The Primeval Portfolio — “Caveman Plays” in Water

By Travis Johnson, Stock Gumshoe, September 2, 2009

I don’t usually write about the same editor twice in one week, but in a land where ads like this hit my mailbox every day I can’t have any hard and fast rules along those lines … and I couldn’t resist taking a look at this latest ad from Chris Mayer, and again it’s for his Mayer’s Special Situations newsletter.

Which brings up the complaint that I hear probably more often than any other about newsletters, particularly those from Agora or the Motley Fool or Stansberry or Weiss or Investorplace, any of the big publishers: They treat investors like they’re climbing a ladder. The big push is to get you on that first rung, to sign up for a free newsletter or for a $50 a year letter, and once you’re on the ladder the teases flow even more more furiously for the next great letter on the rung above, or the special one-time payment for membership in all the newsletters, or just a couple more steps to that $5,000 newsletter and then you’ll really get the best and most exclusive information.

It’s clearly a solid business plan or they wouldn’t all do it, and I can’t poke too much fun at the publishers because I do the same thing to a limited extent (I ask folks to support the site by joining the Irregulars, and when they do I provide access to a little more analysis than I do here on the free site — I consider this a “thank you” for supporting my work and I don’t care whether you join as a monthly, quarterly, annual or lifetime member, and I don’t have a dozen pricier offerings that are even more exclusive, but I can see the similarities). I like to think I’m not as pushy about it, but of course that’s in the eye of the beholder.

But I had a point, right? Oh, yes, it’s that I’m seeing a lot of Chris Mayer ads lately, but more for his pricey Special Situations letter than for his lower cost Capital and Crisis, and this is another ad for the top-shelf stuff. As we saw in the comments on my last article about Mayer, whether or not you like that top-shelf stuff is a matter of taste — I always enjoy looking at Mayer’s ads because I think we’re probably of similar temperament, since it’s also my inclination to be a long term value investor and I’ve never been much of a trader, but your taste may differ.

“Enough already!” Shout the masses of Gumshoedom — to the point, please!

Right.

Mayer’s now talking about a “Primeval Portfolio” of stocks that echo the three essential things needed to survive: earth, water, and fire. He (or a talented copywriter, more likely) opens with a nice echo back to the days of the caveman, when a good investor who knew where the water was and controlled the fire would have ruled the world.

And he has turned that into three “Caveman Plays” on this thesis … here’s how he describes it:

“Why do I say we’re at a crossroads in history?

“Well, this timeless truth — our basic need for food, water, and energy — got a lot more complicated in the last few years.

“Millions of people halfway around the world are joining the middle class… improving their diets, using more energy, consuming more water.

“And think about this: the crops we grow need fertilizers produced with huge amounts of fossil fuels — energy.

“Producing that energy uses up huge quantities of water.

“And you still need water to grow the food.

“See what I mean? It’s all interconnected now. Demand grows in one of those sectors, it’s bound to grow in the others.

“What’s it to you?

“I’ve just finished digging deep into those connections. And I’ve come up with three ‘Caveman Plays’ I’m convinced could at least triple your money.”

The ad goes on to cover the astounding (if you haven’t heard them before) statistics about how much water goes into everyday products — 35 gallons to make a cup of coffee, 630 gallons to make a hamburger, etc. … there’s some dispute about a few of these numbers and the way they’re calculated by different academics, but yes, we can stipulate that meat and many other food products require a lot of water, whether it’s from irrigation or feeding the cow or washing down the abattoir.

The big argument is that food, water, and energy are all linked — increases in food supply require more water and more energy; increasing the energy supply requires more water for things like well injection and oil sands refining and ethanol, etc. etc.

And the overarching reason that demand in one or all of these sector should go up is just, to break it down, that the population is growing and that some of the very poor are moving beyond bare subsistence and wanting more and better food, using more energy as autos and electricity proliferate, etc.

All arguments that make a lot of basic sense, and you probably know them already — sooooo … which companies should profit?

That’s the million dollar question — Mayer has three favorites in the “Primeval Portfolio” that he calls “Caveman Plays” … the first one is for irrigation:

“This Company’s Exclusive Technology Waters Crops Up to 90% More Efficiently ….

“The population of China, India, Pakistan, and other big Asian countries will grow by 1.5 billion by 2050 — doubling the continent’s food demand.

“Listen to Colin Chartres, director of the International Water Management Institute, describing what Asia’s up against:

“‘…Existing irrigation systems are often 50 to 70 years old. They are leaking and water is evaporating. We urgently need a new generation of irrigation. That is the only way we are going to feed everyone.’

“One company can deliver the solution. Not just for Asia, but the whole world….

“It uses water up to 90% more efficiently than traditional methods of watering crops.

“The company’s business overseas is exploding. When Saudi Arabia took on the world’s biggest ‘pivot irrigation’ project, it used this company’s technology. The project is so huge, it can be spotted from the space shuttle.”

So … toss that limited little clutch of clues into the mighty, mighty Thinkolator, and we find that this company must be …

Lindsay Corp (LNN)

Lindsay is the world leader in center point irrigation, as far as I can tell, and they are supplying the Zimmatic irrigation equipment for Saudi Arabia’s stunning irrigation projects — and yes, you can see them from space, it’s like the reverse of crop circles, little circles of green in a sea of sand. They also supply road contstruction equipment and have a few other product lines, but they’re mostly known as a maker of more efficient, automated irrigation systems.

Will the shares continue to boom? They’ve already pretty much doubled from the March lows, when Forbes featured them and they had a near-normal PE of about 16, but since then earnings expectations have dropped, in part on falling farm income in some areas, and the price has exploded, so the shares now change hands for a forward PE of about 27 … assuming that you think the analysts are right.

This is probably “best of breed” when it comes to improving irrigation efficiency around the world — does that mean they’ll make you money? They have been raising the dividend, but it’s still under a 1% yield, and if we’re looking at it as a value play they do have a very solid balance sheet, with about $2.50 a share in net cash on the books, and they trade for about 2.5X book value. They are profitable and they have had a very nice five years of sales growth, but analysts see that growth tailing off pretty significantly — if that’s true, then it’s hard to pay this kind of multiple for a relatively slow grower … then again, it’s a good business that might have a spike in demand, as Mayer seems to believe, so perhaps they’ll surprise on the upside.

More stocks to look at, so I’ll leave it there for you — if you’ve got a feeling on Lindsay, please share it.

Next? More on water …

“China’s Record-Setting Water Firm… for Only $2 Per Share

“Problem: China is home to 21% of the world’s people. And just 7% of the fresh water.

“WORSE PROBLEM: Nine out of ten Chinese cities have groundwater supplies polluted by industrial toxins, pesticides, and human waste.

“Solution: China’s most integrated water company, doing gangbuster business with water filtration not only in China… but also the parched Middle East and drought-stricken northern Africa….

“More to the point, this is a company that did record business in 2008, and it’s on track to do the same in 2009. Revenues are steady and net profit is up….

“It’s a real “bootstrap” kind of story, too — founded 20 years ago by a woman who raised the start-up money by selling her condo and her car.

“She still owns 30% of the company. So she has a powerful incentive to treat her shareholders as well as she treats herself.

“I figure the stock’s an easy double from here. But that’s just the short-term outlook.

“Medium-term, I’m looking at $5 or $6 a share. At today’s prices, that’s a gain of 297%.

“And now’s the perfect time to move on this. For years, water rates in the company’s home market of China have been well below the world average. All of a sudden, that’s changing big-time.

“According to The Wall Street Journal, Shanghai jacked up rates 25% in June… with another 22% on tap next year.

“Higher rates for water go straight to this company’s bottom line.”

This one’s a little sneaky, because the company isn’t technically Chinese … Thinkolator sez we’re dealing with ….

Hyflux (600 on the Singapore exchange, HYFXF on the pink sheets)

I’ve written about Hyflux many times, and I personally own shares in their affiliated income trust, Hyflux Water Trust, which owns most of their Chinese water treatment facilities. Hyflux was indeed started by a woman, Olivia Lum, who sold her car and condo to raise the money — she was (and is, I suppose) a chemist, and the company was originally called Hydrochem when she launched it in 1989 to sell water treatment chemicals and filters.

But it is a Singaporean company, despite the fact that a good chunk of their business and their potential growth is Chinese, and Lum is a pretty big wheel in Singapore business circles. The pink sheets shares do change hands right now for just about $1.98, which is a fair translation from the closing price in Singapore of S$2.86, but if you’re buying on the pink sheets to watch that Singapore price and the exchange rate, that’s where the volume is and where the price should really be set.

Hyflux has been a technology company for a while, innovating particularly in membrane technologies for the water, environmental cleanup, and energy sectors, but their biggest driver of revenues right now is clearly building new water treatment plants that use their membrane technology — and of that, China has been the most significant driver for traditional wastewater and water treatment plants, but the largest projects and the majority of their income in the most recent quarter have been from the Middle East, particularly the large desalination plants — they won the bid for a desalination plant in Algeria that will reportedly be the largest in the world, and they’re negotiating for the contract to build two large plants in Libya.

Hyflux is not cheap based on earnings — they’re currently trading for about 25X their 2008 earnings, and it’s possible that the “story” of water treatment need and Hyflux’s huge growth in 2008 are making investors a bit too optimistic. I do like the company and its businesses, and they may boom if they’re able to get the contract for those Libyan plants and execute them profitably, but the analysts I’ve seen are projecting that growth in earnings will tail off dramatically. If they earn 13 Singapore cents a share this year, as at least one analysts expects, that’s a current PE of 22 that goes with a current earnings growth rate of just a bit over 10%. That’s nothing to sneeze at, and we should be appreciative of any company that can grow both sales and earnings in this environment, as Hyflux probably can, but it’s hard to call it a rock-bottom value unless analysts are being too pessimistic about growth.

Still, perhaps the next great bubble will be desalination and water treatment stocks, and it’s certainly possible for Hyflux to go up from here, even if I think they’re probably fairly valued or perhaps a little overvalued right now (or, I feel I must point out, I could be wrong in my assessment of them). More importantly, it’s your money … so what do you think?

Those are two of the three “Caveman Plays” for today — I’ll try to have a look at the third one, which sounds like it’s some kind of natural gas play, as soon as I’m able (unless I can’t figure it out, of course, in which case I’ll pretend I never saw it and change the subject).

What do you think about these two water plays? I tend to be sympathetic to the thesis that there has to be a way to make some money from the growing demand for water, and as I noted above I do own shares in a Hyflux affiliate, but there are so very many water picks available, from utilities to rights owners to pipe and pump builders to filtration firms, that it’s hard to know where the lottery tickets might be punched.

Or, of course, you could look at the water ETFs if you just want to play this thesis without picking stocks (for what it’s worth, the more global CGW includes a small slice of Hyflux, while the more US-focused FIW and PHO both hold fairly large positions in Lindsay).


Related Gumshoe Articles

Leave a Reply

2 Comments on "The Primeval Portfolio — “Caveman Plays” in Water"

avatar

sheeple123jump
Guest
0
sheeple123jump
September 3, 2009 2:24 am
….right on target again,Mr.G. it is LNN and HYFXF. . They are two of the star picks in Mayer’s special situations….and Ive been waiting impatiently for any reasonable dip to get in on these …but the market hasnt really had a fair dip since the first week in July. and these two stocks, like many others that have recovered 70% or more…seem way too overbought now…how much higher can the market keep going before a big correction. So I debate now, whether to keep buying stocks, or sell everything and wait for the (expected) big correction. I will reveal a… Read more »
sheeple123jump
Guest
0
sheeple123jump
September 3, 2009 2:37 am
p.s…… that third caveman pick you havent deciphered yet… I might hazard a guess if I had some clues…but Mayer’s special situations has a few good ‘Gas and oil’ plays …I own them…and they are doing well. I also liked your essay on the gripe about these newsletter hype businesses with their marketing plans to get people sucked into the more expensive packages. I understand all that. and youre right. One has to wade thru the baloney all the time. Thats why your web site is go great for us all…. I especially am finding the Elliot Wave International newsletter… Read more »
wpDiscuz