“Lifeboat Stocks: Lifted by Secret $2.5 Trillion Wealth Recovery Fund”

by Travis Johnson, Stock Gumshoe | January 7, 2008 5:44 pm

This one comes in from Agora[1], selling us Christopher Hancock[2]’s Free Market Investor. Hancock is fairly new on the scene, but I have been intrigued by the one other idea of his that I sleuthed out several months ago (back then he was selling the “Secret Pension Payout Plan[3].”)

You’ll also see this teased as a way to save your retirement[4] by watching the most expensive, secret investment clubs.

His service is all about unearthing foreign investments, which is, of course, every advisor’s sweet spot right now. US investors have been putting more money into international stock mutual funds[5] than US-only funds for several years now, but the consensus seems to be that most US investors are under-allocated to foreign investments. Since most investors are much less familiar with foreign companies, and are often less comfortable reading foreign earnings reports. So advisory services of all kinds jump on top of this — you’ll notice lots of new mutual funds (T. Rowe Price even has a mutual fund for just Africa[6] and the Middle East[7]), and lots of new newsletters and pushes for older newsletters that focus on global investing.\

This, of course, is no exception. This service launched last year as foreign investing heated up, and they’ve got some ideas for us about international investing … but the latest ad push is based on a different premise.

This time around, it’s not just that the global economy is “decoupled” from US consumer performance, or that there are more opportunities abroad that can still be acquired at bargain prices. Those are standby rationales for foreign investment.

No, Hancock’s premise is that the huge government-related “sovereign wealth” funds will be investing in these companies, and your goal should be to ride that wave of liquidity by investing in the “lifeboat stocks” that these funds are likely to lift.

The one part of Hancock’s argument that strikes a hollow note is that he says these sovereign wealth funds are investing overseas and avoiding the US markets due to mortgage, financial and consumer crises. That appears to me to not be true — I agree that many of these funds will be targeted at building companies in their local geographic areas, and that they will often invest overseas. But the reason you and I have heard all about sovereign wealth funds is that they’re buying in the US — oftentimes these purchases and investments are strategic, as with the aborted Dubai Ports World deal, but more often they’ve looked like bottom fishing in just the sectors Hancock says these funds are avoiding. Overseas investment funds have recently taken significant positions in many of the big financials — Citigroup has gotten investments from the Middle East, Morgan Stanley and Blackstone from China[8], Temasek bought into Barclays (OK, not US — but still facing the same issues). The list gets quite long if you make an effort to compile it.

The “Sovereign Wealth” funds, by the way, are all over the map in terms of their strategies, the source of their funds, and their location. Talk about this has to incorporate Norway’s oil[9] and gas funds, which have a strong social responsibility component, the Middle Eastern oil funds, which are in many cases being used to build up non-oil businesses in their countries (including building financial centers), and Chinese government-related funds, which are being used to build national champions and diversify their interests as well as buying up US treasury bonds to keep the yuan down. There are also plenty of older funds, like the Singaporean Temasek Holdings, that have been doing this for a long time — in many ways, we can think about the majority of these funds as doing the kinds of things that the US Social Security[10] Trust Fund might do if it were permitted to buy anything except US treasury bonds. Or in another way, these aren’t too different from CalPERS — the California Public Employees Retirement System pension fund, which is the biggest US pension fund and a mover of the stock market in its own right.

But accepting that on its face, Hancock does throw in a couple specific stock ideas that he thinks will benefit from the liquidity created by these sovereign wealth funds. So we’ll take a look at the three stocks that he teases:

1: “The world’s greatest growth stock and the next infrastructure giant. It already dominates the Far East…now it’s wooing hearts and wallets in the West. The world’s richest investor himself has already snapped up a 4% stake. You should consider getting in too, while you can still get these shares at a price well below true book value.”

With this kind of clue even the mighty Gumshoe can’t be absolutely certain, but it really sounds like it has to be Posco (PKX)[11], the Korean steelmaker. This is indeed a dominant provider of the steel being used to build up the “Far East”, and Warren Buffett[12] does indeed own 4% of it as of his last filings/announcements. I’m assuming that Warren is our “world’s richest investor,” even though it’s arguably true that Carlos Slim has taken that mantle now.

I owned Posco stock a few years ago, back when it had a huge dividend and seemed ridiculously cheap. I don’t own it any more, and I missed a lot of the run up to the current price of $140 or so a share. I’d argue that it’s now awfully expensive for a steel company, but it has been the lowest cost steel producer, and it is expanding to Brazil[13] and certainly still growing, even though it still trades at a fairly high PEG ratio, if you believe the analysts, of around 1.7. My two cents on Posco is that it’s a great company, but not much of a bargain today … and I don’t know of any particular reason why sovereign wealth funds would be interested in buying up shares. But certainly, I’d encourage everyone to pay much more attention to Warren Buffett than they do do me.

Idea number 2: “One of the world’s most brilliant energy stocks, courtesy of a new ‘silver[14] bullet’ fuel technology that turns coal[15] into true gasoline, diesel, crude oil…even plastics, fertilizer[16] and pure hydrogen[17] fuel. The Chinese, the U.S. and everyone else with growing energy demand are hot on the trail of this story. But there’s still time to invest early.”

This one doesn’t offet any specific clues to make me certain, but it seems very likely to be Sasol (SSL)[18], which has had a pretty decent run since the Summer (can’t say that about so many stocks, eh?). This is a big South African firm, among the leaders in coal-to-liquids technology that turns Coal into usable petrochemical liquids, as teased. They do own some interesting technology, though we should note that the basic coal-to-liquid conversion process has been in use for 50+ years, and it’s very dirty — it’s alternative energy[19], but it’s far from being clean energy.

That said, it’s certainly true the the US and China tend to be very interested in these technologies — thanks to the fact that the two countries have precious few oil reserves but centuries worth of coal underground. Sasol’s history of pushing this technology owes much to the fact that South Africa doesn’t have oil reserves either, and that they had trouble getting many people to trade with them during the Apartheid era — so this company probably still has a jump on many others, including the US firm Headwaters[20] (HW) which focuses on the same general area. So, maybe this one is Sasol — which, FYI, was also teased by the Motley Fool[21]’s Global Gains newsletter back in May, when it was quite a bit cheaper.

And our final teased idea?

“The company at the heart of the “new OPEC” now taking shape worldwide. This one stock gives you a share in Russia[22]’s massive oil and gas resources…and is practically certain to be a major player, as big or bigger than Shell, Exxon Mobil and others today.”

Again, not necessarily a definitive solution here due to the limited clue, but I believe this would have to be Gazprom (highest volume US ticker appears to be OGZPY on the pink sheets, though there are others). Gazprom is the national champion of Russia, a massive natural gas[23] company. They went public in the last year or so in London, and I noted at the time that I was absolutely not interested in buying shares because my lack of trust in the Russian government is fairly strong, but in terms of stock price movement I’ve certainly been wrong — it has moved quickly this year, and had a stronger year than most US natural gas names.

The “new OPEC,” I’m assuming, is the long-rumored and somewhat nascent Natural Gas Cartel, which has been talked about for at least four years and which is still somewhat possible. Big producers like Russia, which dominates the world in this commodity, and Algeria[24], Bolivia, Venezuela and others are all interested in setting up some way of “protecting their interests” to set a strong market for natural gas. This makes people quake in their boots a little bit, and it might mean better profits for Gazprom at some point (Gazprom already is in a very enviable position as the dominant provider of natural gas to Europe). But we’re quite a ways from a real international market for natural gas, thansk to the fact that most natural gas is consumed pretty close to where it is produced and travels via pipeline — liquefied natural gas (LNG), which can travel by tanker, is certainly growing fast and is already a big market player in some parts of the world, particularly Asia[25], but it’s far from being a liquid enough market to control the way OPEC tries to control the oil market.

So, if you believe natural gas will be a big international commodity in the future and prices will firm up and remain high, maybe Gazprom is one you want to look at. For me, it’s too much of a political punching bag going back and forth from Moscow to Berlin and Paris (to say nothing of Finland and the Ukraine[26], who are essentially completely under Russia’s thumb on natural gas), but many people are looking for ways to invest in the awakening Russian bear, and maybe you’re one of them.

So … a few foreign ideas that might be the ones teased by Christopher Hancock, and an investment thesis that you should be following the investment strategies of the sovereign wealth funds. I think it’s important to remember that sovereign wealth funds often have much longer time horizons than you or I, and they also have non-financial reasons for some of their investments, but they also certainly do bring a lot of investable cash to the table.

What do you think?

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