Strike Started at Potash Mines

I wrote earlier about a possible strike at three of Potash of Saskatchewan's (POT) mines. As of August 7, the miners are on strike. In morning trading, Potash is in the low $170s (down 3 to 4%), and has touched 169.

I don't think the strike is affecting the stock's price yet, as Mosaic (MOS) is lower by around the same percentage. The price of oil dropped today. Agriculture prices have also slumped. These are the most likely causes. However, should the strike be lengthy, POT might fall more. I'll evaluate the stock again if it gets to $150.

The company's strike updates are here.

A Note About My Stock "Recommendations"

It occurred to me that some of my posts about individual stocks read like formal recommendations to buy or sell. I aim to be as accurate as possible with the information I present. My conclusions based on that information, however, should be scrutinized closely and with great suspicion. So, for example, if I say something like, "the stock will go higher because of x," consider x to be true but form your own opinion on how x will affect the stock and whether x is even relevant.

While I'm positive on some stocks and bearish on others, I only trade a small fraction of them. If you want to buy the stuff I buy, and sell the stuff I sell, (and lose money with me) all the power to you. I hope you make money. But remember, all investment decisions are your own. Take all stock advice--from everyone!--with a grain of salt.


Why I'd Wait to Buy FRO and OSG

Over the next several years, as emerging economies continue to grow and developed economies (hopefully) get back on track, demand for oil should continue to rise. Frontline, Ltd. (FRO) and Overseas Shipholding Group (OSG) are two of the largest crude tanker operators in the world. Both companies have bright futures, but now may not be the best time to buy their shares.

Reasons to Wait to Buy Frontline

Frontline is highly leveraged to tanker spot rates. While rates have been high recently (factors include China getting ready for Olympics, Iran using some of its tankers for purposes other than oil transport), they are likely to drop next year. FRO, along with its competitors, has been busy investing in new ships. While some of these will replace existing ships, the first half of 2009 is expected to see a large net gain. Tanker oversupply may lead to a fall in spot rates, even if demand for oil remains constant.

While high, the dividend yield is probably below the 19% currently advertised. Frontline has never had a stable dividend. So don't buy the stock expecting $2.75 per quarter. It may be higher next quarter, but as earnings mostly depend on spot rates and asset sales, the dividend will likely decline next year.

The high analyst estimate for 2009 earnings is $6.66 per share. As of the recent close of $55.90, Frontline is trading at 8.39 times the highest 2009 earnings estimate. The stock has had an average P/E of 4.7 over the last five years. If it trades close to its average P/E, the share price will be substantially lower.

In addition to the short term concerns above, investors in FRO always run the risk of share dilution. The generous dividend policy leaves the company with little cash. Acquisitions and unexpected expenses are likely to be financed by issuing new shares or taking on more debt (debt/equity is already over 5.9).

Frontline's fleet list can be found here.

While FRO may not get that low, as John Fredrksen runs a tight ship, I would wait until the stock goes below $40 a share before buying.

OSG May Be a Better Buy Right Now, But It Can Go Lower Too

Overseas Shipholding Group faces similar earnings pressures for 2009. However, the company is less leveraged to the spot rate market. As of June 30, 2008, non-cancelable term charters amounted to $1.6 billion. Locked in future revenues also include $1.8 billion from OSG's natural gas operations.

OSG is trading at a substantial discount to its Net Asset Value (estimated at $110 to $120 per share). Frontline has made buyout overtures, and OSG is receptive. The US Jones Act, which provides, among other things, that foreign investors cannot own more than 20% of a US shipping company, seems to be preventing a deal. Frontline is incorporated in Bermuda. Whether a deal materializes or not, the prospect of one can provide additional downside protection for investors (although it doesn't seem to prevent the stock dropping over 7% in one day).

While there aren't any significant barriers to entry in the crude shipping market, OSG enjoys the protection of the Jones Act from foreign competition. The company expects earnings before taxes and expenses in its US operations to grow by 65% over the next three years. Future projects include shuttling oil from deepwater drilling in the US Gulf. (Interested investors might want to take a look at OSP, OSG's master limited partnership.)

While OSG's dividend yield is not nearly as high as FRO's, it is stable, and may rise in the future (it was recently raised by 40%). OSG has good cash flow, and its debt/equity ratio is 0.66. The company's clean balance sheet will enable it to take advantage of future opportunities.

While the share price looks attractive compared to OSG's estimated NAV, the company may trend lower in 2009. Analyst consensus for 2009 earnings is $7.37 a share. Over the last five years, the company's P/E has been 7.46 on average. As of the recent closing price of $66.33, OSG is trading at 9 times 2009 earnings consensus. Keep in mind that OSG has a knack for failing to meet Street estimates, sometimes to the upside and sometimes to the downside, usually by double digit rates (who's to blame, the company or the analysts?). The low analyst estimate is $2.21 a share. If this turns out to be correct, OSG is trading at nearly 31 times 2009 earnings.

A list of OSG's fleet can be found here. Note that the link is an Excel spreadsheet.

Expect lots of volatility and keep an eye on the tanker rates (here and here are good places to get started). I would look to buy a small speculative position in OSG if it falls below $60, and then see what happens in 2009.

Disclosure: I don't own any of the stocks mentioned in this post, but I used to own OSG.


Still Waiting to Buy POT

I wrote not too long ago that I'd wait for a 15% discount before buying Potash of Saskatchewan (POT). Today it's trading in the low $170s, right around my target entry price. As there is still a possibility of a labor strike, I'm going to wait a while longer to see if there will be a better entry price. It would be neat if I could get in at $150 (provided it doesn't keep dropping after that, of course).

If a strike does occur, there may be a short term increase in potash fertilizer prices. This may benefit POT's competitors, like MOS and IPI.


Congress and Alternative Energy

Congress has left for August recess without extending renewable energy tax credits, which are set to expire at the end of 2008. Congress will meet for three more weeks this year, in September.

The debate in the Senate, where Republicans blocked the latest attempt to extend the tax credits, is not about renewable energy. Everyone seems to be in favor of it. The argument is over how to fund it. The most recent plan, for a short term credit extension, was to levy more taxes on hedge funds and to delay certain tax breaks for multinational companies. Republicans did not like it. They also wanted to focus more on domestic oil drilling.

A compromise may be in the works. A group of ten senators--five Republicans and five Democrats--has proposed opening up parts of the Gulf of Mexico for oil drilling. The tax revenues generated from these new projects can be used to fund renewable energy. Even if the plan is not adopted, it shows that progress is being made. Come September, a bill will probably be sent to President Bush for his signature. But with the government we never know.

Alternative energy ETFs, like GEX, PBW, PWND, PZD, QCLN, FAN, and TAN, whose holdings include companies such as Vestas Wind Systems, First Solar (FSLR), MEMC Electronic Materials (WFR), and Suntech Power (STP), have traded sharply lower since the end of June. Until the energy tax credits are renewed, this trend is likely to continue.

The nascent alternative energy industry is greatly dependent on subsidies. Demand for solar and wind energy products is likely to fall if the tax credits are not renewed. Given that companies require around half a year lead time for financing major projects, plans for next year are starting to come on hold. If nothing happens by the end of September, projects will be dropped. Solar and wind shares will likely continue falling as a result. General Electric (GE), a chief proponent of the renewable energy credits and the largest wind turbine manufacturer in the US, also stands to be hurt (although much less so) if credits are not renewed.

As solar and wind shares are likely to spike if/when the tax credits are renewed, there are opportunities for investors wishing to speculate. Those thinking the credits will be extended next time congress meets might consider buying near term calls. Those thinking congress won't do anything may consider buying puts. If interested in a diversified approach instead of individual stocks, consider KWT, FAN, PBW, PZD, and TAN, which have options.

For those not wishing to speculate on alternative energy stocks but still wanting to make a profit (over the longer term) from congress' continued trouble in creating a sensible energy policy, oil drillers may be a safer bet. Some companies to consider for further research are Transocean (RIG), Noble Corp (NE), and Diamond Offshore (DO). These have traded along with the price of oil lately. Day rates for their deepwater rigs, however, are increasing, as are contract lengths. Oil companies face production declines, which should keep demand for deepwater (where most oil in the future will probably be found) rigs growing. When the market realizes that earnings at companies like Transocean are not directly related to the price of oil, drillers' share prices should go up.

Disclosure: At the time of writing I owned shares of General Electric.


Jim Jubak's Portfolios for Income Investors

Two reasons for this post:

1. Many readers of this blog are interested in dividend paying stocks. This may alert those among them who have never heard of Jim Jubak to his income portfolios.

2. Some time this month (hopefully soon) I plan to put up a review of Motley Fool's Income Investor newsletter. Jubak's Dividend Portfolio will be a useful comparison.

Jim Jubak is senior market's editor at MSN Money. He usually writes two columns a week, which are published on Tuesdays and Fridays here. Sometimes he makes mistakes, but usually he is dead on. As an example, check out his article on Blackstone (BX) before the firm's initial public offering last year.

Jubak runs a number of model portfolios, which have done very well. His main portfolio, Jubak's Picks, has returned over 13% annually from May 1997 through June 2008.

Jubak's Dividend Stocks for Income Investors has also returned over 13% annually (from late 2005 through April 2008). He plans to retire this portfolio, and has started constructing a new one, called the Unfixed Income Portfolio. He announced it here.

The following is a review--sort of--of the Dividend Stocks for Income Investors portfolio. Where appropriate I mention Jubak's other portfolios.

When started, the Dividend Stocks for Income Investors goal was "to find equity investments with yields at or above the 4.5% paid by the 10-year Treasury note that are also safer than those Treasurys."

The Good

1. It's free. All you have to do is read Jubak's columns.

2. Jubak has a great track record as a stock picker.

3. The model portfolio method is much easier for readers to replicate than what newsletters typically do. With a model portfolio, Jubak has limited funds to work with. When he adds a stock, he has to do it with the cash in the portfolio. If there is not enough cash, he has to replace an old holding with a new one. This is much closer to what individual investors do with their portfolios, especially income investors (usually retirees with a limited amount of fresh money to invest).

Newsletters, on the other hand, usually provide a few stock picks per week or month, making it very hard for typical investors to own all their picks. As everyone makes mistakes, even the best newsletters pick bad stocks. If you cherry pick even a great newsletter's stock selections, you might wind up with the ones that don't do as well. For example, suppose the newsletter picks 24 stocks a year, but you can only afford to buy 10. It's entirely possible that the 14 picks you don't buy are the ones that contribute to the newsletter's market beating returns. The stocks you do buy might be the ones that lower returns.

4. The Dividend portfolio has included certificates of deposit and Treasury notes. This is different from many newsletters, which often are restricted to stocks.

5. Jubak often puts his own money in his model portfolio picks. Here are his general suggestions for new investors wishing to follow him.

6. Unlike newsletters, which give readers a certain number of picks every month (or week, etc), Jubak updates his portfolios mostly when he thinks it's a good time to buy new stocks or sell old ones. He has less incentive to crank out new picks constantly. This usually means that the picks will be better than the "our best ideas at the time" picks of many newsletters.

The Not So Good

1. For the Dividend Portfolio, there isn't a separate page with updates (the Jubak's Picks portfolio has one here). There is a tracker of sorts here, but it does not include certificates of deposit or similar positions. The new Unfixed Income Portfolio does not have any sort of tracking at all so far. Readers wanting portfolio updates have to keep up with Jubak's columns. It's not entirely a bad thing, since one can learn a great deal by reading what Jubak has to say.

2. Number 6 above notwithstanding, Jubak does face some pressure to modify his portfolio. After all, he has to keep up reader interest. Some stocks that he would otherwise hold for a longer period are sold off as a result. This is more true of Jubak's Picks than it is of the Dividend Portfolio.

3. Since portfolio picks and drops are announced in Jubak's columns, and the columns are posted at set times, portfolio modifications may not always occur at the best times.

4. Because of the model portfolio format, Jubak does not buy the same stock on multiple occassions. He does not average down or up. When he thinks a potentially good stock may go lower in the near term, Jubak tells his readers that the pick should be viewed as an anchor position and they might have an opportunity to average down at a later time.

I can't think of anything bad. To sum up, Jubak has a great track record and his model portfolios are free.