One of Peter Schiff’s Top Picks for 2009

by Travis Johnson, Stock Gumshoe | February 26, 2009 4:22 pm

Peter Schiff[1] has become one of the rock stars of the economic collapse. If you haven’t yet run across his fans or his critics (and they usually end up at the same place), then here’s the brief:

Schiff is a broker, he runs EuroPacific Capital. He has written two books in the past couple years, one from the “Little Books” series last fall, and the more famous “Crash Proof” in 2007 (you can see Peter Schiff’s books here[2]).

I’m no expert on the man, but he has some extraordinarily rabid fans, and is up there with Jim Cramer among the pundits that bloggers and reporters love to try to take down by disputing or maligning their stock picking records. You can take either side of that debate — personally, I read his stuff sometimes and listen to his podcast on occasion … I find his public persona to be kind of irritating because he is so focused on self promotion and his mantra of “I was right all along,” but that doesn’t mean much … I’m sure there are lots of people in the business who I wouldn’t feel warm and fuzzy about in person. He seems to be a successful broker who’s trying to very aggressively grow his business while the tide is with him, and you have the Gumshoe’s blessing to either love or hate him, as you will.

Generally, what Schiff’s brokers at EuroPacific Capital are selling are dividend-paying stocks that trade on foreign exchanges, and gold[3] and gold certificates (I think he uses the Perth Mint, though there are similar gold certificate and gold storage programs, either allocated or unallocated, all over the world).

Most of the recent criticism of him has been over the fact that many of his clients took big hits, particularly with their foreign stocks, over the last year or so — since he doesn’t run a mutual fund or a recommendations newsletter it’s probably awfully hard to pin down when or how folks might have done who have EuroPacific accounts … and frankly, I tend to have some sympathy with the interest in dividend-paying foreign stocks, even though the past six months of dollar resurgence and emerging market collapse have certainly been cruel to that strategy.

So that’s a long-winded way of getting around to today’s point: Schiff has a “teaser” stock recommendation in the latest issue of his free newsletter (the newsletter is called The Global Investor — I haven’t seen the latest issue up on their website yet, but it is being distributed via email). His teasers are set up a little differently than many — you don’t have to sign up for a trial subscription to anything to find the answer, you just have to call one of his brokers and, one might assume, sit through the sales pitch to open a EuroPacific account.

Or, of course, you can just read on a bit — I don’t want to sit through a sales pitch, either, and I’m sure the mighty Stock Gumshoe can solve this little teaser mystery.

The newsletter article calls this “One of Peter Schiff’s Top Picks for 2009”

Here are some excerpts with the clues:

“Based in Australia[4], Company #2 represents an attractive mixture of high yield[5] and growth potential, in the highly regulated, low growth utility field. Company #2 is a holding company, comprised of 5 operating units. The largest of these operating units is Western Australia’s principal natural gas[6] transmission pipeline, and the only one connecting the enormous gas reserves in Australia’s North West Shelf with rapidly growing gas demand in South Western Australia (Perth area). With a yield of around 15%, and government regulated and sanctioned monopolies, we believe this company is a very attractive purchase candidate for investors seeking yield.”

Sounds like a good start — I know a lot of folks out there in Gumshoe Nation are yield lovers. What else do we learn, aside from the fact that they persist in calling this “Company #2” for no apparent reason?

They say the company is “a growth story in an otherwise low-growth sector,” because “the natural gas pipeline earns higher returns than other regulated utilities[7] …[and has a] higher than normal rate of return until 2016.”

This investment has several business units in addition to the pipeline:

“1) an electrical utility, 2) 2 regional gas distribution companies, and 3) a power company located in the US. All of the 4 operating units are government regulated, natural monopolies that should provide stable, predictable earnings in these uncertain times….

“While this company, like most others in the utilities sector, is highly leveraged, rising interest rates have a limited effect on the profit and cash flow.”

Some other tidbits? Most of the debt portfolio doesn’t need to be refinanced until 2012, and it has reduced its leverage a little bit since the IPO[8]. Schiff thinks they will grow distributions (dividends[9]) by 5% a year going forward.

And on the stock price details …

“The company reached its 52 week high of A$3.48 in June 2008 and its low of A$1.60 in November of 2008. At a current price of around A$1.90, the company has a market cap of about A$1.2 billion and is expected to yield about 15% over the next year. The company is trading below its book value per share. The P/E ratio is 8.4 times projected 2009 earnings. The cash flow multiple, based on 2009 estimates, is 3.3.”

OK … so we feed all that into the hopper, and we find that this company is almost certainly …

DUET Group (DUE on the Australian exchange, DUETF on the pink sheets)

The shares have fallen a bit further, to A$1.68 (that would be about $1.09 at the current exchange rate) — they just released earnings, which you can see here[10], though the dividend distribution was announced earlier for last year (and the twice-yearly dividend was paid just last week, I think).

They paid out .14125 cents per share (all these numbers are for Australian dollars) for the last six months, which they say has them on pace to deliver twice that amount, as guided, for FY09 (that would be .2825, if you don’t want to do the math). If that is indeed the current annual dividend, the yield translates to about 16.8% now. Not too shabby, though I have no idea what the tax treatment might be. Those who own the shares in Australia and enroll in their dividend reinvestment plan get a slight discount for those DRIP shares.

So who are these guys? The company looks like it is essentially an investment vehicle run by Macquarie, the big Australian bank that runs infrastructure investment funds around the world (and had some of them really get clobbered over the past year or so, especially some of the more leveraged ones).

DUET stands for Duet Utility and Energy Trust, and what trades at this ticker is a “stapled” unit that appears to actually be several trusts smooshed together with one public company. You can have a look here at their organizational chart[11] — be warned, it may give you a headache.

It really does own much of a critical pipeline — that part of the tease refers to their 60% ownership of the Dampier Bunbury Pipeline (learn more about that here if you like[12]). And they do own part of a US utility, Duquesne Light … if you want to see the full portfolio that information is here[13].

So … high yield, pretty significantly leveraged but perhaps not dangerously so (not sure what a standard would be for these folks, but they’re about 66% leveraged, so that yield probably depends on their core utility businesses and the pipeline continuing to perform at least reasonably well). They’re probably not terribly connected with the US dollar (which Schiff believes will ultimately fall significantly), the company largely operates in regulated businesses (though I have absolutely no idea what the regulatory framework for utilities is in Australia), and the company seems optimistic about their own future.

Is that enough for you? Let us know with a comment below, and feel free to share if you’ve dug into DUET Group to see what they’re all about. I don’t own any stock mentioned above, though I am invested in a couple US pipeline MLPs.

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