Saturday, August 30, 2008

September 2008 Stock Pick

TFP will do something different this month. Not only will there be two new picks, but there will also be a conditional sell recommendation. In this post I am giving updates on my existing picks, in addition to making two new picks. No, I'm not abandoning my theses, but I've had a change of heart about whom to serve with this blog. No longer am I dedicated exclusively to those risk-loving financial daredevils in their early 20's who want more volatility in their stocks than in their stormy personal relationships. Even though I am typically not a fan of hedging (because I am a risk-loving financial daredevil in my early, or rather mid 20's), I am going to talk a little bit about mitigating risk today.

First of all, NDAQ is no longer quite so much of a screaming bargain as it was for most of the past two months, but it is still enormously undervalued. BATS (yes, that's actually the name of one of Nasdaq's competitors) is potentially going to cut into Nasdaq OMX's market share, but the risks there are already more than priced into the stock, especially considering the headway that Nasdaq OMX is making in Europe, with the aptly named Nasdaq OMX Europe. In the past, competition hasn't stopped NYSE, CME, CBOT, Nasdaq, and plenty of other exchanges from growing their revenue and cash profits all at the same time. BATS isn't going to bankrupt the big girls either.

NDAQ is still a buy at $32.69 (Friday's closing price) up to $39. (I am lowering my maximum buy price out of respect for BATS. I'm not afraid of BATS, I just have a healthy respect for them.) This is probably my safest pick so far. (Disclosure: I own shares of NDAQ.)

CDE, my second pick, is way down, partly due to the laughably shortsighted dip in silver prices, and partly due to company-specific problems, particularly at the San Bartalome mine in Bolivia. I remain concerned that company-specific problems may make the stock an unprofitable investment despite what I see as an almost inevitable rise in the price of silver. For those of you who want a guaranteed return in the event of a rise in the price of silver, you can buy the ETF that goes by the ticker SLV. It has some modest expenses, but for it tracks the price of silver almost exactly. I think gold will go up less than silver, but there's a fascinating ETN with the ticker DGP, which allegedly doubles the monthly price change of gold. If this works like it's supposed to, and gold goes up as much as I expect it to, this would be a very fine investment. For those who don't mind the added risks of CDE, I still consider a Screaming Buy at Friday's closing price of $1.79. Silver and SLV are Buys at $13.69/oz and $13.37, respectively, and gold and DGP are Buys at $831.90/oz and $17.90, respectively. (Disclosure: I own shares and call options of CDE.)

My most recent pick was WNR, a refiner that, as of the close Friday, was up more than 19% from where I recommended it, and more than that (37%) from where you bought it if you bought it after the market opened the following Monday. Better still are the returns of those who bought the December calls with the $5 strike. Now, I am recommending that you sell all of them. Unless...

(Brilliant segue into the new stock pick, n'est-ce pas?) Buy BOLT. Bolt Technology Corp. makes energy sources and cables for marine seismic imagers. If you guessed that that has something to do with oil exploration, you get a cookie! (Disclosure: you don't actually get a cookie unless you buy it for yourself.) Bolt (ticker: BOLT) is also very small, at a market cap of just $165.90M. This means their annual revenue growth rate could continue to be 50-70% for a long time before they become big and slow. And their earnings and free cash flow could continue to double or triple every year for several years before they become a mega-cap industrial giant like GE or ExxonMobil. But why should their growth continue to be torrid? Well, because marine seismic imager energy sources are a growth market, and they will be as long as oil prices stay high or, better yet, go higher.

You see, seismic imagers are used more and more by oil exploration companies the more confident they feel that offshore drilling will be worth the cost -that is, the more oil stays over $100/barrel. In fact, if the price of oil skyrockets, oil companies will be scrambling to seismically image the whole ocean in search of more oil. If oil stays flat from here, BOLT could still see substantial revenue growth as oil companies start to feel confident that they will get more than $100/barrel for oil that has to be found using marine seismic imaging. If oil starts to go up again (which I think it will in the not-too-distant future), BOLT could see a return to frenzied revenue growth, with exploding cash earnings propelling its share price skyward. From its current share price of $19.25, BOLT could see a 300+% gain within 3 years. I expect oil prices won't stay down for long, and that's why I'm setting a 3-year price target of $80 per share on BOLT.

The downside, in the event oil plummets to $90 or less per barrel, is pretty well covered by owning a refiner, such as WNR, which would profit tremendously in such a scenario. Other risks include the company not performing well and failing to exploit the opportunity afforded by higher oil prices. In that case, both BOLT and WNR would probably go down. I doubt the likelihood of such a scenario, but it could happen. I think it is more likely that both will profit from oil trading in a 110-140 range and refined petroleum products increasing in price. Anyway, BOLT seems to have a lot of potential reward relative to its risks. Still, a much safer (though less likely to quadruple) oil pick is RIG. Transocean, Inc.

From over $160 in May, RIG has dropped more than 20% to $127.20 as of this past Friday. RIG had had a marvelous 5-year run from below $20 in much of 2003 to over $160, a >700% gain. That was because oil prices were shooting up, and much like Bolt, Transocean was in demand when oil companies went after underwater oil wells. Unlike Bolt, Transocean works with oil that has already been discovered. They have things known as jackups and floaters, and they go and get the oil that oil companies found using Bolt's equipment. They charge substantial fees for their services, too, because it's dangerous, difficult work.

Well, like I said, oil will probably continue to climb again over the next 3 years. It will probably be way up in 2009 and 2010. Petroleum is used in so many applications besides energy, it's not even funny. And we're finding less and less of it all the time, especially in easily accessible, dry land-type areas. That makes Transocean's services all that much more valuable, because they can go get the oil out in the deep water, the oil that's hardest to reach.

In addition to all these peachy things, Transocean's risk is further diminished by the sizeable portion of their revenue that comes from contracts that are signed years in advance of the actual drilling, with high prices written in. Also, this is a $40B company, by market cap. That means that if something happens that wipes out $10M of value, they can pretty much absorb it and move on.

If you really want to avoid company risks and hedge your refiner, you could even buy USO, the ETF that tracks the price of a barrel of oil, minus expenses. But that would make you a weenie in my eyes, if you care.

So, basically, if you have WNR and you can afford to buy BOLT, I recommend that. If you're nervous about small, niche companies, buy RIG instead of BOLT. If you're a real nancy, you could buy USO. And if you can't buy some company that profits from rising oil prices (and no, Exxon and solar companies don't count), just sell your refining stocks, take your profits, and move on.

As always, do your own due diligence, and own the decision(s) that you make. Disclosure summary: I own shares of NDAQ and CDE, as well as call options for CDE.

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.