The Primeval Portfolio — “Caveman Plays” in Water

By Travis Johnson, Stock Gumshoe, September 2, 2009

I don’t usually write about the same editor twice in one week, but in a land where ads like this hit my mailbox every day I can’t have any hard and fast rules along those lines … and I couldn’t resist taking a look at this latest ad from Chris Mayer, and again it’s for his Mayer’s Special Situations newsletter.

Which brings up the complaint that I hear probably more often than any other about newsletters, particularly those from Agora or the Motley Fool or Stansberry or Weiss or Investorplace, any of the big publishers: They treat investors like they’re climbing a ladder. The big push is to get you on that first rung, to sign up for a free newsletter or for a $50 a year letter, and once you’re on the ladder the teases flow even more more furiously for the next great letter on the rung above, or the special one-time payment for membership in all the newsletters, or just a couple more steps to that $5,000 newsletter and then you’ll really get the best and most exclusive information.

It’s clearly a solid business plan or they wouldn’t all do it, and I can’t poke too much fun at the publishers because I do the same thing to a limited extent (I ask folks to support the site by joining the Irregulars, and when they do I provide access to a little more analysis than I do here on the free site — I consider this a “thank you” for supporting my work and I don’t care whether you join as a monthly, quarterly, annual or lifetime member, and I don’t have a dozen pricier offerings that are even more exclusive, but I can see the similarities). I like to think I’m not as pushy about it, but of course that’s in the eye of the beholder.

But I had a point, right? Oh, yes, it’s that I’m seeing a lot of Chris Mayer ads lately, but more for his pricey Special Situations letter than for his lower cost Capital and Crisis, and this is another ad for the top-shelf stuff. As we saw in the comments on my last article about Mayer, whether or not you like that top-shelf stuff is a matter of taste — I always enjoy looking at Mayer’s ads because I think we’re probably of similar temperament, since it’s also my inclination to be a long term value investor and I’ve never been much of a trader, but your taste may differ.

“Enough already!” Shout the masses of Gumshoedom — to the point, please!

Right.

Mayer’s now talking about a “Primeval Portfolio” of stocks that echo the three essential things needed to survive: earth, water, and fire. He (or a talented copywriter, more likely) opens with a nice echo back to the days of the caveman, when a good investor who knew where the water was and controlled the fire would have ruled the world.

And he has turned that into three “Caveman Plays” on this thesis … here’s how he describes it:

“Why do I say we’re at a crossroads in history?

“Well, this timeless truth — our basic need for food, water, and energy — got a lot more complicated in the last few years.

“Millions of people halfway around the world are joining the middle class… improving their diets, using more energy, consuming more water.

“And think about this: the crops we grow need fertilizers produced with huge amounts of fossil fuels — energy.

“Producing that energy uses up huge quantities of water.

“And you still need water to grow the food.

“See what I mean? It’s all interconnected now. Demand grows in one of those sectors, it’s bound to grow in the others.

“What’s it to you?

“I’ve just finished digging deep into those connections. And I’ve come up with three ‘Caveman Plays’ I’m convinced could at least triple your money.”

The ad goes on to cover the astounding (if you haven’t heard them before) statistics about how much water goes into everyday products — 35 gallons to make a cup of coffee, 630 gallons to make a hamburger, etc. … there’s some dispute about a few of these numbers and the way they’re calculated by different academics, but yes, we can stipulate that meat and many other food products require a lot of water, whether it’s from irrigation or feeding the cow or washing down the abattoir.

The big argument is that food, water, and energy are all linked — increases in food supply require more water and more energy; increasing the energy supply requires more water for things like well injection and oil sands refining and ethanol, etc. etc.

And the overarching reason that demand in one or all of these sector should go up is just, to break it down, that the population is growing and that some of the very poor are moving beyond bare subsistence and wanting more and better food, using more energy as autos and electricity proliferate, etc.

All arguments that make a lot of basic sense, and you probably know them already — sooooo … which companies should profit?

That’s the million dollar question — Mayer has three favorites in the “Primeval Portfolio” that he calls “Caveman Plays” … the first one is for irrigation:

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“This Company’s Exclusive Technology Waters Crops Up to 90% More Efficiently ….

“The population of China, India, Pakistan, and other big Asian countries will grow by 1.5 billion by 2050 — doubling the continent’s food demand.

“Listen to Colin Chartres, director of the International Water Management Institute, describing what Asia’s up against:

“‘…Existing irrigation systems are often 50 to 70 years old. They are leaking and water is evaporating. We urgently need a new generation of irrigation. That is the only way we are going to feed everyone.’

“One company can deliver the solution. Not just for Asia, but the whole world….

“It uses water up to 90% more efficiently than traditional methods of watering crops.

“The company’s business overseas is exploding. When Saudi Arabia took on the world’s biggest ‘pivot irrigation’ project, it used this company’s technology. The project is so huge, it can be spotted from the space shuttle.”

So … toss that limited little clutch of clues into the mighty, mighty Thinkolator, and we find that this company must be …

Lindsay Corp (LNN)

Lindsay is the world leader in center point irrigation, as far as I can tell, and they are supplying the Zimmatic irrigation equipment for Saudi Arabia’s stunning irrigation projects — and yes, you can see them from space, it’s like the reverse of crop circles, little circles of green in a sea of sand. They also supply road contstruction equipment and have a few other product lines, but they’re mostly known as a maker of more efficient, automated irrigation systems.

Will the shares continue to boom? They’ve already pretty much doubled from the March lows, when Forbes featured them and they had a near-normal PE of about 16, but since then earnings expectations have dropped, in part on falling farm income in some areas, and the price has exploded, so the shares now change hands for a forward PE of about 27 … assuming that you think the analysts are right.

This is probably “best of breed” when it comes to improving irrigation efficiency around the world — does that mean they’ll make you money? They have been raising the dividend, but it’s still under a 1% yield, and if we’re looking at it as a value play they do have a very solid balance sheet, with about $2.50 a share in net cash on the books, and they trade for about 2.5X book value. They are profitable and they have had a very nice five years of sales growth, but analysts see that growth tailing off pretty significantly — if that’s true, then it’s hard to pay this kind of multiple for a relatively slow grower … then again, it’s a good business that might have a spike in demand, as Mayer seems to believe, so perhaps they’ll surprise on the upside.

More stocks to look at, so I’ll leave it there for you — if you’ve got a feeling on Lindsay, please share it.

Next? More on water …

“China’s Record-Setting Water Firm… for Only $2 Per Share

“Problem: China is home to 21% of the world’s people. And just 7% of the fresh water.

“WORSE PROBLEM: Nine out of ten Chinese cities have groundwater supplies polluted by industrial toxins, pesticides, and human waste.

“Solution: China’s most integrated water company, doing gangbuster business with water filtration not only in China… but also the parched Middle East and drought-stricken northern Africa….

“More to the point, this is a company that did record business in 2008, and it’s on track to do the same in 2009. Revenues are steady and net profit is up….

“It’s a real “bootstrap” kind of story, too — founded 20 years ago by a woman who raised the start-up money by selling her condo an