The Millionaire Maker Investment Advisory
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Buy This High-Yield Stock

9/25/2013

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When Guy Gottfried of Rational Investment Group takes the podium in front of the world’s best value investors, you know something big is about to happen. His track record is simply impressive. Over the past few years, Mr. Gottfried has attained a cult-like following only rivaled by legends like Warren Buffett. That’s because he has an uncanny knack for finding DEEP value stocks right before they take off. The last four times he addressed attendees of the Value Investing Congress, you could have made an average of 67% by just buying his recommended stocks.
Unlike many hedge fund managers, Gottfried has a low profile and avoids the media. Google his name, and you won’t find much. However, twice a year he pops up at the VIC to share his top investment idea.

At a conference known for super-star investors, Gottfried was chosen to be the first speaker at this year’s conference in New York City on the strength of his presentations’ track record. Simply put, when he talks, people buy shares in a way that would make Jim Cramer blush.

One of his top investment ideas from the VIC is a company called Supremex Inc. (Toronto: SXP). It’s a small cap Canadian stock that trades at $1.84 Canadian (all figures in this article will be in Canadian dollars). For U.S. investors, the stock also trades on the OTC market under the ticker symbol SUMXF.

Supremex is one of the most boring businesses in the world. The company is in the envelope business, and is the biggest player in Canada. Yes, plain vanilla envelopes used for letters, account statements, and direct mail. The envelope business is no doubt shrinking. That’s a fact that everyone knows, and it’s one of the reasons this stock is so cheap.

Why on earth would an investor want to own shares of Supremex? The bottom line is that this company is a cash machine. The company’s EBITDA – or a calculation of business earnings before various accounting adjustments – was $16 million in the first half of 2013. And that was a 39% increase from the year earlier.

Gottfried convincingly argues that the stock is dirt-cheap. Shares today trade at around $1.80 or just three-times the free cash flow of the business. The stock is so cheap primarily because the company slashed its dividend by 90% a few years ago. The share price plunged as a result – falling from $10 in 2006 to as low as $1 earlier this year. With only one investment bank analyst following this small cap Canadian stock, the company gets little attention.

Today the company pays a quarterly dividend of $0.03. Annualized, that 12-cent dividend translates into a yield of 6.6%. Today Supremex makes plenty of profits to cover its dividend. In fact, the dividend payout ratio is just 23%.

Now that alone might be enough to attract investors to this high yield stock. To unlock shareholder value, Gottfried is advocating a big increase in the company’s dividend. He thinks Supremex could easily double its dividend payment, which would translate into a 13% yield.

Immediately following Gottfried’s presentation at the Value Investing Congress, I bought shares of Supremex in my personal investment account at $1.86. After climbing to a 52-week high of $2.09 on Tuesday, shares pulled back to $1.84.

I tried buying more shares [on Thursday], but my order wasn’t executed. And I intended to buy more shares [yesterday], and continue building a small position in the stock.

To be perfectly blunt, Supremex is a very tiny company with a market cap of just $54 million. It’s so small that I would normally avoid telling you about this opportunity. Shares are extremely illiquid – it averages just 21,000 shares of volume per day. Compared with most dividend stocks I recommend, Supremex is a higher-risk, higher-reward opportunity.

But if the company does double its dividend, I expect the share price to follow suit. And that’s why I’m building a small position in this stock. If you’re looking for dividends plus growth potential, look no further…

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Dividend Growers

9/25/2013

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Over the past week, the following companies- each of which has grown their dividends each year for at least the last five years- made important announcements regarding their future dividend payments.
Dividend Increases
  • Microsoft (MSFT)- 22% increase- announced an increase to its quarterly dividend by 22% to $.28. The next dividend is payable December 12 to shareholders of record on November 21. The ex-dividend date will be November 19.
  • Artesian Resources (ARTNA)- 1.5% increase- has declared a regular quarterly dividend of $.2088, a 1.5% increase in the company’s Class A and Class B Common Stock dividend. This increase raises the annualized dividend rate to $.8352 per share. The quarterly dividend is payable on November 22 to shareholders of record at the close of business on November 8, 2013. This is the 84 consecutive quarterly dividend paid to shareholders.
  • McDonald’s (MCD)- 5% increase- declared a quarterly cash dividend of $.81 per share of common stock payable on December 16 to shareholders of record at the close of business on December 2. This represents a 5% increase over the company’s previous quarterly dividend and brings the Q4 dividend payout to more than $800M.
  • Texas Instruments (TXN)- 7% increase- announced a quarterly dividend increase of 7% to $.30 from $.28 per share. The higher dividend will be payable November 18 to stockholders of record on October 31, contingent upon formal declaration by the Board of Directors at its regular meeting in October.
  • W.P. Carey (WPC) – 2% increase- announced a dividend increase to $.86 per share. The dividend is payable on October 15, to stockholders of record as of September 30.
  • Yum! Brands (YUM) – 10% increase- announced a 10% increase in the company’s quarterly dividend. The quarterly cash dividend will increase to $.37 from $.335 per share and will be effective with the dividend payment to be distributed on November 1 to shareholders of record at the close of business on October 11.
  • First Long Island (FLIC)- 4% increase- announced the declaration of a Q3 cash dividend in the amount of $.26 per share. This represents a 4% increase over the dividend of $.25 per share declared in the prior quarter. The dividend will be paid on October 11 to shareholders of record on October 3.
  • The Kroger Co. (KR)- 10% increase- announced a quarterly dividend increase by 10% to $.165 per share, to be paid on December 1 to shareholders of record as of the close of business on November 15.
  • Covidien (COV)- 23% increase- has declared a 23% increase in the quarterly dividend rate, from $.26 per ordinary share to $.32 per ordinary share. The next quarterly dividend is payable on November 5 to shareholders of record on October 10.
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3 Top Picks From Billionaire David Einhorn

9/24/2013

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He started his hedge fund, Greenlight Capital, in 1996 with about $1 million. Seventeen years later, the firm manages more than $5 billion and has delivered average annual returns of about 19% a year; for the most part by shorting what he views as over-valued stocks.
Billionaire hedge fund manager David Einhorn has proven his ability to find winners on the short side but he maintains a "net long" position in his funds, which means he has more long positions than shorts. One of his recent winners on the long side was Seagate Technology (NASDAQ: STX), which Einhorn began buying in 2011 and resulted in a 64% average annual return in less than two years.

Einhorn selects investments with a traditional value approach, although he may not be as patient as a typical value investor. Einhorn took Apple (NASDAQ: AAPL) to court in an effort to force the company to return cash to shareholders, and more recently challenged Oil States International (NYSE: OIS) to unlock shareholder value.

Among his current holdings are three stocks that have strong cash flow and high relative strength (RS). Cash flow is more predictive of a company's financial health than earnings, and RS shows how a stock is performing compared to the rest of the market.

Value stocks can trade at low values for years before other investors catch on. Buying only when RS is high helps avoid this problem. RS is shown as a number between 0 and 100, with 100 being the strongest and 0 being the weakest. High RS means a stock is among the best performers in the market.

The Babcock & Wilcox Company (NYSE: BWC) is a leader in the nuclear power industry. The company makes nuclear reactors for submarines and aircraft carriers, and even with cutbacks in defense spending, it reported a $2.8 billion backlog in that sector. The company also has a backlog of $2.3 billion in its power generation business segment.

For 2013, the company expects revenue of $3.4 billion to $3.5 billion and earnings per share (EPS) of $2.25 to $2.45, after adjusting for some accounting charges related to pension obligations and restructuring.

It is unlikely that new competitors will emerge in the near future in the nuclear reactor business. There are engineering and regulatory hurdles in place to ensure safety and the market is fairly limited. The U.S. Navy has plans to buy only two aircraft carriers between now and 2025, and plans to buy no more than two nuclear-powered submarines a year for the next decade.

BWC is also providing alternative energy solutions beyond nuclear power. Last year, the company was awarded more than $900 million in contracts for waste-to-energy projects, including major projects in the U.S. and Denmark.

BWC has been steadily growing revenue, earnings and cash flow since 2009. Analysts expect earnings growth to average almost 20% a year in the next five years. Based on estimated earnings for 2014, BWC is trading with a price-to-earnings (P/E) ratio of about 13.

The PEG ratio compares the P/E ratio to the earnings growth rate and is about 0.65 for BWC. Stocks with PEG ratios below 1 are considered to be bargains.

Finally, BWC has a RS rank of 100, meaning it is one of the absolute strongest stocks in the market right now.
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Rite Aid (NYSE: RAD) is not the type of stock usually seen on a list of hedge fund holdings. The stock trades at about $3.60, under the $5 a share price limit set by many large investors. Many brokers will not allow traders to margin positions in stocks that cost less than $5 a share, and that means the funds might have to accept unleveraged returns on their positions in low-priced stocks.

We have no way to know if Einhorn is allowed to margin stocks trading for less than $5 a share (as allowed by some brokers) or if he is convinced the stock can deliver gains without leverage.

RAD operates more than 4,600 drug stores around the country, making it the third largest drug store chain in the country. Revenue topped $25 billion in the past 12 months with RAD reporting a profit of $0.24 per share.

The company's fiscal year ended in March, and RAD reported its first full-year profit since 2007. That makes this a potential turnaround.

Drug stores might benefit from the Affordable Care Act, which will expand access to health care and could increase the number of customers for pharmacies. RAD might also benefit from an aging population since older people tend to use more prescription drugs.

Einhorn is not alone in buying RAD. The stock has an RS of 100 and has more than doubled in price since the beginning of the year.
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Einhorn added RAD to his portfolio in the second quarter of 2013, the last quarter we have a full report of his activity for. During that time, he was also buying Spirit AeroSystems Holdings (NYSE: SPR).

This company supplies aero-structures to airplane manufacturers Boeing (NYSE: BA) and European Aeronautic Defense and Space Company EADS N.V. (OTC: EADSY), the maker of Airbus aircraft.

SPR is expected to see earnings grow at about the same rate as BA, but SPR is significantly cheaper from a value perspective. In 2014, analysts expect SPR to report EPS of $2.59. The stock is currently trading at about 9.2 times that amount. The expected growth rate of 12.75% a year results in a PEG ratio of 0.72.

SPR is also a buy from a technical perspective. The RS rank is 66 and rising, meaning SPR has outperformed 66% of the market in the past six months.

The monthly chart shows that SPR is near the upper limit of a multi-year trading range. A breakout from that range points to a price target of $35.48, which is about 50% above the recent price.
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These stocks are market leaders and have been researched by one of the best value investors in the markets right now. David Einhorn rated these stocks as buys when he filed his most recent report of holdings. All three are worth consideration by any investor.
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Profits at Your Convenience

9/23/2013

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PROFILED: Casey's General Stores (Nasdaq: CASY)
By Chad Fraser

The convenience store has come a long way from its humble beginnings in 1927. That year, Jefferson Green, an employee of the Southland Ice Company in Dallas, realized people needed to buy staples, like bread and milk, after the grocery stores closed. His store was already open 16 hours a day, seven days a week, so he began offering these items.

The idea was expanded to other Southland locations, and in 1928, the company began selling gasoline. The stores took on the 7-Eleven name in 1946 to reflect their extended hours, and the format hit its stride in the 1950s, when suburbanization drove more workers further from the city—and into their cars.

Today, convenience stores are a $123-billion business in the U.S., and the outlets have continued to evolve, peddling all manner of goods, from energy drinks to coffee and prepared foods, including healthier fare like veggie trays and fruit bowls. Sales of these foods have risen as schedules have gotten tighter and today's mobile workforce looks to eat better.

This diversification is helping the best convenience stores lower their reliance on two segments that still make up a large portion of their sales: cigarettes and gas. Smoking rates have declined to just 18% of American adults, while volatile fuel costs have prompted motorists to cut back on unnecessary driving. The move toward more efficient vehicles is another long-term trend that could weigh on gas sales.

How Investors Can Fill Up
Over 8,100 convenience stores have gone up around the country since 2005, bringing the total to around 149,000. According to figures from IRI Allscan, convenience stores were the only retail channel to show both unit (up 1.2%) and dollar (up 2.4%) sales growth in 2012.

Still, the industry remains highly fragmented and competitive, with the top four players controlling a total of just one-third market, with smaller chains and single-store operations comprising much of the rest. Convenience stores also face indirect competition from grocery stores, fast food outlets, coffee shops and even big-box retailers like Target (NYSE: TGT).

For investors, the key is to zero in on chains with outlets in attractive locations and the ability to change with customers' tastes. They should also have strong balance sheets that will help them snap up smaller competitors.

One chain that continues to match up well with the above criteria is Casey's General Stores (Nasdaq: CASY). We last highlighted the company's strong prospects in a December Investing Daily article. Since then, the stock has risen nearly 40%.

Going Where the Competition Isn't
Iowa-based Casey's owns and operates over 1,750 convenience stores in 14 Midwestern states, making it the 10th largest convenience store chain in the country.

Through these outlets, Casey's sells traditional convenience store items, such as gasoline (which accounted for 72% of its 2012 revenue) and cigarettes (9%). However, it also offers prepared foods, such as made-from scratch pizzas, donuts, chicken tenders and sandwiches.

Casey's pizza has a particularly strong following, which has helped turn the company into the fifth-largest pizza chain in the U.S. Casey's has been building on that success by rolling out pizza delivery, adding this feature to 200 more of its outlets in its 2013 fiscal year, which ended April 30. It also converted another 200 of its stores to 24-hour operations.

The location of Casey's outlets helps the company duck the competition: 59% of its stores are in communities of 5,000 people or less. These markets are typically too small to attract the attention of larger chains, and their residents also tend to be more car-dependent than big-city dwellers.

But that doesn't mean the company is taking its eye off of expansion: it continues to branch out into the familiar markets surrounding its Iowa base. In fiscal 2013, it moved into three new states, completing stores in Kentucky and Tennessee and acquiring one outlet in North Dakota. During fiscal 2014, it aims to build or acquire 70 to 105 new stores and replace 20 of its existing locations.

Tasty Prepared Food Sets Casey's Apart
In Casey's fiscal 2014 first quarter, which ended July 31, its overall sales rose 13.2% from a year ago, to $2.11 billion, while diluted earnings per share (EPS) gained 41.6%, to $1.43. These results were well ahead of the consensus forecast of $1.06 a share in profits on $2.03 billion of revenue.

The company saw strong sales across all its businesses. Same-store gas sales (by the gallon) rose 3.2%, with an average margin of $0.221 per gallon, topping the company's goal of a 1.5% increase with an average margin of $0.15. Same-store grocery sales rose 6.1%, with an average margin of 32.7%, again above the company's goal of 32.3%, despite recent cigarette price cuts.

Same-store prepared food sales jumped 11.9%, with an average margin of 61.8%. The company attributed the sales gain to the continued roll-outs of pizza delivery and around-the-clock operating hours. Casey's balance sheet also remains healthy, with $803.9 million of long-term debt and $190.9 million of cash and equivalents.

The stock trades at 21.6 times the $3.28 a share that Casey's has earned in the past 12 months. However, the average analyst estimate calls for EPS of $3.68 a share for fiscal 2014—up from $2.86 in fiscal 2013—and $3.97 in fiscal 2015.

With its smart growth strategy and market-leading prepared food, this Midwestern convenience store chain should deliver healthy gains for years to come.
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Batting Cleanup on MLP Chat Queries

9/23/2013

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For those who are unaware, each month there is a joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits. The chat is conducted by Igor Greenwald, managing editor for TES and chief investment strategist for MLP Profits, and myself. This month's chat took place on Sept. 10.
By Robert Rapier

We place a priority on answering questions about portfolio holdings and recommendations during the chat, but often we get questions about companies we don't currently recommend. Or, we sometimes get questions or comments about a company that require an extended answer. In these cases we push those questions to the end, and attempt to answer them if time allows. For this past chat there were several questions remaining at the end, which I will address here today. For each company, a brief background is presented for readers who may not be familiar with the company.

Q: What is your view of BCEI at the present price?

Bonanza Creek Energy (NYSE: BCEI) is a Denver-based oil and gas company with operations in Colorado and southern Arkansas. While the Bakken Formation in North Dakota and the Eagle Ford Shale in Texas get more press, oil and gas plays in the Denver-Julesburg Basin have helped turn Colorado into one of the fastest growing energy producing states in the country and the fastest growing oil producer in the Rocky Mountains. Since 2008 oil production in Colorado has risen by an impressive 63 percent to a 50-year high.

BCEI is well-positioned with acreage in the Wattenberg Gas Field north of Denver. The field is one of the largest natural gas plays in the US. Wattenberg represents 60 percent of BCEI's proved reserves, with 59 percent of those reserves classified as liquid. Of the company's remaining reserves, 39 percent are located in the oil-bearing Cotton Valley Sands in Southern Arkansas (68 percent liquids) and 1 percent in Colorado's North Park Basin (100 percent liquids).

BCEI has grown reserves at a 45 percent compound annual growth rate (CAGR) since 2007, while production has grown at a 71 percent CAGR. In the most recent quarter, production was 55 percent higher than in 2012, and production in the Rocky Mountain region was 105 percent higher. This followed a first quarter that actually disappointed on production and EBITDA, and saw the company take a 10 percent hit to its market cap. But shares have since recovered, and are trading at an all-time high, which represents a 238 percent increase in the share price since the 2011 IPO.

Bonanza Creek's incredible growth rate continues to justify the premium valuation. Nevertheless, with the share price up 21 percent in the past month and major flooding in Colorado potentially affecting Q3 operations, you will likely find a better entry point over the next two to three months.

Q: What do you think of the latest Peyto results?

Peyto Exploration & Development (TSX: PEY) is a Canadian producer of natural gas. Its production had been on the decline for several years until 2009, when Peyto joined the fracking revolution and began to use hydraulic fracturing on horizontal wells. Since then, the fortunes of the company have made a sharp reversal along with the production rate. After declining from 2005 to 2009, Peyto's share price has risen 230 percent since the beginning of 2009.

In the most recent quarter, Peyto reported a year-over-year production increase of 41 percent to a new company record of 58,145 barrels of oil equivalent per day. The sharp recovery in natural gas prices also helped, propelling the company's funds from operations 70 percent higher to $110 million Canadian dollars.

So, to answer the question, the quarterly results were superb, and continued the pattern of strong growth the company has shown since 2009. But strong production growth is only a part of the company's story. They have also done a fantastic job of controlling costs. Peyto should be on anyone's short list if they are looking to invest in natural gas, and are looking for diversification beyond the US.

Q: Would like your opinion on TAT

TransAtlantic Petroleum (NYSE: TAT, TSX: TNP) is a small energy company with interests in Turkey (primarily) and Bulgaria. There are untold numbers of small, publicly-traded energy companies operating in different regions of the world, but TAT has a story worth telling.

When people suggest to me that the world won't produce much more oil or gas than is currently produced, my counterargument is that the fracking revolution that has made the US the fastest growing oil and gas-producing country in the world has yet to spread across the globe. It was less than a month ago that Poland became the first European country with a significant hydraulic fracturing success, producing commercial quantities of shale gas.

TransAtlantic Petroleum seeks to bring the fracking revolution to Turkey. (Bulgaria has banned fracking.) In fact, TAT has begun to hydraulically fracture wells in Turkey's Thrace Basin. In the ideal scenario, TAT, which has seen its share price languish for years, would see the sort of renaissance experienced by Peyto once they began their program of hydraulic fracturing.

But it's far too early to tell if TAT will have commercial success, and it faces significant competitors in the region, such as Shell (NYSE: RDS.A). Given all the risk factors, this is not one that I would feel comfortable owning at this time, but if it were to significantly increase production in Turkey as Peyto did in Canada, I might reconsider.

Q: Can you comment on the prospects for Devon Energy?

Devon Energy (NYSE: DVN) is one of the major oil and gas producers in North America. Historically the company has produced more natural gas than oil -- at present producing more than 3 percent of the natural gas consumed in North America -- but Devon is now focused on producing more liquids. At present these make up only about a third of the output, but the company anticipates pushing that to 50 percent by 2016 and is devoting substantial capital to that goal.

The market has richly rewarded Chesapeake Energy (NYSE: CHK) for shifting production from natural gas to liquids -- that stock is up 31 percent since joining The Energy Strategist's Aggressive Portfolio four months ago.

But investors have so far taken a wait-and-see approach with Devon. This is somewhat understandable since Devon's total production of oil and gas is about where it was 10 years ago.

Having said that, the recovery of natural gas prices since last year pushed Devon's second-quarter earnings to $1.69 a share versus $1.16 a year ago. Oil production increased 14 percent over the previous year. The market's response to date has been tepid; shares are up less than 5 percent since the earnings release six weeks ago.

But Devon looks like a real value to me at this level, and I would exercise a bit more patience if you are holding it. I have been tempted in the past to buy a few shares, and I don't think they have looked like a bigger value than they do today.

Q: Please comment on LRE and MEMP

I am going to address LRR Energy LP (NYSE: LRE) and Memorial Production Partners LP (NASDAQ: MEMP) in an upcoming issue of MLP Investing Insider.
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The Sweet Smell of Decay

9/23/2013

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People particularly brokers all clamored to the idea that interest rates were on the rise more in part to the Fed pull back and that MLPs were going to be severely impacted. They of little faith should have realized that there is more than just the LNG market to generate hefty returns and still weather the storm all the way to the bank during any interest rate hikes.
By Robert Rapier

While the MLP space is dominated by the oil and gas sector, in last week's article we began to explore some of the more exotic master limited partnership offerings. This week we continue our exploration of nontraditional MLPs by looking at the partnerships supplying fertilizer.

Rentech (Nasdaq: RTK) has been around for more than a decade, and it has shifted strategies several times. Full disclosure: Rentech's Chief Technology Officer Harold Wright is a former manager of mine when we were both at ConocoPhillips, and I have visited Rentech's facility in Commerce City, Colorado.

For most of Rentech's existence, the company has sought to commercialize alternative fuels. At one time it had ambitions to build a large coal-to-liquids (CTL) plant, but federal legislation ultimately nudged it instead into the biomass-to-liquids (BTL) space. The company did build a BTL demonstration plant, but ultimately shut it down and has now refocused its efforts on becoming "one of the largest wood processing companies in the world.”

During its interesting journey as a company, Rentech acquired two ammonia nitrogen fertilizer facilities, which turned out to be a profit center that funded the alternative energy research. In November 2011, Rentech spun off this fertilizer business into an MLP called Rentech Nitrogen Partners LP (NYSE: RNF).

In the months leading to the spin-off, RTK's market capitalization was about $200 million. Rentech maintained 60 percent ownership of RNF, and three months after the spin-off RTK's market cap had risen to $400 million, while investors had bid RNF up to $1 billion. Interestingly, RTK's share of RNF was worth more than RTK's entire market cap, a situation that persists. The market currently values Rentech at $482 million, while the valuation of Rentech Nitrogen Partners makes RTK's 60 percent stake in RNF worth slightly more than $600 million -- another illustration of the premium investors have been willing to pay for MLPs.

RNF owns two fertilizer production facilities, one in East Dubuque, Illinois and the other in Pasadena, Texas. The partnership is a pure play on nitrogen fertilizer, which is produced from natural gas and which is therefore subject to natural gas price volatility. The Illinois plant is in the heart of the Corn Belt, and as a result will also be subject to corn price volatility (i.e., high corn prices will mean higher fertilizer demand, and vice versa). Modifications to the Renewable Fuel Standard, which supports corn prices by encouraging the production of ethanol, could significantly affect demand for nitrogen fertilizer.

RNF had a solid 2012 when natural gas prices were lower, but the recovery of natural gas prices this year has eaten into margins. This, as well as some unscheduled outages led RNF to recently reduce its 2013 distribution guidance to $2.05-2.20 per unit from $2.60 previously. The partnership already paid out $0.50 in Q1 2013 and $0.85 in Q2, which leaves $0.70 to $0.85 to be paid for the rest of 2013. At the current price, this implies an annualized yield for the final two quarters between 5.3 percent and 6.4 percent. But fertilizer is a seasonal business, and including the two distributions already paid for 2013 bumps the 2013 yield to roughly 8 percent.

Rentech has two competitors in this space. Terra Nitrogen Company LP (NYSE: TNH) owns and operates a nitrogen fertilizer plant in Oklahoma. The general partner is a wholly owned subsidiary of CF Industries Holdings (NYSE: CF), the second largest nitrogen fertilizer producer in the world.

Terra Nitrogen's claim to fame is the extraordinary performance of units. Over the last 10 years, the price rose from approximately $5 to the current level above $200. Like RNF, Terra Nitrogen profits from historically low natural gas prices. Thus its most recent distribution, equivalent to 7.9 percent on an annualized basis, might be reduced if the cost of its main input rose dramatically.

One other risk factor for US-based fertilizer manufacturers is the threat of cheap Chinese exports. China produces fertilizer predominantly from coal instead of natural gas, and with natural gas prices increasing in the US and global coal prices declining, Chinese fertilizer has become much more competitive.

Enter CVR Partners LP (NYSE: UAN), the only company in the US to produce fertilizer from petroleum coke (petcoke). Petcoke is a byproduct of petroleum refining, and prices are usually set off coal prices, since these two products compete in the same niche. Thus the same dynamics that currently threaten the distributions of Rentech Nitrogen Partners and Terra Nitrogen Company play in CVR Partners' favor.

CVR Partners' fertilizer plant is located in Coffeyville, Kansas, adjacent to the refinery owned by CVR Refining (NYSE: CVRR). CVR Energy (NYSE: CVI), majority-owned by Carl Icahn via Icahn Enterprises (NYSE: IEP), is the general partner and owns most of the units for both CVR Partners and CVR Refining.

CVR Partners' results are up across the board in 2013. Sales rose 6.6 percent in the first half compared with the first half of 2012, while EBITDA was up 10 percent, and distributable cash flow was up 6.3 percent. But unit prices have been weak, registering a decline of 25 percent year-to-date. This has pushed the yield of CVR Partners up to the range of 9.8 percent to 10.9 percent based on the most recent guidance.

Investing in fertilizer MLPs is not for everyone. There are special risks that must be recognized, and that won't be acceptable to the more conservative income investors. But a growing global population means growing fertilizer demand, and patient investors who are selective with their entry points may find this sector to be richly rewarding.
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Clean Up on Natural Gas

9/23/2013

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By Brian O'Connell

It's one thing when environmental advocates say that natural gas is better than regular gasoline. It's another thing when chief executive officers at transportation and trucking industry companies say the same thing.

But that's exactly what's happening with liquefied natural gas (LNG), which is cheaper than regular gasoline by $1.50 per gallon. Here's how United Parcel Service (NYSE: UPS) explains plans to purchase 700 new LNG tractors, and open four new LNG filling stations by 2014:
  • Lower fuel prices compared to imported petroleum (30 percent to 40 percent lower today)
  • 25 percent lower CO2 emissions (US Energy Information Administration)
  • Growing domestic supply, insulated from market volatility
  • LNG does not compromise tractor's abilities, fuel economy or drivability, and significantly reduces greenhouse gases
  • LNG tractors have a 600-mile range and no route limitations
  • Viability of LNG as a "bridge” fuel toward energy independence from fossil fuels for heavyweight trucks

UPS is isn't alone. According to Pike Research, commercial vehicles running on natural gas instead of oil should reach one million in annual US sales by 2019. There's plenty of money to be made in that market, Pike says.

"Natural gas vehicles emit substantially lower levels of GHGs [greenhouse gasses], particulate matter, and nitrogen oxide than either gasoline- or diesel-powered trucks and buses," writes senior research analyst Dave Hurst. "What's more, compared [with] diesel engines, natural gas provides a financial benefit. In most cases, the higher incremental cost of a natural gas vehicle is typically recovered, due to lower fuel costs, within two to seven years."

Enter Clean Energy Fuels (Nasdaq: CLNE)
CLNE is the largest provider of natural gas fuel for transportation in North America and a global leader in the expanding natural gas vehicle fueling market. The company, founded by oil billionaire T. Boone Pickens, has tapped into the transportation industry's insatiable desire for cheaper alternative fuels. (After buying out Chesapeake Energy's (NYSE: CHK) stake in Clean Energy Fuels in June, Pickens now owns 22 million shares, or about 25 percent of the company.)

Clean Energy caters to customers like third-party logistics shipper Saddle Creek, which last year inked a 10-year deal with CLNE to install compressed natural gas (CNG) filling stations at some of its 29 US locations. In all, the Seal Beach, Calif.-based Clean Energy fuels 30,600 vehicles belonging to more than 650 fleet customers at its 348 US locations.

CLNE shares are currently trading near the midpoint of their 52-week trading. Last week, CEO Andrew Littlefair bought 127,000 shares for $1.6 million. This week, Clean Energy announced a major partnership with General Electric (NYSE: GE) to build LNG facilities across the US. The company is forecasting a 23 percent sales increase to more than $400 million this year. Clean Energy is the prime mover in the growing natural gas fueling market, and the stock is poised to keep motoring higher.

Brian O'Connell is an investment analyst at Investing Daily. He has frequently appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.
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FedEx: Gaining Altitude

9/23/2013

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FedEx Corp. (FDX) reported better-than-expected earnings growth as customers world-wide increasingly used the company's lower-priced shipping options. The world's largest air-cargo shipper and its rivals have been wrestling with a shift by clients toward cheaper and slower delivery services. FedEx's latest results reflect that customer emphasis as the company reported double-digit percentage increases in
packages shipped through its lower-priced plans.
Almost exactly a year ago, we recommended our investors buy shares of FedEx Corp. (NYSE: FDX), the world's second-largest package delivery company, behind United Parcel Service (NYSE: UPS).

We based recommendation on a number of strengths, including FedEx's non-unionized workforce, which gives it more flexibility to adapt to business fluctuations than UPS. We also liked the fact that FedEx's air freight division was scrapping its older planes and replacing them with more fuel efficient models.

In addition, we saw the growth potential offered by the company's expansion into emerging markets like China, where it currently has a permit to operate on its own in eight cities, compared to five for UPS. (FedEx serves the remainder of the country through joint ventures.) China's domestic express delivery market is expected to grow 20% annually over the next two decades. This was a delicate time for FedEx, which had just reported its first earnings drop since 2010, due to global economic weakness.

But 12 months later, the recommendation has paid off: FedEx is up 37.2% since, outperforming both the S&P 500 index (up 18.2%) and UPS (up 26.6%). Including dividends, FedEx returned 37.9%, compared to 29.9% for UPS.

FedEx's Ground Game Still Looks Strong
In a June Investing Daily article, we examined another long-term trend that FedEx is capitalizing on: the move toward online shopping. According to April 2013 figures from eMarketer, U.S. online retail sales will rise to $434.2 billion in 2017, nearly doubling 2012's total of $225.5 billion.

This trend has helped FedEx's ground-delivery division (which supplied 24% of its overall revenue in fiscal 2013) post strong results in recent quarters, including the company's fiscal 2014 first quarter, results for which it reported on Wednesday morning.

During the quarter, FedEx Ground's revenue rose 11% from a year ago, to $2.73 billion. Operating income gained 5%, to $468 million. The division saw an 11% increase in average daily shipping volumes, and revenue per package rose 1%. Average daily volume increased 26% at FedEx SmartPost, which deals with less-time-sensitive deliveries, mainly due to rising online orders.

Adjusting to Fewer Air Deliveries
However, revenue at the FedEx Express air-delivery division slipped slightly, to $6.61 billion from $6.63 billion a year ago. That's because the weak economy has been prompting penny-pinching businesses to opt for cheaper, slower options. FedEx Express accounted for 61% of the company's total sales in fiscal 2013.

The company doesn't see that trend reversing anytime soon: "You can understand why customers are trading down, because they get a significantly better price, and they give up a couple of days,” said CFO Alan Graf in the post-earnings conference call.

FedEx is adjusting through a significant restructuring, which it announced last October. Under this plan, it aims to save $1.7 billion annually by 2016 through a number of initiatives, such as voluntary employee buyouts, parking excess aircraft and buying more fuel-efficient planes.

In the latest quarter, the company's efficiency improvements helped FedEx Express boost its operating income by 14%, despite the lower revenue. Operating margins widened to 3.6% from 3.1%.

In all, FedEx's revenue rose 2.1%, during the quarter, to $11.0 billion. Per-share earnings gained 5.5%, to $1.53. The latest results were above the Street's estimate of $1.50 a share in profits on revenue of $10.97 billion.

                                                                   FEDEX (NYSE:FDX)
                                                         Historical Stock Chart
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Moderate” Growth Ahead
The company has long been looked to as an economic bellwether due to its global reach—it handles more than 10 million packages a day in 220 countries—and the fact that it serves nearly all economic sectors.

FedEx described global economic growth as "tepid” in its earnings release and stood by its forecast of full-year earnings growth of 7% to 13%, assuming U.S. GDP growth of 2.1% and global GDP growth of 2.6%.

"The FedEx economic forecast calls for continued moderate growth, both in the global and domestic economy,” said executive Mike Glenn on the conference call. The company also noted "signs of improvement” in China and Europe.

Separately, FedEx announced that it will hike rates at FedEx Express by 3.9% in January. The move comes after it increased rates at its FedEx Freight less-than-truckload delivery business by 4.5%, effective July 1. These figures are roughly in line with last year's increases, but they do indicate that the company is confident the market will bear higher prices.

"It's going to be another quarter or two in a challenging global environment, and the company's taking the appropriate steps to right their cost structure, capacity structure and international routes,” Oppenheimer analyst Scott Schneeberger said.

 Tapping Into African Growth
Meanwhile, FedEx continues to expand its international reach. In June, the company announced that it will acquire businesses operated by Supaswift (Pty) Ltd. in five countries in Southern Africa, including Malawi, Mozambique, Swaziland and Zambia. FedEx is also reportedly in discussions to buy the courier's operations in Botswana and Namibia.

It's an opportune time for FedEx to expand in Africa, as the continent's economy is growing strongly: according to the African Development Bank, one-third of African countries have GDP growth rates of more than 6%. In addition, the cost of starting a business has fallen by more than two-thirds in the past seven years, while delays in starting a business have declined by about 50%.

Meantime, FedEx continues to sport a strong balance sheet: it ended the quarter with $5.1 billion of cash, nearly double its long-term debt of $2.7 billion.

FedEx trades at 23.3 times its $5.00 a share it earned in the last 12 months. The average analyst estimate calls for earnings of $6.96 a share for fiscal 2014 (which ends May 31), with profits rising to $8.68 a share in fiscal 2015.
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Fed May Taper Without Causing Market Tantrum

9/17/2013

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MARKET CONDITIONS
Thomson/Reuters:

Months of anticipation will come to an end this week when the Federal Reserve finally says whether it will start to rein in its massive stimulus of the economy, which has flooded financial markets with some $2.75 trillion over the past five years, supercharging returns on everything from stocks to junk bonds.

But for all the concerns that the reduced presence of such a giant asset buyer would be calamitous for investors, it appears equity and bond markets are poised to take the Fed decision largely in stride – provided the central bank doesn't surprise with the size of its move or shock in some other way.

The Fed has telegraphed its intentions to pare back its monthly purchases of $85 billion in bonds at its two-day meeting that ends Wednesday. The scale of the tapering and what Fed Chairman Ben Bernanke might say at his press conference are key, but the steady messaging in the past few months means this week probably won't see carnage in the markets.

Investors have already done a lot of work in absorbing the Fed's message. Benchmark bond yields are now hovering near two-year highs, while stocks have edged off highs reached in early August, removing some of the froth that had started to concern some investment strategists.

"The Fed already got tapering without actually tapering," said Daniel Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City, Missouri.

Key measures of volatility and futures positioning show there is not much fear. The CBOE Volatility Index, the market's favored gauge of Wall Street's anxiety, hovered around 14 on Friday, a level associated with calm markets.

The Fed has said it would wind down its program if it is confident that the economy is improving, particularly that the jobless rate is heading lower. If it delays any action, it could raise concerns that it fears economic growth is going to be too anemic without the Fed's help.

Recent data has been mixed, with August jobs and retail sales data falling short of expectations. Consumer sentiment has fallen in part due to rising interest rates.

That's prompted analysts to issue only modest forecasts for the reduced buying. A Reuters poll showed a consensus for the program's $85 billion monthly pace to be cut by $10 billion, less than earlier estimates.

However, the current low volatility means the Fed runs the risk of spooking markets if it moves too quickly or surprises with its intentions.

"The Fed needs to move from being aggressively stimulative to merely very stimulative," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York. "Markets are less prepared for it to do more, and if it does you might see a return to defensive areas."

In May, after Bernanke spoke about potentially slowing stimulus this year, the S&P 500 fell 7.5 percent. The index is unlikely to see a similar decline on any surprise next week, with many analysts citing its 50-day moving average as support. Currently, the index is 0.7 percent above that level.

REDUCING RISK
Still, investors have been taking steps to reduce risks ahead of such an important announcement. Trading in options of the S&P 500 tracking exchange traded fund – the SPDRs – was dominated by bearish put buying. Put contracts give a holder a right to sell a security by a given date at a certain price, and are generally used to hedge against declines.

A total of 1.16 million puts and 559,000 calls changed hands in the SPY fund on Thursday, a ratio of 2.08 to 1, according to options analytics firm Trade Alert. That ratio is above the 22-day moving average of 1.64.

"As we head into the weekend and the Fed meeting next week, traders are starting to hedge their long equity positions," said JJ Kinahan, chief strategist at TD Ameritrade.

Michael Mullaney, who oversees $10.7 billion as chief investment officer at Fiduciary Trust Co in Boston, said his firm was pulling back because of the uncertainty.

"We don't want to get aggressive for a while; there are just too many uncertainties to get through before we add more risk," he said, also citing seasonal issues and government budget policy as overhangs.

That sentiment prevailed among many investors in August, resulting in a 3.1 percent loss for the S&P that month, the worst monthly performance in a year. That decline helped restrain S&P valuations, with the forward price-to-earnings ratio of the S&P 500 currently at 14.6, according to Thomson Reuters data, in line with a historic average of 15.

Sectors tied to the pace of economic growth have been among the biggest beneficiaries to the Fed's policy, with both the financial and consumer discretionary groups up more than 20 percent this year, outpacing the S&P 500's 18-percent rise. Any surprise from the Fed could hit those groups the hardest.

"Those economically sensitive groups would pullback the most, and housing is at the top of any list of vulnerable sectors," said BNY's Grohowski, who oversees about $175 billion in client assets.

Housing stocks have performed well recently, rising 6.3 percent in September, but remain more than 16 percent below a peak reached in May. The sector could weaken further if the Fed takes any steps that lead to a rise in interest rates.

"Both stocks and bonds will like it if the Fed tapers $10 billion only in Treasuries. If it pares down on its mortgage-backed security purchases, we're very worried about what that will do to the housing market," said Mullaney.

The Fed is expected to maintain its current level of purchases of mortgage securities, focusing instead on pulling back on its $45 billion in monthly buys of Treasury notes. Anticipation of this has pushed yields on the 10-year Treasury note higher for five straight months.

Still, blistering demand for Verizon's record $49 billion bond deal this week, together with a solid reception for the government's $65 billion in debt supply this week, signaled investors might have grown less wary of reduced stimulus.

HURTING EMERGING MARKETS
In the currency market, an aggressive Fed could lift the U.S. dollar "by pushing rates up at the long end, making U.S. yields more attractive, and at the short end as well, making Japanese investors, among others, worry that hedging costs could go up quicker than expected," said Steven Englander, head of currency strategy at CitiFX, a division of Citigroup, in New York.

Emerging markets were hardest-hit once the Fed started to lean in the direction of cutting stimulus, with sharp sell-offs in debt and equity markets around the world. Some markets have since recovered some losses, but investors have been hedging against any Fed shock that could hit those markets.

Mike Tosaw, financial adviser at RCM Financial Services, an investor adviser in Chicago, said his firm has a put position on the iShares China Large-Cap ETF.

"Now is definitely not the time to take it off because what happens with the FOMC meeting next week could have a ripple effect on global markets," Tosaw said.

While the Fed will be the primary market driver this week, investors will also look to quarterly results from FedEx Corp., viewed as a proxy for economic activity, and software giant Oracle Corp. The market will also see data on August housing starts and existing home sales, and the monthly Philadelphia Fed business index.
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The Next Sector Set to Rally At Least 50%

9/17/2013

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MARKET CONDITIONS
Steel is an interesting sector. Over the years its volatility has wrecked portfolios if you didn't hedge with options. There is lot's of opportunity in the "building boom". The building boom isn't in constructing new skyscrapers and city infrastructure but LNG pipelines and the tankers to ship it.
By Brian Hunt

Last week, I covered a crazy idea that is making people a lot of money right now. It's the idea that despite all the negative press it's getting, the economy is somehow "not falling apart." It's slowly getting better. This means growing demand for things like cars and shipping services. As I noted, shares of Ford Motor are up more than 30% this year. Plus, shipping stocks are in a big "stealth" bull market.  

As this economic trend plays out, these sectors should keep winning. And the next sector that will follow will be steel. My investor following know we always look to trade the market's "boom and bust" sectors. These sectors include steelmakers, coal producers, gold miners, and airlines. They're all prone to wild swings up and down. If you get into the upswings early and avoid the downswings, you can make huge returns. 

It all sounds easy but executing these trades is actually very difficult. The right time to buy into a "boom and bust" sector is after it has suffered a huge bear market. You want to buy when the news coverage of the sector is terrible. You want to buy when nobody else will buy. These trades have the potential to double, triple, even quadruple your money in a short time.

It takes a contrarian "iron stomach" to initiate these trades. You'll need to fight your natural crowd-following instincts. But as one of the ultimate trading truisms goes, the hard trade to make is the right trade to make. Right now, the "hard trade to make" is buying the steelmaking sector. And that's why it makes sense to buy shares of steelmakers like AK Steel (AKS), ArcelorMital (MT), and U.S. Steel (X) .  

I introduced the idea of buying U.S. Steel to investors about a month ago. The company is America's largest steelmaker. It makes steel that goes into automobiles, structures, appliances, and containers. Because of industry overcapacity and a sluggish global economy, U.S. Steel and its fellow steelmakers have been crushed in the past two years. Shares of U.S. Steel fell more than 70% from their 2011 high to their 2013 bottom. You can see this horrible bear market in the three-year chart below:
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Because of this bear market, sentiment toward the steel sector is terrible. Anyone who has bought steel stocks in the past few years has lost big. Nobody is bragging at cocktail parties about "being long steel." Few Wall Street analysts would dream of urging clients to "buy steel."  But this is precisely the time to buy steel... when nobody can stand the thought of owning it... when the investment public thinks you're insane for buying... when it's the hard trade to make.  

Just like winter is followed by spring, big steel busts are followed by big steel rallies. And a gradually improving U.S. economy should help power U.S. Steel's earnings and share price higher. It makes sense.

The improving economy has caused housing stocks to gain 135% in the past two years. It's driving a boom in auto sales (and Ford Motor shares)... And it's driving a rally in shipping stocks. I expect steel will be the next train to leave the station. The one-year chart of U.S. Steel below shows how the train is starting to move.

Note the right-hand side of the chart. You'll see how U.S. Steel just broke out to its highest level in five months.
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Keep in mind: Buying steel stocks here is a speculative trade. It's not like buying a blue-chip stock.
My stance toward speculative "boom and bust" stocks like U.S. Steel is "rent, don't buy."   Steel has gone through a terrible bear market. And while the crowd likes the idea of owning glamorous stocks like Facebook and Netflix, it can't stand the thought of owning steel.

Buying steel is the hard trade to make... That's why it's the right trade to make.  
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