Money and Investing Thoughts

How times have changed. Three months ago when I reported on Silver Wheaton’s (SLW: 36.11 0.00 0.00%) 2nd quarter results, I put forth the opinion that the stock would be a good value buy if the share price dropped below $12 from its current $14 to $15 trading range. Well the shares were not a good value at $12 and they fell all the way to $2.56 on October 27. The stock has been hammered for what I see as two reasons:

• Spot silver has fallen over the last 4 months from $17 per oz. to under $10.
• Falling base metal prices (lead, copper, zinc) may force the shut down of the mines where SLW gets their silver production as a by-product to the mine’s main focus.

I will respond to the second reason 1st. On the conference call management noted that they currently receive 85% of their silver from 3 mines that have been in production for over 100 years. There is almost no chance they will shut down and will probably shift to mining higher grade ores. They have been focusing on the lower grade ores that recent high metal prices made profitable and will now shift to higher yield ores to maintain profit levels.

As to silver prices, the online investment sites and discussion point to over supply, under supply, conspiracy theories and market manipulation. Silver Wheaton management believes that prices will recover next year, but at this point I think it is impossible to predict where precious metals will go. I do know that SLW purchases its silver at an average price of under $4 per oz. and will stay profitable at much lower silver prices if it comes to that.

The 3rd quarter earning came in at 9¢ per share, right in the 9-11¢ quarterly earning have been stuck in for the last 10 quarters. Silver sales have been stuck in the 2.7 to 2.9 million oz. per quarter range, defying company predictions of increased production from their contracted sources. This time they reduced their 2009 projections to 15-17 million oz. from their previous guestimate of 19 million oz. To invest in this stock means that you believe at some point in time silver production and sales will start ramping up significantly, increasing revenues and profits. This company does have 40%+ earnings per year growth in its future somewhere. When is the question.

SLW is a component of this site’s Opportunities Portfolio and last week I doubled the number of shares in the portfolio. The SLW position is currently about 2.5% of the portfolio.

Shipping Lines Sail Uncertain Seas – WSJ.com.

The article linked above from WSJ.com (subscription required) started me to think about the ongoing prospects for the shipping related companies I follow. The gist of the article is that container shipping rates have fallen up to 75% reaching unprofitable levels. The Baltic Dry Index has fallen by 2/3 over the last several months hitting the bulk shippers. The Claymore/Delta Global Shipping ETF (SEA: 17.636 0.00 0.00%) has fallen by 50% in the two months since it was launched. The three shipping stocks I follow here have also fallen so I wanted to revisit each and look at the prospects going forward.

First up, oil tanker company Nordic American Tanker (NAT: 14.41 0.00 0.00%). NAT leases all of its Suezmax tankers on the spot market. The company has kept its expenses very low and pays out virtually all of its free cash flow as quarterly dividends. Dividends fluctuate with the spot tanker rate and vary wildly from quarter to quarter ranging from 40¢ to $1.88 during the last 4 years. Over it’s 10 year history the dividend has provided a greater than 10% yield. NAT share price has fallen from over $40 in late July to the current $27. The company has given guidance that 3rd quarter dividend will be in the same range as the 2nd quarter’s $1.60. Earned Suezmax tanker rates for NAT averaged $64,900 for the 2nd quarter and I calculate rates for Q3 will come in near there. Early October spot rates are still in the $60k per day range, so tanker rates have not fallen like the cargo shipping.  Since the future dividends of Nordic American are unpredictable, I consider this stock an accumulate proposition when share prices fall.

Ship Finance International (SFL: 12.07 0.00 0.00%) has exposure to both the dry bulk and container shipping sectors. Of the current 73 ships in the company’s fleet, 11 are dry bulk and 13 are container vessels. These ships account for 14% of the asset value of Ship Finance. Over 80% of SFL’s revenues are derived from their oil tankers and offshore vessels. Ship Finance leases their vessels to shipping companies on long term, bare boat leases. They get the first dollars their ships earn and should continue to get their lease payments unless one of their customers goes completely under. For the 2nd quarter SFL had $1.57 in free cash flow to easily cover their 58¢ dividend. About $1.20 of the cash flow is from their long term leases and the balance is from the profit sharing agreement with Frontline (FRO: 4.99 0.00 0.00%). A recently announce deal to buy and lease back a pair of deep sea drilling rigs with SeaDrill will add an additional 90¢ per quarter starting Q2, 2009. I believe the current 16% dividend is secure and will grow over the next several quarters. The only problems I foresee is possible difficulty obtaining financing for future deals. The graphic below shows the different banks that Ship Finance does business with and we are all guessing as to when access to additional funds for companies like SFL will be possible. Please note, they are in no need of any additional financing at this time. I think SFL is a great value at the current share price.

Star Bulk Carriers (SBLK: 1.16 0.00 0.00%) is a much more speculative pick in this sector. Star Bulk is a year-old start up with a fleet of  12 bulk carriers. The company plans to keep all of their vessels on longer term contract and are currently booked 90% through 2009 and 60% through 2010. The current 35¢ quarterly dividend appears to be well covered by earnings. Of course, any kind of hiccup in their contracts would kill this company’s cash flow. If earnings have been maintained when the 3rd quarter results are announced, the current stock price is going to look like a great value. This is a high risk opportunity that may end up with a 24% yield plus stock price appreciation if the company’s contracts are solid.

SFL and NAT are components of this site’s Income Portfolio. NAT and SBLK are included in the Opportunities Portfolio. These portfolios are for the hypothetical tracking of stocks I am interested in.

Note: I have long positions in NAT and SFL.

I had plans to write a stock review today, but the current market conditions make that seem a little foolish. I sit here watching the stock market continue to crash, pulling down all stocks, regardless of value or prospects. At this point I see no reason to sell my stock holdings as the horse has already left the barn. I also do not see any reason to buy as the market shows no sign of bottoming. At some point the bottom will come as investors will realize the tremendous values the current selling frenzy has brought about.

I would consider my Income Portfolio as fairly defensive because normally a strong dividend will keep a stock price from falling to far and increasing yield. Yet the stocks in the portfolio keep falling and the average yield of the 10 stocks is now approaching 13% including the measly 3.9% yield of City Bank (CTBK: 0.00 N/A N/A). In “normal” times this bunch of stocks should have an average yield of around 8-9%. My research leads me to believe that all of the dividends are secure and 3 to 4 of the stocks will actually increase their payouts for the next quarter. Yet share prices keep plunging. The only two stocks with any kind of price stability are City Bank and the REIT Monmouth Real Estate Investment Corp. (MNRTA: 0.00 N/A N/A).

At this point I am hoping that sanity returns to stock pricing with the next earnings release season, starting in a few weeks for the stocks I watch. At this point I must practice patience and take some hope that if Warren Buffet is willing to invest billions into this market is a positive sign for the future.

Each week I provide a review of the previous week’s performance of the WilderHill New Energy Global Innovation Index, symbol NEX. This information is provided by New Energy Finance. The NEX consists of about 90 stocks from 20 countries in seven sectors and is the bogey for the PowerShares Global Clean Energy Fund (PBD: 9.68 0.00 0.00%). These results are for the week ending on Friday.

NEX finished the week down 1.5%, bracketed by the NASDAQ, off 0.9% and the S&P 500, losing 2.0%. The renewable energy world tracked by the NEX had a pretty wide spread in sector performance. Solar energy was top dog, gaining 4.2%, led by Chinese solar PV manufacturer, LDK Solar. At the other end of the sector race was wind energy, losing 5.2%. The windies were led downward by Chinese wind turbine manufacturer Goldwind.

The market’s have been tough recently on the renewable energy space. Falling energy (carbon based) prices seem to be holding the sector down even as the market rallies. The international nature of NEX is also definitely a factor when comparing performance to the U.S. stock markets.

Here are the winners and losers from the NEX for the week:

NEX top gainers since 12 Aug 2008
LDK Solar LDK + 26.3%
International Rectifier IRF + 17.3%
Sunpower SPWR + 16.9%
Evergreen Solar ESLR + 12.8%
Suntech Power Holdings STP + 11.2%

NEX top losers since 12 Aug 2008
Comverge COMV – 33.1%
Schmack Biogas SB1 - 18.7%
Canadian Hydro Developers KHD - 15.8%
Xingjiang Goldwind Science & Technology 2202 - 12.6%
Aventine Renewable Energy Holdings AVR

Headwaters Inc. (HW: 2.72 0.00 0.00%) released 3rd quarter earnings this morning and their reorganization and new business growth appear to be on track. The company shut down their Section 45 renewable energy program on Dec 31, 2007 and have been entering some new business lines to replace the loss of the companies major revenue and profit generator. Headwater’s secondary business of building products has also taken a serious hit with the decline in housing construction over the last 2-3 years. I became interested in the company when I learned how they are attempting to take their renewable fuel (coal gasification) expertise into new areas to rebuild the company’s revenues and profits.

Any comparison with 2007 results does not give a good picture of where the company is going since a significant portion of the 2007 business no longer exists. I will pull a few figures from Q2 2008 for comparison to Q3.

• Total revenues: Q2: $172 million, Q3: $230 million, +33%
• Net income: Q2: -$9.2 million, Q3: $13.7 million, loss to gain
• Net per share: Q2: -22¢, Q3: 31¢, ditto

Thing are definitely going in the right direction and meeting the company’s guidelines that they will earn 60¢-75¢ per share for 2008. At this time, Headwaters is generating revenues from 3 business areas with a couple of others in the development stage.

Building Products: Q3 revenues of $129.3 million, up from $93.6 million in Q2, but down 11% from Q3, 2007. Gains Q over Q due to seasonality and not a turn around from the current building slowdown. New products are performing well in spite of the slowdown and gross margin was 27.3%.

Coal Combustion Products: Fly ash is a strengthening additive for concrete and concrete building materials. Q3 revenues of $83.2 million, essentially the same as 2007, and compared th $61 million in Q2, which was also level with 2007. Extremely environmentally friendly fly ash sales are staying level in spite of construction down turn and should be a future growth engine.

Coal Cleaning: Q3 revenues of $13.1 million, up 111% from Q2. 358,000 tons of coal sold compared to 192,000 in Q2. Average price of $48 per ton up from $40 in Q2. Headwaters now has 8 facilities in various stages from start up to full operation and is on track to have at least 10 operating by the end of 2008.

The next revenue source to come on line will be a recently completed, joint venture, hydrogen peroxide facility in South Korea.  Headwaters is working on several other technologies, primarily in energy utilization, that could produce future revenue streams.

Headwaters appears to be on track to achieve the goals that prompted me to add them to this site’s Special Opportunities Portfolio in January 2008. The share price has dropped about 14% since then but has traded as high as $15 this year. I am looking for a share price in the $20′s in the next couple of years.

Note: I have a long position in HW.