Schiff’s Picks from Norway

by Travis Johnson, Stock Gumshoe | March 25, 2011 4:09 pm

The folks at Euro Pacific Capital, the brokerage firm run by Peter Schiff, tend to follow his Austrian economics-derived philosophy pretty closely — and they recommend the kinds of investments that many of my readers also tend to be interested in: foreign stocks that pay above average dividends in strong currencies and provide income that’s in some way sheltered from inflation … or really, In Schiff’s case, dollar devaluation.

And while I hesitate to see the kind of bleak immediate future that Schiff and Porter Stansberry and their ilk preach about, I do think the U.S. has no choice but to gradually monetize our government debt and, therefore, continue to devalue the dollar over time. That doesn’t mean that all investments will be devalued, of course — just that the unit of measurement changes, so assets that have actual value should be worth more of those devalued dollars in the future. I wouldn’t want to be a long-term saver in dollars, which is why I put most of my savings into stocks, foreign currency CDs, and precious metals (in that order), but I also think the dollar will hold on as the reserve currency a lot longer than many of the newsletter touters believe. I do wish the Feds would have spent more effort rolling debt over into 30 year bonds over the last few years, instead of the short-term debt that fuels the government now … but, in the typically short-sighted decisionmaking that the Treasury shares with homeowners who got teaser-rate adjustable mortgages, we may have to refinance huge chunks of the debt at unfortunate interest rates in the next few years. So, on the odd chance that you might care what I think, I agree in principle with a lot of what Schiff says about the future downward trend for the dollar … even if I think the future will be far less linear than he projects, and the dislocation far less abrupt.

So every once in a while, when they send out their Global Investor Newsletter (you can see the latest issue here, FYI[1]) and hint at a couple investments that they can’t specifically name for you, I like to get into the specifics. I imagine they’d also tell you the names of these picks if you call up and ask one of their brokers … but then again, to do that you have to, well, call a new broker and, one assumes, hear a sales pitch. Ugh.

No offense to all you brokers out there, I’m sure you’re the good ones.

So let’s do some learning on our own, shall we?

The investment theme, Norway, is introduced by Andrew Schiff, Peter’s brother and the communications and marketing guy at Euro Pacific Capital:

“Country fundamentals and outlook for the currency have us consistently positive on Norwegian investments. Given the recent run up in energy and food prices around the world, Norway is particularly well-positioned to benefit from current trends. Our portfolio managers have recently returned from a trip to Norway where they met with many companies active in the energy, resource, banking, and infrastructure sectors. Two of their favorite picks are described below.”

Norway has been a favorite among investors for quite a while, particularly resource investors — it is among the wealthiest and most stable countries in the world, thanks to the riches of the North Sea, and they’re a part of Europe geographically but not politically or economically: they aren’t part of either the European Union or the euro zone, and their currency, the Kroner, has been held up, along with the Canadian and Aussie dollars, as stable “commodity currencies” that are backed by commodity-rich nations.

So what are the Norwegian picks from the Schiffsters?

Number one:

“This company is the world’s second largest salmon farmer. It supplies seafood products destined for canneries, restaurants, and household consumers in more than 65 markets worldwide. The company maintains operations in coastal European countries, fishing the North Sea.

“Though the dividend has fluctuated, the company has paid one every year for the last decade. The stock price currently is off from its all time high made a few months ago. Yield is 6.1%.”

“The company risks are:

* Prices of fish could fall due to over supply
* Environmental scares could dry up demand
* Low harvest could hurt revenue
* Consumer taste for fish could change”

Interestingly enough, this isn’t the stock I would have though they’d cop to in this sector — that would be Marine Harvest, which is the largest fish farmer in the world and a high-dividend pick run by dividend (and leverage) lover John Fredriksen, the Norwegian (unless it’s their tax man asking) billionaire who also launched Frontline (FRO), our own fave Seadrill (SDRL), Golar LNG (GLNG), and other companies, mostly in the shipping business. Marine Harvest has a trailing yield of about 10%, but does arguably face more growth headwinds than the pick Euro Cap hints at here, which is Lerøy Seafood (LSG in Oslo, LYSFF on the pink sheets — pink sheets trading is almost nonexistent in this one, though theoretically one ought to be able to buy in NY in the morning, when Oslo is still open for setting a reasonable price … if you try to buy this one on the pinks, please be careful to do currency conversion and set a reasonable limit price, and be patient and note that it’s just as hard to sell as it is to buy in these illiquid markets).

You can see Lerøy’s latest report (4Q and 2010 annual) here[2] — and it was a good year … a record year, actually, revenue growth of about 19% and earnings increases that are far higher, they report earnings per share of about 22 Kroner (before adjustment for biomass value, which I assume must be the book value of their current fish “inventory” based on fluctuating salmon prices). That gives them a rough PE ratio of about 8 on the current price of 169 Kroner, and they proposed a dividend for the year of 10 Kroner (about half of earnings, which seems like a pretty conservative payout ratio), so the current dividend yield is roughly 6% (5.8% at the moment).

The company also announced that results so far in 2011 are looking even better, and they’re extrapolating that for the year ahead:

“Good demand together with expectations for improved productivity for the Group, including improved biology, provides justification for the Board’s positive attitude to the Group’s development. The Board of Directors currently anticipates a better result for the Group in the first quarter of 2011 than was achieved in the first quarter of 2010, and correspondingly for 2011 as a whole.”

Salmon farming — and fish farming in general — is certainly growing and becoming more consolidated, and Lerøy is no exception, they’ve been rolling up regional competitors in Scandinavia and Scotland in recent years in becoming the world’s second largest salmon and trout farmer. Growth of the industry seems to be quite strong still in Chile and Canada, too, so there is competitive production and I suppose there’s some threat that there will be overproduction that drives prices down. There is also growing scrutiny of the environmental impact of salmon farms — particularly the impact that the farmed salmon has on the local wild salmon, and the impact of antibiotic use in these farms. The biggest headlines I’ve seen lately are about sea lice, which are a substantial problem in parts of Norway. The sea louse problem has the government restricting new farming licenses and apparently pushing for stricter regulation and inspection — and they also have broad limits on ownership in Norway that Marine Harvest is going to bump up against very soon, they won’t allow one company to own more than 25% of the licenses, so it might be that the slightly smaller Lerøy has a bit more room to expand at home, and they certainly have done less international expansion than Marine Harvest.

So … I can’t say that I know much about the fish farming business, but there are some regulatory and environmental challenges to consider, particularly if a consumer backlash about farmed fish emerges as a strong force, and the demand side is driven by increasing global demand for fish protein, which has helped drive salmon prices higher over the past year or so. Lerøy is reportedly focused on some degree of stability with longer term contracts, presumably for processed food clients, so that sounds pretty good, and given a quick read of their filings they seem a bit less aggressive than Marine Harvest, but the dividend yield is impressive and the industry is growing. I might have to come back to this one for future consideration.

And what’s their second pick?

Company two:

“This company is involved in every step of oil and natural gas production and is active throughout Europe, Africa and South America. It has almost 5,000 miles of pipelines, piping gas and petroleum from the North Sea to continental Europe. The company also has a liquid natural gas (LNG) terminal that can load ships with LNG for destination around the globe.

“The company recently stated that it wishes to grow its annual dividend to match growth in earnings. In addition to cash dividends, the company said it plans to buy back shares from time to time.

“The stock made its all time high in 2008 and is still below it. Yield is approximately 4.1%. *

“The oil producer risks are:

“Oil prices could fall if the Middle East/North Africa (MENA) problems resolve quickly
If the MENA problems accelerate, the company might not have access to its MENA oil & gas, reducing revenue
A recession in Europe could reduce revenue”

This one is, interestingly enough, Statoil — and the chart they include for the stock (they include charts for both the teased stocks, which is part of why I can be definitive about identifying them — no two stocks have exactly identical charts) is for the Oslo-traded shares of this integrated oil company that is controlled by the Norwegian government. I can’t think of any good reason for US investors to buy shares of Statoil in Oslo at higher cost rather than buy the ADR in NY (which is STO — Oslo’s ticker for this one is STL), the ownership of the company is the same, and it’s largely irrelevant in which currency you happen to price your ownership of the shares unless you feel that it’s important to receive your dividend in Kroner and keep them in Kroner. Volume is greater in Oslo, but certainly there are enough shares traded in NY to give individual investors plenty of liquidity.

Statoil has been featured in the pages of the Gumshoe a few times over the years, most recently because it was teased so aggressively last year as the “Scandinavian Income Certificates” — which was a bit silly, but it does pay a decent dividend (3.5%-ish) and have a focus on keeping that dividend on pace with potential earnings growth. Statoil has been, like many oil companies, going pretty far afield to try to replace the reserves they produce — their heart is in the North Sea, where Norway’s fortunes were made, but with those fields declining in future importance (though still producing huge volumes) they’re expanding to almost all the oil fields in the world, as well as investing in US shale gas resources. They have a reputation as experts in deepwater oil production, thanks to their experience in the harsh environment at home, so have invested in using that expertise elsewhere — in the Gulf of Mexico, Angola, Indonesia, Brazil … pretty much anywhere that oil lurks beneath the seas.

Statoil trades pretty much in line with the big global oil and gas integrated companies — they probably get a bit of a discount because of their government control stake, but there are many other companies that have similar relationships with their home governments (Petrobras, for example). STO trades at a forward PE of about 8, pretty much the same as fellow European integrateds ENI (E) and Total (TOT) and similar to Chevron (CVX), and a bit cheaper than ExxonMobil (XOM) or ConocoPhilips (COP) — it’s also right in the middle of the pack in terms of size, with a market cap of about $80 billion.

I don’t know of any particular reason to steer you away from Statoil if you’re looking for continued strong oil and gas prices, but nor can I tell you — other than their demonstrated offshore expertise — why you should buy Statoil over the other global oil companies. I’ve owned them in the past and always appreciated their government connection that gives them access to the resources off Norway’s continental shelf, and if they’re spurring the dividend higher in the years to come that would be promising … but if oil prices are going to stay in this area or above, all of these companies will do extremely well and pay you handsomely to own the shares.

So that’s what we hear from Peter Schiff’s gang — a couple interesting picks with solid dividends, from a country that has avoided all the troubles of peripheral Europe and wisely, it appears, chose not to entangle itself with the EU or the Euro. I do have some foreign currency exposure to the Kroner right now, but I do not own any of the companies mentioned above except for Seadrill, which remains one of my top ten personal holdings.

  1. see the latest issue here, FYI:
  2. Lerøy’s latest report (4Q and 2010 annual) here:

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