Well, I promised I’d get to the other “bonus small caps” pitched by Tim Melvin, after the misleadingly disappointing pitch for his number one “9% yield” (not really) stock yesterday… so let’s get to it.

This is from the same ad for Melvin’s M.V.P. Trader that I covered in yesterday’s article, but in addition to that “#1 Buy” he focused on, he also drops hints about the other four stocks he thinks you should start with for your 2023 small portfolio, mostly some pretty high yielders (unlike yesterday’s story, it looks like these next four actually do pay dividends right now).

We’ll be a little quicker since we’ve got four stocks to look at — first in line, please!

“BONUS SMALL CAP #1: A 24% dividend yielding small cap

“(as of this writing March 2023)

“This $7 oil play has seen a sharp pullback thanks to oil price decline.

“At the same time, they’ve 8X’d their dividend in the last 12 months. Meaning, there’s a huge yield sitting out there right now.”

OK, so oil has had a good week or so, thanks to OPEC’s announcement that they’re cutting back, so we should expect most oil stocks to have risen, it may not be at $7 anymore.

Other clues?

“This company is an oil producer and has 3,147 producing wells in the western US. They’ve been around since 1909.

“Except, they’ve only IPO’d in 2018!”

And it’s quite small, no surprise, since this is a small-cap newsletter…

“The market cap is less than $1B which won’t even hit the radars of the Wall Street suits.

“This is a good business, guys. The price-to-earnings is a wild 2.3. (Exxon goes for 8).

“80% of debt reduction will go to stock buybacks and debt reduction (remember, we don’t want debt). They’re also stockpiling cash for a big special dividend coming.

“If we get an oil shock in prices up… this stock will go bananas….

“You can buy this stock up to $10, it’ll still be an incredible price there.”

Hoodat? Thinkolator sez this is Berry Petroleum (BRY), which pays a “base” dividend of six cents a quarter but has been juicing that with much larger “special” dividends… and then in February they doubled that base dividend to 12 cents per quarter. The shares are around $8 now, so that would be a 6% dividend, but if they keep up the special dividends at the current pace (the last one was 50 cents), the yield could be dramatically higher, in the 20%+ range. Over the past four quarters, including most of the post-Ukraine invasion oil boom, they’ve paid out a total of $1.78 in dividends, so that’s roughly a 20% trailing dividend yield at the current price. Their investor presentation says they’re targeting an 8-9% dividend for 2023, which means they’re hoping to continue to have special dividends, albeit maybe smaller ones.

And yes, according to their last Investor Presentation, they do intend to put 80% of their adjusted free cash flow into share buybacks and debt reduction (they bought back about 7% of the shares last year, and the other 20% into dividend payments. They think their production should continue to be pretty steady, they’re producing from conventional oil wells and not from the hydraulically fractured wells that require a big “finishing” investment and deplete very rapidly.

There is probably some risk in that they produce primarily in California, in the San Joaquin valley, and oil production in California is not politically favored at the moment (they produce some in Utah as well, about a quarter of their reserves are outside of CA)… but California legislators did push back on the windfall profits tax that Governor Newsom wanted last month, and the “price gouging” regulation that his administration pushed through instead might not hit producers like Berry directly.

Obviously, a lot depends on the oil price. They do some hedging, but most of their production is unhedged. Their earnings for 2023 are likely to be dramatically lower than 2022, given current analyst estimates, which presumably means most folks aren’t expecting more windfall oil prices, though I guess that’s possible. Right now, analysts think their revenue will fall by about 25% from 2022’s levels, and that earnings per share will be about 83 cents. That’s enough to pay their hoped-for 8-9% dividend from current prices. As of December 31, they had about $46 million in cash and $395 million in long-term debt, and oil companies carry pretty big liabilities for cleanup (I assume that’s the “long term provisions” they carry of $159 million on their balance sheet), so they don’t have a ton of flexibility… but they are not particularly hamstrung right now, especially with oil prices bouncing back up a bit.

Next?

“BONUS SMALL CAP #2: Steel play set to double

“This stock is priced like no one will ever use steel again!

“Another $5 small cap to add right now. A company that’s nearly tripled their revenue compared to their 2016 numbers. Yet, the stock is down 75% from 2018.

“Its price-to-earnings is a mere 3… which is almost as low as you can go for value buying.

“They’ve bought back shares every year for the past 5 years and they plan to buy back nearly 10% of all their shares going forward.

“This company is a picks-and-shovels play providing electrodes that are necessary to produce steel. Their main business has been around 140 years. They’ve weathered recessions and world wars… I see them holding up just fine.

“They’re using cash to pay dividends, buy back shares and reduce debt. All things you want to see from executives.

“The stock could easily double in 9-12 months. That’s not a promise, just what I see could happen with how fundamentally sound they are.”

Who do we have here? Thinkolator sez he’s almost certainly touting GrafTech International (EAF), which is a little below $5 these days and certainly had some better years in the past (they were briefly over $20 in 2018, so yes, they’re down 75% from that point). They were taken public in early 2018 at about $15/share, sold by one of the private equity funds of Brookfield Asset Management, which had bought the company in 2015, when its market was very weak, and restructured the company. Brookfield bought GrafTech for a total valuation about $1.25 billion seven years ago ($855 million in equity), sold it back to the market at a market cap of about $5 billion, and probably did just fine… but now GrafTech is back down to about a $2 billion enterprise value (almost half of which is debt). Brookfield funds still own about a quarter of the company.

What happens next? Beats me. They’ve been pretty reliably profitable, though they’re not growing the top line, and investors tend to not love companies that aren’t growing… but they do pay a token dividend (it was slashed in 2020, but they still pay one cent per quarter), and the company looks pretty healthy. Not growing, but healthy. No idea what the demand will be for the graphite electrodes they sell, which are used in smaller steel mills and aluminum smelting, but they are trading at only 3X their trailing profits, so you can’t argue with the “cheap” part. They’ve bought back 15-20% of their shares since 2018, all of which was clearly a mistake, in retrospect, because those shares are cheaper now… but it’s hard to argue with buying back stock when you have excess cash flow and are valued at 3X earnings.

If that one sounds familiar to some of our longtime readers, it’s because GrafTech was sometimes pitched as a “graphene” play by a few newsletters a decade ago (the ticker was GTI back then) — that didn’t ever turn out to be a real business for them, the newsletter folks were a bit too optimistic on that front and Brookfield scuppered all the non-core projects when they took them private a few years later. Now, as then, Graftech is mostly a supplier of graphite electrodes for steelmaking… their stock price probably depends mostly on what the demand for steel is in the next few years.

Next!

“BONUS SMALL CAP #3: Real estate small cap with 50% gains already built in!

“This 3rd bonus small cap is in the mortgage and real estate business. They provide that pesky mortgage insurance you pay if you don’t put down enough buying a home. However, they also provide services and products to real estate brokers and lenders.

“They aren’t slowing down due to single family slowing.

“They returned 22% on their equity in 2022… that’s as good as most tech stocks.”

Apparently the valuation is tempting with this one, too…

“Their book value is HIGHER than their stock price… meaning, you’re buying the stock for less than the assets they own.

“That’s the way of value investing which makes you rich. Because this business also cashflows… the highest profits in years last year.

“They used that wonderful cash to buy back more than $400 million in stock… and about to buy another $300 million. That’s nearly 20% of their stock in total they’re buying back.

“And still the stock is trading at 4.5 price-to-earnings.

“Analysts expect future P/E to be 50% higher… meaning a 50% bump is already planned… it’s just no one has seen this yet.

“They also pay a tidy 4% dividend kicker… nearly doubling the dividend since 2020.”

Thinkolator sez our best match here is longtime title insurance specialist Stewart Information Services (STC), which has historically been a way to ride the waves of activity in the US housing market — in hot markets, with lots of transactions, like 2003-2006 or 2020-2022, they make buckets of money… in soft markets or real estate crashes, when transactions dry up, not so much.

How do we match the clues? Well, they don’t have a 22% Return on Equity (ROE) right now, but it was at that level in mid-2022. They do pay a decent dividend (up to 4.6% now, the shares have fallen a bit), and analysts do think they’ll earn less but also trade at a higher multiple over the next year or two, they have an average price target of $55 (which would be 11X the expected $5 in earnings those analysts think they’l report in 2024… though I should caution you that this is the average of only two analyst estimates, this isn’t a widely-followed name).

Their next earnings report will be in about three weeks, so we may learn more then — but given the spike in interest rates and the relative weakness of home sales (especially existing home sales, new home sales are holding up a bit better), it probably won’t surprise you that those analysts are expecting seven cents in earnings per share this quarter, a dramatic drop (it was $2.03 in the same quarter a year ago). There’s clearly plenty of uncertainty to go around. The dividend hasn’t really “nearly doubled” since 2020, it’s gone from $1.20 to $1.80… but, well, 50% growth ain’t so bad in three years. I wouldn’t bet on that dividend going up in 2023, incidentally, not with earnings cratering so far this year.

Title insurance is a pretty fantastic business, there are almost never any losses, and Stewart has continued to grow by buying other providers in the industry… but there’s no getting around it, they make money when there are transactions in the real estate industry, when homes and buildings change hands, and if there are fewer transactions, they’ll make less money. They have put some debt on their balance sheet in recent years, partly to make some good-sized acquisitions that should pay off, and that debt might eventually be a problem, but it looks like they timed it pretty well — most of their debt matures in 2031, and costs them only 3.6%. I wouldn’t be paying that off if I were them (if they have to borrow more at some point, it would cost them roughly twice that much in today’s market). They may have overpaid for acquisitions in 2021, but even so they ought to be able to survive a real estate downturn and come out OK on the other end — I don’t know what valuation they’ll have at that point, and the stock could certainly fall further as we watch what will probably be some very bad earnings reports in the next quarter or two… but it looks to me like a persistent business that should come back when real estate normalizes. Whenever that is.

It might be too early to get excited about this one, but I do like that they made some acquisitions… if the current real estate downtrend falls short of being completely disastrous, STC will probably work out pretty well. If they lose money for a year or so because mortgage rates spike higher and nobody is willing to sell their home, investors could give up and drive the value down by another 50% or more, but they will probably come back… and the acquisitions they’ve made to grow their market share should let them come back stronger. There are other big US title insurance companies, and title insurance is a commodity, so no guarantees… but it’s a very profitable business, so much so that many home buyers think it’s essentially a government-required scam, and those little charges on your HUD form that all blur together and act as taxes on home purchases seem to be awfully persistent.

I’ve never owned one of these companies, and won’t be buying one today, I haven’t really gotten very far under the hood… but Stewart might be a nice contrarian play on housing at these levels. Fidelity National (FNF), First American Financial (FAF) and Old Republic (ORI) are all much larger competitors, they own the larger title insurance companies, and their stocks have generally been a bit steadier over the years, so not surprisingly they also generally trade at higher multiples… though FAF and ORI, at least, are also more diversified, with more non-title insurance revenue as well.

Moving on!

“BONUS SMALL CAP #4: Shipping stock with a massive moat

“The last bonus play may be the best play of all these bonuses. Another $5 stock.

“It’s in the shipping business with 25 vessels carrying the most necessary items you can imagine. Think grains, coal, iron, aluminum… things that we need almost daily.”

This one might be fun… shipping rates in general went bonkers for a couple years and then collapsed last year, so I bet we’ve got some more volatility here. What else do we learn?

“They have specialized vessels that allow them to charge 42% more than others and vendors have to pay it.

“That’s allowed the business to increase cash flows by over 40% year-over-year.

“Their revenue has doubled in two years…

“Profits have gone up 588% in that same timeframe.”

Apparently they’re using that money to buy back shares and pay a dividend… he says that dividend yield is “around 7.2%” and the payout has doubled in 12 months.

A couple other clues:

“Insiders of the company own 29% of the stock.

“Price-to-earnings is just 3.2… and you’re buying shares at a price of 84% of their book value. “

That’s a pretty small number of vessels for a publicly traded dry bulk tanker owner, even the relatively small companies like Diana Shipping (DSX, $400 million market cap), Safe Bulkers (SB, $400 million) and Eagle Bulk Shipping (EGLE, $600 million), own 40-50 ships, and Star Bulk’s (SBLK) fleet is 128 vessels (their market cap is still “only” $2 billion, so they’d be considered a small cap by most folks). You can even make it more specialized, too, I think Algoma Central (ALC.TO, AGMJF) still has about 25 vessels, all moving grain and ore around the Great Lakes.

The bulk shippers pretty much all paid very large dividends over the past year, as is typical of shippers — companies in this business usually run very hot and cold, they carry a ton of debt most of the time, since building or buying these massive tankers is very capital-intensive, and most of them offload a ton of their cash flow as dividends to keep shareholders happy (like most commercial real estate companies, they last thing they want to do is waste their cash by paying off debt on depreciating assets, they’d rather ride that debt forever… no surprise, lots of shipping companies are very familiar with bankruptcy laws).

As for this one, I’d just be guessing — particularly because the pitch doesn’t seem all that consistent about which time frame they’re referencing. The logical matches for a near-$5 small cap dry bulk shipping stock, at least if you’re sticking with a US listing, would be Diana (DSX) or Safe Bulkers (SB), but neither quite matches the clues perfectly. If you want to dig into other ideas, Genco Shipping (GNK), Eagle (EGLE), Golden Ocean (GOGL), EuroDry (EDRY) and Castor (CTRM) are all quite small and had great years last year. Can’t say I’ve got a favorite in this space, I haven’t really dug into the boom-and-bust dry bulk shipping business in a while — it’s so volatile that it’s a frequent hunting ground for traders, so you might do well if you put the time in to find the companies who can predictably keep those dividends going, usually through longer-term charters.

And that’s all I’ve got for you today, dear friends… I’d say the Thinkolator pointed us to at least three of the four picks here, all of which are interesting, though I confess that I haven’t rushed to put my money to work in any of these investments today. Have a favorite? Think I missed a better answer on that shipping one? Do let us know with a comment below… thanks for reading!

Disclosure: I own shares of both Brookfield Corp and Brookfield Asset Management, which are referred to briefly above, but don’t own any of the other companies mentioned, and won’t trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.