Paul Tracy runs the StreetAuthority Market Advisor newsletter, and he has an ad out now about investing only in stocks that have a “driving force” behind them.
He doesn’t mean any technical indicators, or fundamental financial forces, he means catalysts. Catalysts are, of course, the great holy grail of “story” investing — when you buy most biotech stocks, for example, you’re looking for a “catalyst” to drive the shares higher in the form of an FDA approval or a buyout. You’ll hear pundits like Jim Cramer talk about catalysts all the time, too — there are a lot of folks who might be excited about a stock’s valuation or prospects, but are unwilling to buy it if they don’t see an event in the near future that should move the stock abruptly higher (or lower, one must add).
And apparently Paul Tracy is one of those folks. The letter gives some examples of his past success — they say that his “top ten” lists of favorite stocks, released each January, have handily beaten the S&P 500 for the past four years, so that sounds at least a little promising. The examples he gives for past “catalyst” stocks are InterDigital, which went up dramatically after a patent deal, MasterCard, which we probably all know quite well, and Central European Distribution Corporation. All fell significantly after their big runs, of course, so one would have had to be an effective seller as well as buyer, but they all at least did go up. No examples were provided of stocks that didn’t go up, oddly enough.
So what are the “catalyst” stocks that Tracy thinks you should look at now?
“Stock #1 — High-Yielding Container Shipper
“Here’s something you don’t find often: a stock whose yield is 10 times as high as its P/E! Yielding 26.6%, this dynamic shipping company sells at a multiple of just 2.6 times earnings.
“This is the cream of the crop in a booming container shipping business that almost doubled in size from 2000 through 2006. This key industry player owns a fleet of 36 containerships and has 32 more scheduled for delivery by the end of 2011.”
More evidence is given for why this is a great buy …
“… it has almost no exposure to volatile shipping rates. It locks in its ships under 8- to 12-year fixed-rate contracts. And it is also benefiting from the trend toward vessel outsourcing by shippers who would rather lease their ships than buy them.”
And of course, they see some catalysts:
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“Locked-in growth” because it has so many vessels on order to double the fleet in the next couple years.
Industry trend — shippers are apparently trying to lease instead of buy these days (who knows, maybe this is even going to increase if folks can’t borrow the gazillions required to build one of these ships)
… and the one that probably sounds sweetest to many of you:
“Dividend Payout almost has to rise. Pays $1.86 per share, with little downside risk to dividends because of its long-term deals. Plus, as new ships are delivered and start earning fees, it can continue boosting its payout, attracting more investors.”
So what is it? Well, this little beaut almost has to be …
Seaspan Corporation (SSW)
Sound familiar? Yep, we’ve looked at this one before — only back then, it was near $30, and it was Robert Hsu touting these guys as a play on China’s increasing trade with both North and South America. Now the shares are right around $10, though the dividend has indeed gone up nicely.
The teaser clues match up almost perfectly — they actually have 35 vessels now, with 33 to be delivered, but that’s only a difference of a couple months as we await the next delivery. And the dividend is currently a bit higher, the $1.86 figure must have included the last dividend at the old rate, the annualized dividend is now $1.90, with a current yield of almost 20%.
Will this be a winner for you? Well, the container trade is not what it was a couple years ago, since we’re all buying fewer Chinese consumer products these days, and they’re buying somewhat less by way of commodities and unfinished goods — but unless things get really, really bad it’s probably true that global trade in general will continue to grow … at least in the long run, if not in the next year. And it’s also true that Seaspan does have deals in place for most of the ships on order, and that their deals are long — so they don’t have to get new leases each year for each ship, and if they arrange their deals well the ships will come close to breaking even after 8-10 years of use.
It’s been quite a while since I last looked at this company, but I do have a little fondness for shipping firms with great visibility like this — they have some strong customers, so it seems likely that their deals should probably hold up, and that means even though new deals that they might sign could be weaker, they are making money. And of course, it sounds a lot nicer to earn 20% than 5 or 6%.
On the negative side, other than the fact that their future depends on the stability of their customers and, for the long run, on increasing global container trade, they do carry a lot of debt. This is true of almost every shipper, Seaspan is a leasing company and they borrow much of the money they need to build the ships they lease to their clients. They have assets to back up that debt, so perhaps it’s not a concern, but if there is ever a significant problem with the company it may be worth noting that there’s enough debt outstanding that the equity holders would probably be left a bit bereft, and if they have to refinance much debt in this environment their profits could certainly dip — I don’t know of any such problems, it’s just a risk to keep in mind.
So there’s one — I’m barely getting this done as I catch up on a week’s absense, so I’ll leave you there. There was a second “catalyst” stock just waiting for you from Paul Tracy, another one that has a connection to China, so I’ll cover that soon.