Monday, October 13, 2008

Mid-Mayhem Update

This is your Uncle Fleabagger (disclosure: I am not really your uncle), and I'm here to talk to you about the market mayhem, and the effect that that will have on TFP's picks.

First, I would like to remind both of my readers that all my picks (except options) are for at least two years. If you've held on to them, you have not yet lost any money, and you probably won't (as always, no guaranties possible). For one thing, both recession and massive government deficit spending and interest rate slashing in an attempt to ward off recession would be good for owners of silver and gold. So I stand by my silver mining picks, as I expect at least one of those scenarios. The only difference is that they're cheaper now, so your potential gain is increased. The possible explanations of why include liquidation of large mutual fund/hedge fund/exchange-traded fund positions for the sake of returning capital to the funds' investors who are withdrawing their money in a panic. Also, there could be well-founded fears of inability of management to execute well in the face of credit annihilation and other challenges. This is why I am in favor of diversifying among silver miners.

Silver Wheaton (SLW - $5.03) remains the most respected of silver producers, and Coeur d'Alene (CDE - $1.08) remains rich in silver reserves, especially relative to their valuation. Apex (SIL - $1.80) is heavily debt-laden and very risky, but could pay off big if silver prices rise far enough, soon enough. Silver Standard Resources (SSRI - $10.17) is another good choice, and other silver miners to a lesser extent. Diversification is more important in this industry than most, so cast a wide net in relation to the amount of your investable capital.

One thing about CDE in particular: my trusted TMF CAPS colleague Christopher Barker quotes Coeur CEO Dennis Wheeler as saying that "the company has no need to access or seek new lines of credit in the foreseeable future." And that "capital expenditures [are] fully funded by cash on hand and cash flow." If this is true, there is no need to worry about the credit crunch affecting this particular business. With its enormous silver reserves, and a lot of tough luck behind it, factored into the share price, CDE is still poised to explode upward if the price of silver responds to the coming stagflation.

Nasdaq OMX Group (NDAQ - $26.75) remains a great brand name in a great business (stock exchanges), helmed by shrewd, invested managers. The decline in share price may have short-term justification in the worsening economy, the almost certain dearth of new IPO's and listings, and the gradual loss of trading volume in long-term bear market. However, Nasdaq is probably not about to disappear just because the going has gotten rough. In fact, this may turn out to be an opportunity for long-term expansion and further industry consolidation. Hold onto this one for the long term, and if you already have a diversified portfolio (across different industries and different economies), go ahead and invest extra capital here at these reduced prices.

Western Refining (WNR - $6.20) is still a junior refiner, easily wracked by increases in crude oil prices or threats to the credit market. I still like their chances for a big recovery, but would balance that with a company that could profit from higher oil prices, such as Bolt Technologies (BOLT - $8.05), or the somewhat safer (and now attractively priced) Transocean (RIG - $68.36). Just looking at the numbers, Bolt is astonishingly cheap, and marvelously fast-growing. That growth could be slowed by a pullback in energy prices, but there are some companies preparing for prices to go back up, and as a parts supplier, Bolt can still sell to those businesses, even if they turn out to be wrong. The pulse-pounding growth potential, however, is realized only if oil goes back up to $150 or higher.

It's a similar story with Transocean. As deepwater drilling services company, they will really prosper if oil goes soaring to new highs again. However, the downside risk is mitigated, in this case by already-inked contracts worth billions of dollars over the next few years.

The long and the short of it: now is a better time than ever to buy most of these stocks, as well as many others. Outside of financials, homebuilders, and other companies heavily dependent on debt or an asset bubble, most companies are already oversold. Now is the time to start buying, and it will be time to keep buying probably for a while yet. Good hunting!

As always, own your own decisions, as The Fleabagger Portfolio is not responsible for losses you may sustain in following the advice found here. All investments are subject to risk.

The author owns call options for SLW and CDE, and shares of CDE and NDAQ, and intends to buy shares of BOLT.

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