It Pays to Check the Oil

      About 20 years ago, I bought my wife a new riding lawn mower. It was one of the best available at that time with a 21 horsepower engine and automatic transaxle. She loved that mower and used it often, keeping our yard the pride of the neighborhood. I always nagged her to check the oil in the engine each time she used it but she seldom did. One day, shortly after starting to mow, it made a loud noise and died. When I inspected it I found the engine was out of oil and the connecting rod was protruding from the crankcase. Oil is a must for any internal combustion engine, ignore this and disaster will ensue. Our economy also is reliant on oil and it's byproducts like gasoline, jet fuel and diesel fuel. Many people in rural areas heat their homes with heating oil. The recent ransomware attack on the Colonial Pipeline which supplies gasoline to the east coast of the US was a reminder of just how reliant we are on oil and its distillates. I recently counted 22 different gas engines that I own for transportation, recreation, lawn  maintenance, emergency electricity, and gardening. With the advent of electric vehicles, the oil industry has been under pressure for the last 10 years but I believe that there will not be a wholesale conversion to electric power during my lifetime. The internal combustion engine is just too ingrained in our lives to vanish quickly. Since the oil industry is so volatile, I do not have a "buy and forget" mentality about it. Over the past 30 years I have been in and out of names like Schlumberger, Halliburton, Chevron, Royal Dutch Shell,  Marathon Petroleum, Phillips 66, and Valero. Each of these companies have a niche in the industry and should be considered on their individual merits. I like the last 3 listed because they are the refiners of oil and supply us with the finished products that we need in our everyday lives. The barriers to entry into the refinery business are very high for obvious reasons which creates a moat, giving these companies a near monopoly. It also helps that they pay generous dividends while you wait for price appreciation. Schlumberger provides technology to drillers to streamline their operations and make wells more productive. New technology always takes longer to roll-out than expected so I think gas engines will be with us for the foreseeable future. It still pays to check the oil.

A Lesson From Uncle Earl

      Many years ago, my Dad's brother, Earl, came to town from his home in Florida to visit his mother. Earl liked to invest in stocks so I made it a point to meet with him to get some insights into where he was putting his money. To my surprise, Earl told me that he was investing in companies located right here in Evansville, In. With a whole world available to him, he liked this small town in the midwest for his investable dollars. In those days Evansville was a manufacturing mecca. We had heavy industry like Alcoa, Arkla, Whirlpool, General Electric, Meade Johnson, Bristol Myers, and a very robust plastics industry. A byproduct of the plastics industry is many small machine shops that made and repaired molds for plastic injection machines. The end result was a skilled workforce able to keep the wheels of industry turning and a strong work ethic that was inherent in their DNA. Earl stated that some of the best investments are right here under my nose and I didn't even see that. Over the years, local conditions have changed. Many of the industries left and moved production to countries where labor is much cheaper. Some companies have sold or spun-off divisions to streamline their operations. Like the rest of our country, there has been a shift from a manufacturing economy to a service economy. As our local economy changed, I invested more in large companies with global operations but I never forgot what Uncle Earl taught me. Currently, my large-cap stocks are trading at lofty multiples as measured by the P/E ratio. There is also a movement to relocate our supply chain back to America. The problems of relying on foreign sources, especially China, for critical components are obvious now. Also small cap stocks are currently in favor again after many years and so is value investing. Add it all up and it makes sense to take Earl's advice now and look locally for opportunities to make money. Regional Banks are making money on mortgages, higher interest rates, and a surging economy, the plastic industry has a local powerhouse in Berry Plastics, we still have a presence in the pharma industry, and metals are again in demand due to the reopening. Most of these local stocks have performed well so far this year but still trade at very reasonable valuations and they are right under my nose.