Money and Investing Thoughts

As I have written articles for this blog, my personal investment criteria have evolved and changed. I have discovered the types of companies that interest me as investments and subjects to write about. I do not manage money for anyone and want my personal stock accounts to reflect my philosophy and views. Through the research I have done here, I have found there are a few areas that I prefer to focus on. Here they are:

• Income stocks: I am very interested in stocks that pay large dividends. I like getting the cash to put back to work. Short term stock prices reflect a lot of fears about a company that may affect the stock price, but the dividend can still provide a balance to the return.

• Small cap stocks. For me, this is companies with a market capitalization of less than about $2 billion. Small caps have more room for multiples of the initial investment returns. They are also less analyzed, and often inaccurately, by the Wall Street analysts.

• International and emerging markets. The U.S. is a very competitive place, and if a company has a really good, really profitable idea, competition will soon follow. In many other countries a good company with a good business can stay that way for years with little or no competition.

That about covers the types of companies I am looking for. I then try to find those that have something that sets them apart and will allow continued and growing profitability. It is a fairly simple idea, but I put a lot of work into digging into whatever I can find about a stock that catches my eye.

Back to the title of this post, I have simplified my category list to more closely align with the bullets listed above. The 20 Stock Articles page on this site give a listing of selected posts by their categories. I believe it is a good way to get an overview about what is going on here.

Dick Green, President of Briefing.com gives his reasons why the U.S. is not moving towards recession. I pulled the following quotes but read the entire letter.

“Of course, there is always the risk that conditions will change. Still, it has been two years since housing started lower and employment is still rising. It has been many months since banks knew of their asset problems and they are still making loans. It is our belief that neither a recession or classic credit crunch will develop. Fears are driving the market. Of course, fears count too, just as much as greed when the market is on a run. And we aren’t arguing for fighting the market. Fears could keep the market in check for quite a while, and will certainly lead to a high level of volatility.

However, investors should understand the facts. Once it becomes clear that there is no recession developing, and that the write-down of assets at financial institutions is not a reason to take all corporate values lower, the market will recover – somewhat.”

Briefing.com: Page One

Thanks to Jeff at A Dash of Insight for the link.

I am always on the look out for companies that pay an out-sized dividend, then do some research and see where the cash comes from. Terra Nitrogen Co. LP (TNCLP) (TNH: 197.31 +1.349 +0.69%) caught my attention with its 8.4% yield. I was further intrigued when I saw the stock started the year at $32 and now trades north of $100.

TNCLP manufactures nitrogen fertilizer products used by corn and wheat farmers. Over the last year the company has rode the ethanol/corn/agriculture/fertilizer wagon to some very nice profits. It’s LP structure requires it to pay all of the free cash flow out as distributions and distributions are $6.67 for the first 3 quarters of this year vs. @2.89 for all of last year.

TNCLP is 75% owned by Terra Industries (TRA: 0.00 N/A N/A). Terra is the real fertilizer/nitrogen selling company. They manufacture and sell nitrogen fertilizer products primarily in the U.S. and Great Britain. TNCLP is basically a manufacturing facility in Oklahoma that is managed and controlled by Terra. The general partner of the limited partnership is a wholly owned subsidiary of Terra Industries. Besides the TNCLP plant, Terra owns 6 other facilities in North America and Great Britain, which are just assets of Terra without the LP structure. I did not dig deep enough to figure out why the finances of this one facility was structured differently.

Back to TNCLP and the intriguing share price and dividend history. I think this chart of the annual dividends helps give some understanding:

This appears to be a very cyclical business! The question is whether the cycle is still swinging upwards or ready to turn downwards. The market seems to believe the future dividends will continue to grow, or the current yield would be a lot higher. I am tend to believe the distributions will be strong for the next couple of quarters. My evidence is anecdotal:

Last month I spent a week visiting family in Minnesota and Iowa, prime corn country. The farmer’s were getting great corn yields and prices were high. So this spring they will have extra cash to put to work. Farmers often borrow money in the spring (government programs help out with this) and pay it back after harvest. An uncle who facilitates these loans said many will not need the loans in the spring. By using their own cash instead of borrowing farmers can double down on the 2008 crop. They will definitely make sure their fields are well fertilized.

The biggest expense towards the production of nitrogen fertilizer is natural gas. Terra does some moderate hedging of gas prices against orders received, but a spike in gas prices would definitely hurt profitability. Mating up TNH with 20 Stock Portfolio component Penn West Energy (PWE: 22.21 +0.32 +1.46%) would give a quasi self-hedging income stream.

At some point in time the cycle will turn on TNCLP and distributions will fade and the stock will be in the $20′s. Agriculture is a fickle business: bad weather can ruin a whole season. I would like to see a stock like this yielding 12-14% but I am going to add it to my hypothetical 20 Stock Portfolio to see what happens.

I currently do not have a position in TNH.

Chart source: terraindustries.com

Aegean Seems Poised for Growth – WSJ.com

Subscription is required to the Wall Street Journal.com, but this is an excellent article on the prospects for Aegean Marine Petroleum Network (ANW: 5.44 +0.22 +4.21%). With the recent pullback in the price I finally purchased some of the stock for my own portfolio. This stock should be a big winner over the next 3 to 5 year or longer. I will be looking to add shares on any future price pull backs.

This week I have been taking a closer look at what is going on with tanker stocks. This site’s 20 Stock Portfolio has two members in this class: Nordic American Tanker (NAT: 14.14 +0.07 +0.50%) and Ship Finance Ltd. (SFL: 12.11 +0.41 +3.50%). To me the appeal of the tanker stocks is the opportunity for out-sized dividend payments. Since the dividends of these stocks can fluctuate tremendously, the market tends to price them a very attractive yield.

NAT released their 3rd quarter earnings on Monday, reporting a small loss. This was not too unexpected because of previously reported very low charter rates and a letter from the CEO giving a head’s up. They did declare a 40 cent dividend, I think to keep their record of 10% plus annual yields intact.

Ship Finance has had little news outside of a share buy back program, but the stock has been flat and down quite a bit this week. It popped up today (11/8) over 6% with an strong upgrade from Citibank. I like SFL due to the steady dividend and having first call on the revenue of its leased ships. An 8%+ dividend that should grow makes a lot of sense to me.

From what I read there is slight over supply in the tanker business. High oil prices may get producing countries shipping more oil, a slowdown is the U.S. could reduce oil demand. Spot rates for oil tankers remain flat into the 4th quarter, so I am not looking for strong dividends in NAT for a couple of quarters. SFL has a more stable business model and I expect them do maybe have a few surprises over the next couple of quarters.

Unless some really good news comes across (isn’t that what we all are waiting for?) I expect some dips in the prices of (NAT: 14.14 +0.07 +0.50%) and (SFL: 12.11 +0.41 +3.50%). I think in the longer term (1 to 3 years) prospects are excellent. Here is a chart of the companies and Frontline (FRO: 4.92 +0.02 +0.41%), the largest tanker company.

Note: I own shares in SFL.

<a href=”http://finance.yahoo.com”>Yahoo! Finance</a><br /><a href=”http://finance.yahoo.com/q?s=FRO”>Quote for FRO</a>