Elliott Gue has gotten his share of Gumshoe attention in the past, in part because of the bull market in energy stocks, which are his bailiwick at the Energy Strategist newsletter, and in part because he fairly recently took over Personal Finance, the longstanding high-circulation investment newsletter. But lately the most heavily pushed promos attached to his name have been for the MLP Profits newsletter, and I’ve written probably far too much about Master Limited Partnerships recently already … so I thought this would be a good opportunity to take a look at some of his more conventional picks for Personal Finance. And whaddya know, he’s teasing us about a handful of “superstocks” right now … so what are they?
He starts with a litany of forecasts that form the basis of his picks — here’s the shorthand version, just so we know where he’s coming from:
“Carbon ‘Cap and Trade’ Is Dead…
“Nuclear Energy Goes Green….
“The Alternative Energy Hype Won’t Turn Into Profits…
“Railroads Make a Huge Comeback…
“Expect a Boom in Natural Gas Acquisitions…
“The Market Will Love U.S. Government Gridlock…
“Wind and Solar Development Will Be Slower than Expected…
“Natural Gas Becomes the Top Energy Play of the 21st Century.”
And the “Super Infrastructure Stocks” that he thinks will benefit? Well, we get quite a few of those teased out for us, thank you very much. Here they are, along with the Thinkolator solutions …
“The Natural Gas Innovator. New horizontal drilling and fracturing techniques are unleashing big profits for this stock. These new processes allow much more natural gas to be extracted from their huge acreage of gas fields. This company also has experience in partnering with integrated oil companies that might ultimately become acquirers—just like Exxon and XTO. Management sees an upside to as much as 62 trillion cubic feet of potential resources. The stock is a great value. In my new report, I also give you the details on their preferred shares—a 5.5% annual dividend!”
This pretty well has to be Chesapeake Energy (CHK), and the Convertible Preferred shares (series D) have been teased by Gue in the past and are likely the focus again — they have a $4.50 annual dividend, paid quarterly, and are convertible into 2.26 shares of CHK, if you want the full information they have the prospectus on their website here (symbol is CHK.PD, CHK-PD or CHKpD, or whatever variation on that your broker uses for preferred stock tickers).
The current yield on the preferred is about 5.3% with the shares trading at around $85. They trade at a big premium to the conversion price (they’d have to drop to $57 to make it worth converting your preferreds into common CHK shares … or CHK would have to get up to around $37 (that’s about a 50% gain from here) for the conversion value to drive the preferreds higher. I owned these preferreds several years ago but do not currently have any interest in Chesapeake — the shares probably got a bit too low thanks to Aubrey McClendon’s well-publicized screwups (he had to sell his huge cache of CHK shares in a margin call), but Chesapeake has regained a bit of its luster with the boom in shale gas media coverage and it’s back to trading at a pretty low forward valuation (forward PE is about 8). I wrote about Chesapeake in more detail when I covered the “Back Mountain Covenant” teaser last month if you’d like to see more.
“On Track for Huge Gains. Freight transport is the heart of today’s global economy. Warren Buffett ignited interest in railroads when he acquired BurlingtonNorthern. We have an excellent stock in this sector. It has 21,000 miles of track, primarily in the crowded eastern half of the U.S. The stock is benefiting as freight shippers switch to cheaper, faster, and more-efficient rail rather than trucks.”
Well, with those clues I’m afraid I can’t tell you exactly which stock this is — both Norfolk Southern (NSC) and CSX (CSX) claim roughly 21,000 miles of rail line in their networks, and both are concentrated in the eastern part of the country. I’ve seen Gue mention NSC before (as in this Seeking Alpha article on the “railroad indicator”) and haven’t seen him mention CSX, so I’ll take a wild guess that this is his pick.
The companies are very similar in size and basic valuation, including similar operating margins of about 25%, PE ratios in the high teens (20 for NSC, which has slightly higher growth) and PEG ratios of around 1.9. CSX is a bit more focused on intermodal transport and NSC has a bit more exposure to coal and automobiles, but really they’re extraordinarily similar. The other two big railways that you can easily buy, Canadian National (CNI) and Union Pacific (UNP), are both somewhat larger and exposed to somewhat different dynamics (pacific ports, midwestern grain) but also trade in a similar valuation range. (CNI has been a Motley Fool pick for a while as the “new silk road” railway, FYI). I’m not an expert on the railroads and I’m happy to leave my exposure to the sector in Warren Buffet’s hands for the moment, since I own Berkshire Hathaway shares and they recently acquired Burlington Northern, but that’s not to say there’s anything particularly wrong with NSC or any of the others.
There are several more, but I’ll have to put some of them off to tomorrow — for today, we’ll close out with the other railroad-focused one:
“The High-Tech Railway Leader. This next stock is an innovator in computerized electronics systems for trains. Its specialties include positive train control (PTC) systems which help trains run safer and more efficiently. PTC systems monitor a train’s position relative to other trains and potential dangers. PTCs are a massive growth business because new government regulations require railroads and metro systems to install them. Freight rail giant CSX Corp. noted that it must spend $750 million on PTC systems between now and 2015. Across the industry, estimates say some $10 billion will be spent on PTC and other safety equipment. Get on board before it’s too late!”
There are several companies who sell or are developing PTC systems for railroads, but most of them are either parts of big conglomerates (Alstom, GE, Lockheed Martin), or are private or overseas companies that are difficult or impossible for US investors to buy — not the kind of thing they tend to cover in the mainstream Personal Finance. So who is this? I’d say it pretty well has to be … Westinghouse Air Brake Technologies, usually known as Wabtec (WAB).
Wabtec has been a teaser target before, too, though not for Elliott Gue — I think the last time I wrote about this one was in an article about “stocks for the Obama presidency” from Zack’s. Their signature product is the air brake, but they are now a pretty diversified railroad and light rail (as in subways, commuter trains) service and technology company — and electronic train control systems are a core focus. The shares trade at a forward PE of about 15, which sounds reasonable against expected growth next year of about 15%, but analysts do also see that growth tailing off significantly in the years to come, going down to the low single digits. So you can certainly make a valuation case for the shares, or even claim that they deserve a premium if you expect a continued renaissance in rail infrastructure and systems spending, but it’s not one of those that looks abundantly clear either way — neither a bargain nor gold-plated, at a quick glance.
What say you, great Gumshoe faithful? Intersted in a railroad, or in a railroad supplier? Ready to trust Aubrey McClendon’s judgement again and get aboard Chesapeake? Let us know with a comment below.
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