“A Solution to the Commodities Problem — Hsu’s Asia Edge Idea”

By Travis Johnson, Stock Gumshoe, January 7, 2008

For the last couple days commodities stocks have been taking a serious beating, including the big lead horse for earnings season, Alcoa, which is down big today. But notwithstanding these few weak days, clearly commodities of all kinds (softs like the grains, metals, energy, even coffee and cocoa) have been shooting out the lights lately.

That has made a lot of investors rich, but it has also severely pressured the margins of many companies — especially industrial companies, the heavy users of many of these commodities.

And a lot of the commodity slurping is coming out of Asia, so clearly Robert Hsu has been looking at commodities with his
Asia Edge service (that’s his more expensive “greater China” service that looks broadly for pan-Asian stocks, as opposed to the cheaper and more targeted China Strategy newsletter that he also edits). Robert Hsu has been a favorite of many of my most active readers for some time, which is of course quite natural for an adviser who has been selling the idea that China is the future — he has certainly been correct for the last few years, and has made some excellent picks (whether he will continue to outperform if and when China hits a real speed bump will be the real test for his service, I imagine, but it hasn’t happened yet).

So … he has recommended commodity stocks before, like CVRD out of Brazil, that are benefitting from the Chinese demand for raw materials.

And, in Hsu’s words, “Asia Edge subscribers have been asking me for a year to recommend a broad-based Asian-driven commodity play and finally I’ve come up with one I believe is PERFECT.”

So, you can subscribe and read all about it in Asia Edge if you like, it’s apparently one of his picks for the current month.

Or — and let me just guess that this is your preference — you can read on a bit, and the Gumshoe will tell you a little bit about this one, including the name of the company.

Hsu goes on to say that “Commodities are best traded by professionals, and even professionals can fail spectacularly.”

Hard to argue with that — I would hesitate to bet on the immediate direction of any commodity, even during times like this when it seems like they’re all going up forever and ever.

Hsu then makes some oddly specific claims about the competency of commodity traders in general, and the scarcity of competent traders:

“I calculate that there are probably less than 300-325 consistent commodity winners operating today in the world … of the 300-325, exactly 188 work for one trading desk.”

Which is, of course, the trading desk of the company being teased here.

What else do we know about this company?

They “have been in business for 30 years”

Listed in New York “a few months ago.”

And some lovely specific numbers for us to chew on:

“Net income, up 208% … Revenues, up 43% … The stock split 3-for-2.”

He also ups the ante a little for an urgent purchase: “I’ve been watching block trades on this stock like a hawk and it’s clear that some deep, deep pockets are interested in this stock.”

A few moments on the thinkolator (and those of you who frequent the forum might note that a couple readers figured this one out, too), and we find that the company is …

FCStone Group (FCSX)

This company is essentially a consulting firm that helps companies do commodities trading — hedging their bets, etc. And that’s obviously very important for companies of all stripes these days — I remember a couple years ago when Southwest was pretty much the only profitable airline, and it was largely because they had been much more prescient about hedging against high oil prices than had their competitors. In a time of volatile and high commodity prices, how a company handles those prices and hedges against them can certainly make or break their earnings statement.

But, this isn’t exactly a new thing — and while they have a long history of doing well there’s no guarantee that they’re going to have a dominant market position in the years to come. It might be that their IPO right now is the same kind of “top of the market” indicator that Blackstone’s turned out to be (though their markets are a bit different, of course).

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Michael Santoli commented in Barron’s last week on this sector that “this area is well discovered at this point,” and it’s hard not to agree with him. He was lumping FCSX in with all the exchanges and other commodity trading managers and enablers– they’ve really never been as profitable as they are now, so whether that means good or bad things for the future is your call to make. The fact that commodities trading is the hot new trend in corporate America and on bourses worldwide has not escaped the attention of the big investment banks or of advisers, consultants and traders.

It may be an interesting idea, and I’d hate to argue against Robert Hsu, who has done a very solid job of taking advantage of the growth in China of late … but I do like to poke a few holes in these ideas, if only to slow us down a bit and help us think.

This stock is by no means cheap or contrarian, if that’s what you’re looking for. And it might be a crowded business, given the popular attention that commodities get in all investing circles these days, so even it is a promising sector I’d urge you, as always to read up a little bit on the competition.

If you’ve got an opinion on FC Stone or on commodities trading in general, I’d love to hear it. Happy Investing!

full disclosure: I do own shares of Blackstone and, in a somewhat similar space I own shares of Ambrian Capital. I don’t own any other company mentioned.


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