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Stock Ideas Investors Daily Edge The Rodney Dangerfield of Energy
Stock Ideas Investors Daily Edge The Rodney Dangerfield of Energy 
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By Andrew Mickey Chief Invest Investment Strategist, Q1 Publishing The financial world didn’t get its relief yesterday. The bailout plan and any accompanying reprieve just weren’t in the cards. The Dow tumbled and investors rushed to the exits. I’m not going to harp on the bad news again, I’m sure you’ve heard it all by now. That’s because opportunity is knocking right now. |
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| The Rodney Dangerfield of Energy |
| Tuesday, 29 April 2008 | ||||||||
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We love commodities here at IDE. My colleague Rusty McDougal lives and breathes commodities. My other colleague Charles Delvalle is easily mesmerized by the shiny metals. And both have converted their fascination with commodities into huge money-making investment recommendations. So who am I to question the dentist and the precious metals sleuth, especially since some of my very best stock recommendations – like Bucyrus (BUCY) — have also sprung from the amazing seven-year climb in commodities. I recommended Bucyrus about a year-and-a-half ago. The company makes coal and copper mining equipment. I could have gone with a coal-mining company instead. But rising coal prices had made coal companies a bit expensive. Bucyrus’ price was still cheap. It was probably a vote of “no confidence” on a softening domestic market and uncertain global prospects... supposed signs that dirty coal was falling out of favor. I knew better. It probably had something to do with the fact that I like to keep things simple. And there’s something very simple and compelling about the number 1,000. That’s how many coal-fired plants are scheduled to be built in the next five years, many of them in China and India. I also knew that China and India had ambitious nuclear-plant expansion plans. So ambitious, in fact, that there was little likelihood of coal taking a back seat from either country stepping up its nuclear plant construction timetable. And nuclear – not solar, wind, or geothermal – is the only competitive energy source to coal, in terms of cost and scale. Oil and gas? C’mon. On a per kilowatt basis, they weren’t competitive two years ago. Now, they’re completely off the map. The other thing I know about coal plants is that they don’t die. They just get rebuilt as they get into their 20’s and then 30’s. Sort of reminds me of Northwest’s aging fleet of airplanes, except you don’t have to fly coal plants, thank goodness. This brings me to the third thing I know about coal plants. To paraphrase an old Geritol commercial, they don’t get older, they get better. (That commercial has to be at least 25 years old. Do you remember it?) Let me explain.
A great deal of equipment that goes into coal plants has shelf lives of between 10-20 years. And replacing them is a little tricky. In some ways it’s like you and I going out and getting a new washer and dryer to replace the old one. The new ones will be more effective and efficient. That is, it’ll do a better job washing our clothes and it’ll do it on less energy. But our washer and dryer aren’t hooked up to a vast and complex array of machinery – all working together to pump out electricity. Replacing a 15-year old piece of machinery with a new one is hard because they usually aren’t made anymore. The new-and-improved part usually comes in a slightly different shape and size. And these small differences can create huge headaches. Even getting it from the OEM (original equipment manufacturer) is no guarantee that you can slip it into the factory without a great deal of re-engineering. This brings me to the final (sort of) thing I know about coal plants. They’re cleaner than you think. Replacing parts and components is a chance to upgrade. If you’re going to spend serious money and have engineering challenges, you might as well go for the replacement machinery that gives you the most improvement in not only effectiveness and efficiency... But also in the environment. Oddly enough, as these coal-fired plants all over the world get older, the environmental gap between them and ever-cleaner new plants gets smaller, not bigger. I happen to know this because at one time I supplied old coal plants in Asia with new parts from American OEMs. These plants weren’t pretty to look at. The re-engineering tended to give these plants a meandering jerry-rigged look. One of the ugliest coal plants in all of creation was one in Taipei. I supplied a ton of parts to it (I don’t think there’s any connection between my role and how ugly it was, but I can’t swear to it.) But it also was one of the most efficient coal-fired plants I knew. Just goes to show you, looks aren’t everything. Look, coal will never be the flavor of the day. And, l guarantee, every few years it’ll be written off. Don’t believe it. When oil and gas end their run and begin to drop, coal won’t follow. Of all the energy commodity plays, it’s the most durable... safest... and longest-lasting. Coal plants aren’t the only things dependent upon a constant stream of parts. Bucyrus’ after-sales market is huge. When I found out that the company was doubling its capacity to make spare parts for its used mining equipment, it struck home. Spare parts aren’t glamorous or sexy. But it’s something I know about. If they could prop up coal-fired plants, certainly they could prop up sales of a single company that mined the very stuff those plants need. Sure, it was just a coincidence: A manufacturer whose reliance on spare parts for growth neatly bookended one of the hidden props of the coal-energy market it was part of. If all our picks had to have these neat little coincidences, we wouldn’t get anywhere with our portfolio, would we? But sometimes a pick just speaks to you. And you have to listen. That’s how it was with Bucyrus. Spare parts were the hidden story and my own personal insight into the company and the sector it belonged to. Nobody mentions coal and spare parts in the same breath. Not even Rusty, the maestro investor of mining. But it’s a great back-end business. The 175% gain I’ve made from Bucyrus so far (and it shows no signs of slowing down) backs up my contention that you should go with what you know. When you make a connection that others aren’t making, chances are you’re on to a good thing. Good Trading, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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