Monday, August 4, 2008

August 2008 Stock Pick

Sorry I'm a little late with this pick. I've been very busy with other things, and I want to take the time to make this the sort of high quality pick my readers have come to expect (stop snickering!) As always, Fleabagger's recommendations are not endorsements of the companies mentioned, and Fleabagger Portfolio disclaims all responsibility for your portfolio. You make your own decision, and you own it.

Okay, so my first two picks are down about 8% per month each. Like I said last month, if you haven't bought Nasdaq stock (Nasdaq: NDAQ) yet, I strongly urge you to do so now. It's a great company trading at a great price. Also, if you believe as I do that we will have a spendthrift government financing their largesse by inflating the currency, Coeur d'Alene Mines (NYSE: CDE) will profit from the flight to silver and gold as inflation hedges. Both of these companies are trading near or below their book value, at bargain valuations compared to their history and their potential. Hey, I own them, right? So they must be great.

Well, here's another pick for the history books, so a year or two from now I can point to this as a reason to start charging for my ideas. What is my idea? Why, buying low of course!

There are plenty of good companies you can buy low right now, considering that many stocks of companies with great brands are trading 30%, 50%, or more off their recent highs in anticipation of a bad recession, with perhaps a dash of inflation (see my July pick). But I think that most of those great companies you could "buy low" right now you will probably still be able to buy low in September, October, and perhaps beyond, much like how you can still buy Nasdaq (NDAQ) low, two months after I recommended it. So I am recommending something that I think could see rapid price increases in the next few months. Western Refining (NYSE: WNR).

As a refiner, Western, like its fellow refiners Valero (NYSE: VLO), Frontier (NYSE: FTO), Tesoro (NYSE: TSO), and Holly (NYSE: HOC), does not extract its own oil, but buys it from drillers. So when oil prices go up, Western, Valero, etc. are spending more money to get what they need to do business.

Now, of course refiners sell gasoline, and gasoline prices have been going up. We've all felt that. But they've been going up a lot less than oil prices. So that puts a squeeze on refiners.

The good news (for refiners) is that other refined petroleum products have been going up in price more than gasoline, and their profit margins are not squeezed as much as the straight oil/gasoline comparison would indicate. They also sell jet fuel, diesel, heating oil, and petroleum coke (not an illegal drug), among other things. Many of these things have been closer to tracking the price of oil than gasoline has been. That's partly because of the political pressure to keep gas prices low, and the fear of gasoline sellers that there may be repercussions for sustained $4/gal gasoline.

Nevertheless, profit margins for refiners have been dropping. And that's bad news for companies like Western. But it could be good news for you. Why? Good question. It's because of supply and demand.

Things like oil and refined petroleum products go up and down in price, and the refining margin goes up and down too. Those who believe oil is going to $200/barrel some time soon don't think refining margins will recover in time to make them a profitable investment. Not likely. Oil may well go to $200/barrel, but the speculators have gotten a little ahead of themselves. Too much buying on margin and too little concern for effects on demand have pushed crude oil prices higher than are sustainable in the short term. We are already seeing a pullback in crude prices. This has been accompanied by a pullback in refined petroleum product prices, and thus done refiners like Western no good yet. But refining capacity in the U.S. is so limited that margins are going to go higher soon. It seems very likely to me that at some point jet fuel and petrochemical prices are going to have to break upward away from a temporarily stagnant or diminishing crude price.

So what? Well, Western Refining has been severely diminished in price in the belief that refining margins are never going to go back up. Or that it will be too late for Western. Either way, Western has come down from over $65 per share last summer (in mid-July), and closed Friday at $7.58. They report earnings on Thursday, August 7, before the markets open. If you think they're going to surprise skeptics, the last time you can buy before the report is Wednesday, August 6, before 4:00PM. Even if they do surprise with better-than-expected earnings, however, there will still be time to catch some upside on Thursday, because they could quadruple from here without reaching half of last year's high. So without good news, buy anywhere below $8.00 and plan to hold for 1-2 years. With good news, pay whatever it takes, and hold for 1-2 years. If you are an experienced investor and are familiar with options, this might be a good time for some call options, because of the short time frame and the high volatility. Dec '08 calls with a $5 strike are going for about 3.30. That gives you two quarterly reports to get about $8.30. Not bad at all.

Whatever you do, research and own your own decision, consult a financial advisor, and do not mistake anything here for a guaranty.

Disclosure: the author holds stock and/or calls in NDAQ and CDE, but does not yet own any position in this month's recommendation, or any other stock mentioned. The author may yet open a position in any of the stocks mentioned.

UPDATE: WNR is down 12% or so to about $6.60 per share this morning. Also, call options involve greater risk than stocks. I should have mentioned that.

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