRO getting pneumonia. Maybe it is just a coincidence but in the last two years I count this happening six or seven times--it worked the other way too sometimes. There were also times where they diverged.

The reader wondered how much solace the dividend could offer to a purchase that turned out to be unlucky. The stock hit its high on June 23. A few days later it knifed down to $65. Anyone buying at that point and still holding on has a 15% loss with a dividend coming in September. The last dividend was $2.75 so assuming it is the same next month how much solace is that versus a $10 drop. There can be no right answer.

The risk seems to be one of poor entry into a volatile stock. In the last couple of years there have been times where buying panic was wrong and times where buying strength was wrong. I certainly don't have the answer. No matter how great or lousy someone might think the name is anyone buying in is adding a lot of velocity. This was even the case when oil money was more easily made in the stock market a few years ago.