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Don't Miss the Opportunities in Resources

While investors have been focusing on the strengthening U.S. market, we've also kept our eyes on other improving indicators happening in resources, Europe, and emerging markets. These places may not be as widely popular, but we believe investors can benefit greatly from taking a view that's different from the ones observed by the majority.

No one would disagree that Warren Buffett, a famous contrarian, has been very successful by going against the herd.

A key is in identifying strengths early and using math in your favor. We've discussed many of these patterns before:

Consider the leadership change in stocks that took place earlier this year. During the last week in April, you'll recall that U.S. equities bounced back after suffering the worst losses of the year in the previous week, with certain companies taking the lead. Here were our observations from the week's performance:

"Cyclicals rose this week and noncyclical areas were the laggards, which is a change from recent trends. We potentially could be at an inflection point, as defensive areas such as telecom, staples, healthcare and utilities have outperformed by a wide margin in recent months and mean reversion may kick in as expectations got too lofty for defensives and too gloomy for cyclicals."

The chart below shows this turn in the market. Until April 23, cyclical sectors were losing strength against defensive areas. Since then, cyclical stocks have been gaining strength and while the path has experienced the occasional stumble, there's clearly a rising trend.

Cyclical Stocks Gaining Strength in 2013

Also consider China's government manufacturing purchasing manager's index (PMI), which rose for the third month in a row in October. Earlier this year, the survey sample was enlarged from 820 to 3,000 companies, so this PMI is generally a good indicator of China's overall demand.

We closely follow PMIs because they provide a measure of well-being for the manufacturing sector and the economy as a whole. A number above 50 represents expansion, but what's more important for investors is to pay attention to the close relationship between the trend in PMIs and the resulting performance of commodities and stocks.

It's a historical fact that in the three months following a "cross above," there was about a 65 percent probability that commodities and stocks would rise in value.

And taking a look at performance from July 31 through October 31 of this year, you can see the trend held for all measures, except for WTI crude oil. Materials stocks in the S&P 500 Index increased the most, rising more than 8 percent, closely followed by the Hang Seng Composite Index.

Commodities and Stock Performance Following Powerful PMI Data

We believe the strength in these areas of the market is especially encouraging for energy companies, especially those that own high-quality assets in the core basin areas of Eagle Ford, Permian, Marcellus and Bakken. What's important to our process at U.S. Global is finding oil and gas companies that are growing their reserves, production and cash flows on a per share basis.

In An American Energy Revolution, we mentioned Pioneer Natural Resources (PXD), the oil and gas company based in Irving, Texas, which has key assets in Eagle Ford shale and Permian Basin. Often discussed as an acquisition target by a major oil company, it has been a large holding for the Global Resources Fund (PSPFX). On a year-to-date basis, the stock has increased 92.6 percent.

There's also Enterprise Products Partners (EPD), which is a midstream MLP with a dividend yield of 4.4 percent. Based in Houston, it's one of the biggest and most successful MLPs over the last decade. It dominates the processing, transportation and storage of natural gas liquids, which is growing rapidly from the rapid development of U.S. and Canadian oil & gas shale plays. MLPs is one significant emerging energy theme the fund managers have been capitalizing on and on a year-to-date basis, EPD has increased 32 percent.

Valero Corp (VLO) is another Texas-based stock in the energy space. Valero is the largest independent refiner in the U.S., with operations in Canada and Europe. Cheap natural gas and discounted oil from shale and oil sands give Valero a competitive edge compared to its global peers. In addition, its complex Gulf Coast refineries are exporting record fuel volumes to rapidly growing emerging markets. VLO has rewarded investors with a 33 percent return, year-to-date.

I've discussed many times the potentially greater returns from energy companies, but the major difference between an investor gaining from the opportunities or missing it is in taking action today. What action will you take?


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