Saturday, August 8, 2009

Capital & Crisis Hotline -- Your New Issue Is Online… Plus, 7 Updates

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Agora Financial's Capital & Crisis

Capital & Crisis Hotline -- Your New Issue Is Online… Plus, 7 Updates
August 7, 2009


Dear Capital & Crisis Reader,

I have your new letter for you today. Plus, we've got seven earnings updates to cover below.

Inside your issue, you'll find:

  • The Sun Sets on the West: Historic Shifts Happening Now and What They Mean for Your Investments -- Join me at the big investment conference in Vancouver: First up, Faber's presentation on the emerging new world
  • A Cheap Oil Stock With a "Free" Option on Oil Sands -- How the Algar Lake project could more than double the reserves of this small oil stock and lead to big gains for investors
  • The Next China Miracle? -- This area's economy is bigger than those of Russia, Brazil or India. It has a population greater than the U.S.' And it is growing faster than any of these countries. It's not China, but may be the site of the next China miracle
  • Bull on India -- Money manager Ajit Dayal gave his view of India to the audience in Vancouver. Take note of his unconventional and thought-provoking insights
  • What to Do Now -- Some final words of advice in this ever-tricky market.
To start reading now, just click on a link below:

Click here for the HTML online version  
Click here for the printable PDF version

Below are earnings updates on existing positions…

*** Good Results From our Gold Stocks

We got good results from IAMGOLD (IAG:nyse) and New Gold (NGD:amex), with both stocks rising on the news. Let's take a quick look at both together…

IAMGOLD's results were in line with expectations. Cash costs continue to fall. For the second quarter, they were $437 an ounce, compared with $472 an ounce a year ago. Financial strength was excellent, with $394 million in cash and long-term debt of only $45 million. The company is also ahead of schedule at its Essakane project. Production should begin in 12 months, adding another 340,000 ounces of gold annually to IAG's production. We're off to a good start here and we have a big catalyst on the horizon in Essakane, even if the gold price goes nowhere.

New Gold beat the consensus easily. The headline numbers say it all: a 30% increase in gold sales and a 37% decrease in cash costs. Nice combo, that. The balance sheet is strong, with $141 million in cash against $272 million in debt. Not much to say here, either. Things are rolling along nicely.

So far so good on our gold stocks. We're up 54% on IAG and 24% on NGD -- and the price of gold hasn't even started its biggest move yet.

*** Brookfield Asset Management

Brookfield (BAM:nyse) is our conglomerate that owns commercial real estate, hydropower assets and a fund management business. Brookfield reported earnings that easily beat the consensus. It generated 46 cents per share in cash flow for the quarter and 92 cents for the year so far. BAM is on pace to generate 1.84 per share in cash flow for the year. At $20, the shares today trade for about 11 times cash flow.

The worrisome aspect of Brookfield is that large commercial real estate portfolio. Commercial real estate, like housing, has a debt problem. BAM's properties are under long-term leases and, as of this quarter, remain 95% occupied. Still, there is a risk this area disappoints. It is something we will have to watch carefully.

So far, though, BAM is performing well. Part of the appeal in owning BAM, too, is that CEO Bruce Flatt and his team are talented investors that have a strong track record. The company has a lot of cash and capital to make a deal.

The company remains financially strong. It has only $3 billion in parent company debt against $15 billion in capital. Management's own estimate of value per share, based on international accounting standards, is $28 per share, a 16% increase from the $24 per share at year-end.

BAM is in good position to create value in this environment by playing the role of the vulture and picking up distressed assets on the cheap. It is, in a way, like our investment in Leucadia National (LUK:nyse), a flexible holding company run by smart guys with a track record. Smart guys can screw up, of course, but backing it is the way to bet nonetheless.

I have not had a chance to listen in on the conference call in time for this e-mail. However, when I do, I will report back any interesting details. BAM remains a buy.

*** Loews Corp

Loews (L:nyse) reported good results and the stock remains cheap.

It still trades at a wide 30% discount to net asset value (NAV). On a bottoms-up basis Loews' parts sum to at least $45 per share. Most of that value comes from publicly traded companies: a 50% interest in Diamond Offshore, a 75% interest in Boardwalk Pipeline and a 90% stake in CNA Financial. Just these investments cover the stock price, as I've pointed out before. You get everything else free.

And there is much else. There is $1.6 billion in cash. There is a wholly owned natural gas subsidiary, HighMount. There are also interests in hotels and preferred stock. Plus, you get the wise hands of the Tisch family at the wheel. They have a long track record of whipping up market-beating returns for investors, and you get that expertise and talent for free. The Tisch family also owns 20% or so of the stock.

The story hasn't changed here. Loews is a buy.

*** Canadian Natural Resources

We got good results from Canadian Natural Resources (CNQ:nyse), too. CNQ produces crude oil (62%) and natural gas (38%). The company continues to generate a lot of cash flow -- $5.32 in operating cash flow for the year so far -- and its big Horizon project moves closer to producing at full capacity.

The company has the ability to produce enormous cash flows as Horizon ramps up. The company also maintains financial strength and flexibility. The balance sheet improved from the last quarter as debt levels fell. If you are long-term bullish on oil and natural gas, as I am, then CNQ is a core holding for you.

I have not listened in on the conference call yet, but when I do, I will report back with anything of particular interest. CNQ remains a buy.

*** Tsakos Energy Navigation

Tsakos (TNP:nyse) beat expectations handily. The market expected 29 cents; Tsakos put up 51. Granted, the environment for tanker stocks is not good right now. But Tsakos is still solidly profitable. When times turn, it is going to run.

In the meantime, you get paid to wait, which is the idea behind Paycheck Portfolio stocks. Tsakos just declared an 85 cent semiannual dividend, bringing the total paid for fiscal 2008 to $1.75 per share. That's 9.7% on the current price, and 5.4% on our initial entry price. And that's a depressed dividend.

The main thing I'm keeping my eye on is financial strength. Tsakos has $309 million in cash. The debt, about $1.3 billion, is basically mortgages on ships. (Its fleet is one of the youngest in the industry, with an average age of 6.6 years). As I've showed in past alerts, the secondary value of those ships is well above the current stock price. TNP as a whole is worth probably $32-36 per share.

That financial strength looks secure, as Tsakos runs its business fairly conservatively. Much of its revenues are under contract. For 2010, the minimum gross revenue already under contract is about $170 million. A lot of tankers will have to go under before Tsakos feels any financial distress.

I also will add that the Tsakos clan, which owns close to 40% of the stock, is as wise as a tree full of owls when it comes to the tanker business. They have made many good decisions over the years, and their stock has outperformed the S&P 500 and the tanker index in its 15-year history.

TNP is a buy. It's one to just hold onto, collect your dividends and wait until times get better.

*** National Fuel Gas

National Fuel Gas (NFG:nyse) reported earnings that were much better than expected. In fact, it beat the consensus by 20%. The company also boosted its guidance for the year to $1.20-1.30 per share, from 95 cents-$1.10.

NFG is a balanced natural gas utility. The main appeal, and what separates it from the pack, is the large acreage it owns in the gas-rich Marcellus Shale. It continues to develop this acreage, which will unlock a lot of value over the next few years.

The wealth creation potential in NFG's shale acreage is substantial. NFG estimates 4-8 trillion cubic feet of natural gas potential across an area of 720,000 acres in the Marcellus.

As I've written about before (see the March issue of C&C, No. 61), the existing operations -- excluding the Marcellus -- are worth $40 per share. The Marcellus acreage is the wild card, but by itself could be worth an additional $40 per share based on transactions in the same area.

For long-term investors looking for a little income, NFG remains a good buy. It won't kill you and it has the potential to deliver a very nice gain.

Have a great weekend, and I'll write you again soon.


Chris Mayer

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