"We are very heavily invested in shale gas. What excites us about shale gas is, first of all, the sheer quantity of it in the U.S. It's enough for decades and decades of supply for all of the U.S. needs. No. 2, it's much less pollutive than coal, and cheaper."
The above quote comes from an interview billionaire investor Wilbur Ross gave to King World News. Ross is making a big bet on shale gas. He believes – like we do – that the huge amount of natural gas coming from U.S. shale plays (like the Bakken in North Dakota and the Eagle Ford in Texas) will revolutionize the world's energy landscape.
And Ross knows energy...
Last year, Ross sold his coal company, International Coal Group, for $3.4 billion. He started the company a decade ago, buying mining company Horizon Natural Resources out of bankruptcy. (Ross' specialty is bankruptcies and turnarounds.)
Coal prices have been destroyed lately. Demand for the resource is currently at a 24-year low. Take a look at this chart of the Market Vectors Coal Fund, a collection of coal producers and related stocks:
Ross doesn't see any bargains in coal today... A decade ago, coal was in the dumps due to its cyclical nature. But Ross now sees a secular change in the energy markets. As he told King World News...
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Coal used to be 50%, or thereabouts, of electric power generation, and natural gas had been around 25%. Now they are each around 33%. Eventually, we think natural gas will supplant coal as the principal source of power generation, and will do so on a much, much cheaper basis. |
Ross said he's playing the trend through the $1.7 billion oil and gas exploration company EXCO Resources (XCO).
The shale boom is destroying the coal market... And it will have a similar – though less pronounced – effect on oil prices. In the May 1 issue of DailyWealth Trader, co-editors Amber Lee Mason and Brian Hunt discussed one of their favorite ways to profit from falling oil prices...
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[Renowned short-seller Jim] Chanos is bearish overall on state-owned oil companies. These types of companies are not the traditional "purely" shareholder-owned firms like ExxonMobil or Chevron. "State owned" oil companies are controlled by national governments... and thus, are often poorly managed and wasteful. According to Chanos, [Brazil's] Petrobras is one such company. |
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Over the past decade, Petrobras has discovered several huge oilfields off the Brazilian coast. But these fields are located in deep water. They require enormous amounts of capital to develop. Petrobras is poised to spend hundreds of billions of dollars over the next four years or so to develop those fields. |
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According to Chanos, such high levels of capital expenditures mean shareholders are unlikely to benefit, even with oil over $100 a barrel. Also, the Brazilian government imposes fuel price caps and forces Petrobras to hire locally. Chanos argues the interference has hamstrung the company. |
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At just 7.6 times forward earnings, this $150 billion company might look cheap. But Chanos is calling it a "value trap." |
At the time of the short recommendation, Petrobras was trading around $25. By June, the stock had dropped to less than $18 a share. A late-summer rally briefly boosted the stock, and DailyWealth Trader subscribers who followed Amber and Brian's recommendation stopped out of the short position in August for a 13% gain.
Since then, Petrobras shares have resumed their descent... Today, the stock trades for less than $18.50. And Petrobras is only $1 off its 52-week low.
Shares of payment processor Visa hit an all-time high last Friday. The media credited the company's strength to Black Friday, when people are spending lots of money. But shares are rising due to a much larger, more important trend...
In 2009, after the U.S. government printed trillions of dollars to rescue the financial system, Porter said the bailout was just the beginning. We would see a flood of new cash hit the economy... leading to a massive inflation. (Since then, we've seen two more rounds of quantitative easing and numerous government guarantees and backstops.)
That's why he recommended buying shares of Visa. His investment thesis was simple... "The more money that exists, the more money Visa will make."
Here's what Porter originally wrote in the June 2009 issue of his Investment Advisory...
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Visa operates the world's largest retail electronic payments network and manages the world's most recognized global financial services brand. Visa has more branded credit and debit cards in circulation than anyone else. |
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And... this is the key: The financial institutions that license their brand do so on the basis of transaction volume. The more money people spend on their Visa-branded debit and credit cards, the more money Visa earns. (This is important: Visa doesn't hold any of the debt put on those cards. It merely licenses the brand and receives a fee for processing the transactions.) |
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Ergo, the more money that exists, the more money Visa will make. It's perfectly correlated to inflation. And Visa has the most to gain from inflation out of all of the credit-card networks because it is the largest, by far. Last year, Visa processed more than $3.8 trillion from more than 50 billion separate transactions. American Express processed 5 billion transactions worth $647 billion. |
Porter exited the position for a 6% gain in 2010... Since then, his thesis has continued to be proved correct... We expect the stock to continue its strong performance as we see more money injected into the economy.
Several housing-related stocks are trading around new highs. As Digest readers know, we're bullish on housing today. Mortgage rates are at record-lows. And home prices, in many cases, are below replacement value.
Home improvement retailers Home Depot and Lowe's hit new highs on Friday. We wrote about Home Depot's recent earnings here.
Shares of American Woodmark are also soaring. American Woodmark is one of the most important housing-related stocks you've probably never heard of. It's a $400 million cabinetmaker.
As goes the real estate market, so goes the cabinet business. And business has been good for American Woodmark. Shares have soared from $11 in November 2011 to $28 today.
Shares jumped 12% last week after the company announced better-than-expected second-quarter earnings. Net sales rose 24% from a year ago to $159.8 million. New construction sales growth was 40% in the quarter.
The company earned $2 million in the quarter, up from a loss of $3 million the year before.
Last week, we told you about Hewlett-Packard's $8.8 billion write-down on its purchase of software company Autonomy. HP alleges accounting shenanigans and a "willful effort" on Autonomy's part to mislead investors.
Now, the allegations have devolved into name-calling... And Autonomy founder Mike Lynch has taken to the press in his defense (an unusual move for a CEO facing allegations of fraud). You can read a bizarre article about Lynch and HP in the New York Times... including HP complaining that Lynch didn't socialize enough during a flight on HP's corporate jet.
We don't know how this situation will play out... And it doesn't really matter. The damage is done at HP. The company is in a death spiral.
New 52-week highs (as of 11/23/12): Guggenheim China Real Estate Fund (TAO), W.R. Berkley (WRB), and Prestige Brands Holdings (PBH).
We hope you all had a great holiday weekend. We'll kick off this week's mailbag with a compliment. Feel free to send further praise to feedback@stansberryresearch.com.
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Regards,
Sean Goldsmith
New York, New York
November 26, 2012
This billionaire is 'heavily invested' in shale gas... Our oil short... The Black Friday winner... The housing stock you've never heard of... HP takes its battle to the press...