“The Play That Will Beat Buffett” plus some updates

Checking out the "pipeline inspector" high yield energy stock for the Friday File, plus updates on some companies in my portfolio.

By Travis Johnson, Stock Gumshoe, February 27, 2015

I’ve got a half dozen notes and comments on companies I own and follow for your Friday File pleasure today, but first I want to toss out a teaser solution for you to chew on… it’s a fun one.

The pitch is from Keith Kohl for his new High Yield Energy Report, a newsletter that Angel Publishing started late last year with both Keith Kohl and Christian DeHaemer supplying the ideas and commentary — I haven’t written about this letter before, but those two certainly have their share of both bust and boom teaser picks over the years.

This teaser ad gets our attention with the idea that Warren Buffett is bribing President Obama, which, given the current political climate and the leanings of most investment newsletter customers, is like throwing a limping zebra in the lion’s cage… the lion isn’t going to think about it, he’s going to jump on it and eat until he falls asleep. That’s the goal of such teaser pitches: to appeal to conspiracy ideas or political leanings so strongly that folks who believe the “red meat” you throw in the cage are inclined to believe everything else you say, and folks who don’t believe it will read carefully out of anger and maybe get sucked into the rest of the marketing message, giving you a chance to sell lots of newsletters to both groups if you trigger the right greed receptors in those brains.

The same thing happens with marketing on both sides of the political spectrum, of course — it’s just that the people who spend the most on investment newsletters tend to be (and have always been) affluent white men in their 60s and 70s who skew firmly Conservative/Republican, so that’s the profitable marketing message. And the worst thing a copywriter can do is create something that’s ignored, making people either cheer or scream when they read your ad is a way to be certain you’re not ignored.

None of that means the stock they’re pitching is necessarily bad (or good), of course — it just means we have to separate the stock from the marketing, as usual, so we can look at it a bit more dispassionately in the light of day.

So we’re going to get a solution to the tease for you… and on the way we’ll skip right over most of that baiting, but here’s just a small taste to give you an idea (you can see the whole ad here if you like):

“Buffett’s $44 Billion Bakken Bomb

“How the biggest buy in Berkshire Hathaway’s storied history completely (and violently) backfired…

“Leaving you with the chance to play the trend Buffett didn’t see coming for $738 per week….

“On November 3, 2009, Mr. Contrarian himself announced that Berkshire Hathaway had acquired the BNSF railroad for the extraordinary sum of $44 billion.

“He was so bullish on this play that he even told Charlie Rose he thought it would bolster portfolios for the next 200 years….

“what the world’s greatest investor couldn’t have known was that he was essentially writing his own financial death sentence….

“And it wouldn’t be long before Buffett would be found scrambling (even involving Obama in the matter) to correct what would turn out to be the biggest blunder of his storied career.

“Best part is… it’s a blunder that could end up making you $738 per week if you play the situation correctly.”

That’s a story that’s been circulating for a long time, the part about Buffett opposing the Keystone XL Pipeline and using his influence to help kill it because that pipeline would compete with the shipment of oil by rail using Berkshire’s BNSF railroad. The part about BNSF being a “blunder” of a purchase by Berkshire is a little hard to swallow — BNSF, like all railroads, is a very long-cycle business (ie, a “bet on the economy”) and was expected to be a pretty stable (almost utility-like) generator of returns for Berkshire for 100 years. The oil shipping has helped BNSF, Union Pacific (UNP) and Canadian Pacific (CP) quite a bit, certainly, but I suspect the business would have been decent without that. Maybe not great, since coal declined and they have fluctuated based on demand for coal, grain, and now oil shipments, but solid — and with the oil demand (which has also created a big capital investment requirement, as tank cars have needed to be built and tracks improved to deal with huge congestion issues brought on by crude and large grain harvests), the railroads have all done extraordinarily well.

Berkshire paid about $45 billion for BNSF (including taking over their debt), and they’ve gotten more than $15 billion in dividends from BNSF so far… way, way better than Buffett anticipated, at least publicly, this was supposed to be a way to put his giant pile of cash to work for the next century, not a way to make a quick windfall in a few years. And the railroad, if it were valued in the market like somewhat similar Union Pacific at about 5X sales, might be worth as much as $100 billion today (Berkshire’s market cap is “only” $240 billion). People called BNSF a blunder when Berkshire was buying it in 2009, but that’s because he bought it at a “full valuation”, not because there was anything wrong with the business… and recall, oil was still in the 2008 collapse then and the Bakken was highly uncertain, at least for the near term.

But anyway, that’s not the main point of the teaser pitch — it’s just there to get your attention. The point from Kohl is that the crisis that will bring down BNSF is the fact that pipelines will inevitably expand to replace the “blunder” of Buffett’s “oil by rail” business, whether Keystone specifically is built or not, and that this is largely because of the risky nature of shipping oil by rail. That’s headline news every few months as a crude-carrying train derails and explodes, as happened most recently to a CSX train in West Virginia, and it’s probably true — efficiency demands that more oil move through pipelines, which are a much cheaper way to transport liquids long distances, and less in tanker cars. It’s obviously not going to happen overnight, and pipelines can’t reach everywhere, but it’s certainly possible that rail shipments of crude oil will fall (particularly if production falls for a while with lower oil prices), and that should hit profitability at the railroads. I sure wouldn’t sell Berkshire for that reason, but that’s not the point of the ad.

No, the point of the ad is that you should buy the company that Kohl says will benefit from increased scrutiny of pipelines, and from the pressure that’s being put on pipeline operators by government regulators (bribed by Buffett, naturally — kidding!) to improve safety and reduce spillage and seepage, the things that worried Keystone opponents most of all (the opponents like midwestern farmers and other folks on the route who worried about spills and their aquifer, at least — Keystone expansion became a political litmus test after a while, so it seems everyone is either an opponent or a proponent now, and feels desperately strongly about it whether they know anything about the issue or not).

So after all that hullabaloo, it appears we’ve got a pipeline service company being teased. And given that the newsletter is called High Yield Energy Report, it’s almost certainly a big dividend payer — so it’s probably either Canadian or a MLP. Let’s dig in to the clues, shall we?

He starts by implying that Buffett got into pipelines to “save” his investment in the railroad after one of the rail car explosions was “blowing up” in his face…