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Investment Review: Industrial Stocks

January 03, 2011 – Comments (1) | RELATED TICKERS: CMP , FTEK , JOE

Considering only the stocks that Morningstar formally classifies as industrial materials stocks, I am underweight in industrials in real life. I have a number of industrials picked in CAPS, but I obviously try to weight my real life portfolio towards my best ideas.

My best performing industrial stock, and one of my best performers ever, is Compass Minerals. It sells salt for highway deicing and sulphate of potash, which is a specialty fertilizer. SOP pricing has mirrored general potash pricing so far. Compass used to be one of my top three positions, but I trimmed it significantly after it hit over $80 a share. I think it's more or less fairly valued at today's prices, but at some point, worries about low snowfall and/or low fertilizer prices are going to sink the stock, at which point I'll buy it again. In the long run, winter weather will require consistent salt use and fertilizer prices will probably climb from present levels.

Fuel Tech sells technology that reduces pollution from coal utility plants. The technology reduces both NO2 emissions and slag buildup in the combustion chambers - the latter takes a lot of time and effort to clean with present technologies. Fuel Tech has a huge addressable market, because like it or not, many countries have plentiful coal reserves, and coal will be a large part of the world's energy mix for decades to come. Fuel Tech's solutions are very cost effective. The problem is getting the conservative utility industry to install them. Fuel Tech's former CEO was a utility executive, but that hasn't really helped them in the US a lot. Increased pollution regulations would help FTEK, but the Republicans are likely to fight any regulations, even sensible ones, tooth and nail. That would be bad for the stock. In addition, Fuel Tech has cultural hurdles and intellectual property theft risk to surmount in China and India. The sales firm they're contracting with to do China is based in Japan (Itochu), and I can't help but wonder if the mainland Chinese are wary of Japanese firms in general due to longstanding disputes over the Nanjing massacre. Anyway, I am holding on to Fuel Tech, but they're trying my patience.

 I initiated two options positions in automakers. The recession severely depressed short term demand for autos. However, in the vast majority of the US, you have to drive to get anywhere. And population growth and the fact that automobiles age make it inevitable that many new drivers will need cars, and many of the cars on the road will have to be replaced. I think the recession put off demand, and that the auto industry is going to see a significant pick up in demand. Based on that, I bought some Ford warrants that expire in 2013 and were struck at $9.20. Those warrants are doing quite well. I also bought some Ford convertible preferreds, which pay 6.5% interest at par. They should trade significantly above par if Ford hits over $25, which I think is plausible.

Lastly, I bought some GM call options expiring in January 2011. I bought these on the basis that none of the major investment banks had issued analyst ratings on GM - they couldn't, because so many of them were involved in the IPO. When the ratings came out late last year, the shares popped. My cost basis in the calls was $0.90 per share, and now the calls are trading at $3.25 a share. I allocated a small position because this bet was not solely based on fundamentals, and I'm fairly close to selling the position. I think that risk tolerant investors could consider buying GM common stock, but I wouldn't.

I have a significant position in St. Joe. St. Joe owns a lot of land in Florida's panhandle. Right now its swampland. However, demographic changes will inevitably result in significant population growth in that area, and that population will require places to live and places to shop at. St. Joe is perfectly positioned to provide land for that. I believe that Einhorn's now famous short thesis is right only in the short term. A very patient investor should consider buying St. Joe. Alternatively, one could sell cash secured puts on the shares - I have done so, and this has been profitable so far.

Lastly, I do not think the housing market will go into a double dip, unlike Robert Shiller. The economy is slowly recovering. The housing market is gradually coming back to life. And Lennar is perfectly positioned to take advantage of that. I bought a Jan 2013 call in Lennar, struck at $15 - then it was just in the money. The stock is now trading at $19. I foresee a likely uptick in demand for Lennar, which will bring the stock price up as well.