Money and Investing Thoughts

The best performing stock in my 20 Stock Portfolio this quarter has been VeraSun Energy (VSE: 0.00 N/A N/A). It is somewhat hard to believe with all the negative commentary about ethanol production, especially from corn, from environmental types and financial types how nicely the stock has performed. Since October 1 the stock is up almost 35%, though the ride has been very bumpy. This 3 month chart should give you an idea of the volatility:

As I watch the stock and do some research on the ethanol industry a few facts and thoughts give me positive indications about grain ethanol as a renewable fuel and VeraSun in particular.

• I have started keeping an eye on the CBOT ethanol crush spread. It is quoted at Ethanol Market.com where you can get daily ethanol and grain prices. The crush spread as quoted there is nearby ethanol, multiplied by 2.80, minus nearby corn. Think of it as the gross profit of converting a bushel of corn into ethanol. The spread fell as low as $.44 in mid October and has climbed to the $1.50 to $1.65 range for the last few weeks. This statistic is an easy to keep an eye on the financial outlook of ethanol production.

• The energy bill recently passed by the U.S. Senate calls for 36 billion gallons of renewable fuel by 2022. 21 billion are supposed to be biomass, leaving 15 billion to corn and other grains. From my reading it is doubtful whether other sources of ethanol feed stock can come anywhere near the 21 billion number in the next 1.5 decades. Corn based ethanol is here to stay.

• All phases of ethanol production are becoming more efficient. Distillers now get 2.8 gallons from a bushel, up from 2.3 a few years ago. Farmers get 200-250 bushels of corn per acre, vs. 140 used in the efficiency studies. New corn hybrids will increase production per bushel.

• As a final thought on this topic, political policy towards corn ethanol will be positive as long as those who want to be President have to start in the Iowa caucuses. Corn is the main crop in Iowa and the people their well understand the economics and politics around one of their most important economic factors.

I think VeraSun Energy has positioned itself to take advantage of the factors outlined above. The recent merger with U.S. Biofuels has made the company by far the largest and most efficient pure play ethanol producer.

Note: A recent study has indicated ethanol/gasoline blends of E20 to E30 may actually increase fuel economy of cars on the road today. I wrote about it here.

I currently do not have a position in VSE.

A pair of recent reports on the growth of renewable energy show how renewable sources are growing rapidly in response to global energy needs. They also show we have a long way to go to replace traditional energy sources. First, Exxon Mobil has released its annual Outlook for Energy which forecasts energy demand until 2030. Here are some of the highlights:

• Global energy demand is forecast to grow at an annual rate of 1.3% per year, with the developing world growing a a 2% rate, and the developed at 0.5% per year.
• Hydrocarbons will make up 80% of energy use through 2030. Oil and gas will be 60% of the total energy use.
• Wind, solar and biofuels will have excellent growth of 9% per year. However, these sources now only provide 0.5% of world energy use and will be only 2% in 2030.

The U.S. Department of Energy; Energy Efficiency and Renewable Energy program (EERE) has released a preliminary report on the growth of renewable energy sources. This report has some good news on the growth of renewable energy. Renewable energy use is growing at greater than 10% per year world wide:

• Excluding large hydro-power, renewable electricity production grew 15% last year and now makes up 5.5% (237 gigawatts) of global energy production.
• Breaking down renewable sources, first the percentage of renewable power the source provides, and second the growth of production last year (if provided):
  • Wind power: 40% of renewable with 25% growth
  • Small hydro-power: 31%
  • Biomass fueled electricity: 18.5%
  • Geothermal: 4.2%
  • Grid connected Solar PV systems: 3.2% with 56% growth
  • Thermal Solar: no data given

The report shows growth rates for the various renewable energy sources:

• Wind: 25-30%
• Solar: PV 50-60%
• Solar Thermal: 15-20%
• Biofuels: 15-20%

Investments into new renewable power resources will total $66 billion for 2007 up from $55 billion in 2006 and $29 billion in 2005. As an investor, I am extremely interested in the long term potential of renewable energy. These number back up the potential of this sector. I also find the valuations of the better know stocks in this sector to be quite distasteful. If the company is profitable, the multiples are huge. If the company is still developing it’s technology, will it be profitable in the long run? Finally, many of the attractive renewable companies are only traded in Europe.

My choice to invest in the renewable sector is the ETF: Powershares Global Clean Energy Portfolio (PBD: 9.70 0.00 0.00%). PBD mirrors the WilderHill Global New Energy Innovation Index NEX. I like this index because it keeps a fairly even weighting of 80+ stocks from 20+ countries and is rebalanced quarterly. PBD is a component of this site’s 20 Stock Portfolio.

Note: Picture is from a wind farm on a real farm outside my hometown of Spring Valley, MN

Note: I currently do not have a position in PBD.

Nordic American Tanker (NAT: 14.59 0.00 0.00%) has released a letter from the CEO with an update on the fortunes of the company. As opposed to the letter in September, this one is of a positive note with little in the way of new news. The letter reiterated the company’s continued growth, with the fleet now at 14 double hull suezmax tankers (up from 3 in 2004). Also noted is some consolidation of operations and management.

The most interesting news was the trend of spot tanker (suezmax) rates so far for the 4th quarter:

• October: $17,160 per day
• November: $29, 921 per day
• December (thru 12/6): $68,013 per day!

NAT is a component of this site’s 20 Stock Portfolio primarily for income. The company is unique in the oil tanker world for its low expense structure, 100% spot market exposure and full dividend payout policy. The dividends fluctuate greatly, but the stock has yielded over 10% for 10 straight years. The share price of NAT is down 11% since October 1, and I think the stock is an excellent value at this time.

I currently do not hold any shares of NAT.

My stock picking strategy is a combination of high yield stocks for income plus small cap growth stocks for long term appreciation. Lately the income stocks have had their prices pushed down to a point where I believe there is tremendous value. The three stocks charted above are from my 20 Stock Portfolio. They all are down recently (as you can easily see!) but I think their dividends are secure, or may even increase. A little info about each:

• Of the two oil tanker stocks here, Ship Finance Ltd (SFL: 12.27 0.00 0.00%) is the steady Eddy. SFL has long term leases on their ships to other companies which which take the risk of changing spot tanker rates. If their lessees are profitable, SFL participates in the profits also. The company is diversifying their fleet, cash and cash flow are growing. The 55 cent dividend is secure and could be raised soon. The stock at today’s price provides a handsome 8.4% yield.

• The other tanker stock, Nordic American (NAT: 14.59 0.00 0.00%) is the other end, financially speaking, of the tanker companies. NAT has all of their ship on the spot market as the low cost provider. Their fortunes, and dividend, rise and fall with spot tanker rates. For the 3rd quarter the company paid a low $.40 dividend, compared to the typical $1+. Dividends have ranged between $.37 and $1.88 over the last 5 years, with 13 out of 20 quarters greater than $1.00. I believe NAT will yield better than 10% for 2008.

• Penn West Energy (PWE: 21.87 0.00 0.00%) is a Canadian oil and gas trust. The share price has been beaten down on merger costs that have reduced cash flow. This should be temporary and the growth gives the company additional equity that will be beneficial when new Canadian income tax laws go into effect. I have read the distribution is secure until 2011, so at a 15%+ yield I think this stock is a very good value.

If, like me, you like those dividend deposits to your account, these stocks have potential to add 10% in cash flow over the next year. Some appreciation in share price would be a nice bonus if the dividends do prove more enduring than the market currently indicates.

I own shares of SFL and PWE.

It was a pretty crappy month, at the end of October the portfolio was up 7% for the quarter, at close yesterday it was down 1.5% for the quarter, meaning down 8.5% for the month. I am tracking the stocks on an equal dollar weighting for a quarter then re-balancing for the next three months.

Despite its name the portfolio now contains 14 stocks, with two additions in November. Terra Nitrogen Co. LP (TNH: 200.00 0.00 0.00%) was added 11/15 and KHD Humboldt Wedag International (KHD: 0.00 N/A N/A) joined the portfolio on 11/24.

Almost every component of the portfolio suffered during the month with the exception of TNH. The fertilizer limited partnership has managed to gain 20% in the last two weeks. I am a bit surprised by the gain and plan to take a close look at what is happening with the company in an up coming post. Here are a couple of highlight (or low lights) from the portfolio for November.

Exactly half of the stocks are in positive territory for the quarter starting 10/01. Previous leader Gigamedia (GIGM: 1.40 0.00 0.00%), which was up 50% in October alone as fallen back to be up about 17% for the two months. I believe this stock will be a 5-fold gainer over the next few years, but it is very volatile! I think buying when the price is below $20 will pay off handsomely.

A couple of thoughts about the three stocks at the bottom of the portfolio. Wayside Technology (WSTG: 12.44 0.00 0.00%) continues to fall in price, and I no longer believe it has the potential I am looking for. I will leave it in the portfolio till the end of the quarter to make calculations easy, but I have sold the shares I did own personally.

Thornburg Mortgage (TMA: 0.00 N/A N/A) has ranged between ugly and really ugly. The stock actually closed yesterday up 2% from the end of October, but the share price recovered a bunch over the last few days. I do not expect much to happen until the company declares a 4th quarter dividend, which usually occurs in late December. If a reasonable dividend is resumed, say 40 cents, I think the share price will recover into the low teens. It will take a growing dividend over several quarters to get the stock up to around $20. Not an unlikely scenario by the end of 2008.

Penn West Energy Trust (PWE: 21.87 0.00 0.00%) has dropped from $33 in late October to a current $26 and change, giving a yield of over 15% based on the current dividend. And it pays monthly. After reading this article, I learned the company has made some acquisitions that have diluted free cash flow (where the dividends come from). The growth is timed to beat a change in Canadian tax law going into effect in 2011. It is better to increase equity now rather than later. Also of not in the article is that the current distribution is to be maintained until at least 2011. This last week I purchased some additional shares for myself.

Final word: The 20 Stock Portfolio is a hypothetical portfolio of stock I am interested in. I own some but not all of the securities listed in the portfolio. Also, returns quoted here do not include any dividends earned during the quarter.