“World’s Greatest Growth Stock”

by Travis Johnson, Stock Gumshoe | August 11, 2007 2:06 pm

This is one I’m surprised I never got around to doing before — but I just had it sent to me again, and I know I’ve been seeing it fairly consistently since mid-May or so, so I might as well give it a quick writeup here. It was actually teased in the same ad[1] as a much more difficult to find stock, the “secret pension plan” and “world’s best retirement[2] stock” that we discovered was BBVA Provida (PVD)[3]. The tease is for Christopher Hancock[4]’s newsletter, Free Market Investor, which is fairly new.

But this one’s different … it’s all about steel.

So the first bit is about skyscrapers, and Andrew Carnegie, and the fact that the first wave of urban industrialization was really made possible by Carnegie’s cheaper steel, which went into such landmarks as the Empire State Building.

And to drop some more names, he notes that the world’s greatest investor bought shares of this stock at 572 million, shares that are now worth 1.3 billion and here he’s clearly referring to Warren Buffett[5].

Which, if you watch Buffett’s portfolio, means you’re done sleuthing — he owns only one steel stock.

But if you don’t, continue along with me … a few more hints, teases and clues.

The ad notes that they expect this stock to triple within two years (it’s already up nicely from the first tease, though tripling is a long way away).

And that we can get rich off the fact that China[6]’s steel demand is expected to double in the next 25 years or so.

The company has – or had, around May 20 or so, a market cap of $32 billion. Certainly no small fish.

So what are we talking about here? This “world’s greatest growth stock”, according to Christopher Hancock, is …

Posco (PKX)[7]

I owned stock in this huge Korean steel company several years ago, and unfortunately sold waaaay too soon (I think I sold around $60 after a near-double, it’s now at about $130). And it’s had a nice gain since the May teaser started, when you could have had it for $111. On the positive side, for folks who are still interested, it has swooned a bit of late, it had hit highs of well over $150 earlier in the Summer.

I bought the stock so long ago because it was ridiculously cheap and paid a nice dividend, and everyone was ignoring Korea and thought their doldrums and credit woes would continue forever. Clearly, that’s no longer the case — Korea has had one of the nicest stock market runs in the world over the last couple of years. I happen personally to believe that the big South Korean companies that used to trade at low-single-digit PEs are no longer cheap, which is why I sold my Korean ETF recently[8], but I certainly can’t come up with anything particularly bad to say about Posco (and as I noted earlier, I misjudged their growth once before). The PE is much higher now, of course, though at 11 you can still argue that it’s relatively inexpensive — and the yield is now negligible, down to under 2%.

I would be slightly careful about this, even though Warren Buffett does indeed hold shares and has bought them somewhat recently — though a PE of 11 sounds cheap, it is historically quite high both for Korean companies and for steel companies. So it’s certainly possible that they’ll grow very well and make that valuation look cheap … but think about the valuation in relation to its peers, not just in relation to the overall market. Arcelor Mittal, for example, though three times larger, trades at a PE of 9 and has significantly higher profit margins and price/sales numbers. US Steel and Nucor both trade at PEs well under 10 as well.

Posco is among the lowest-cost steel producers in the world still, though I don’t know if they’re still number one. They have spent time and treasure expanding internationally, so they have a presence in Brazil[9], for example, and are trying to get access to raw materials around the world. They definitely are well positioned to continue to supply the booming markets of Asia[10], though I don’t know whether Chinese steel companies are a competitive problem for them or not.

Posco is regularly rumored as both a takeover candidate and a potential acquirer, and if memory serves I think they’ve adopted some poison pill measures to fight off acquirers. They’ve also had labor troubles in the past, though those have generally been buying opportunities as Western investors overreact to the sometimes fiery confrontations between Korea’s multinationals and the very strong local unions.

So — for the few of you who hadn’t already figured this one out, here’s a nice steel company at arguably a bit of a premium valuation (depending on your growth calculations), which is in the right part of the world for steel demand and is owned, in part, by the world’s greatest investor. Enjoy your continuing research, and let us know if Posco’s ready for your plate.

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