Stock Picks From the Vancouver Conference

“President Obama said he would’ve fired Lloyd Blankfein, the head of Goldman Sachs, if he worked for the White House… Unfortunately, the White House works for Goldman Sachs.” – from my presentation at the Agora Financial Investment Symposium.

I’m back from the Agora Financial Investment Symposium in Vancouver. As usual, this great event offered a diverse mix of ideas. Doom seemed to prevail often enough, with many speakers calling for a healthy drop in the stock market and challenging economic times ahead. Even so, there was plenty of enthusiasm for certain ideas. More about which, below…

One of the pleasures of being in Vancouver is getting The Globe and Mail delivered to your room every morning. It’s a good paper, and with Canada’s resource-based economy, it tends to carry worthy stories on what’s happening in the resource sector. More than a few caught my eye, as they covered areas I’ve been watching of late.

For instance, there was a story about how Canadian companies are becoming increasingly active in Colombia. There has been something of a resource boom down there, as the country enjoys some stability. There are 17 listed Canadian companies with a presence in Colombia. The lure is the untapped oil reserves. There hasn’t been much exploration in 50 years. Already, Colombia is the third-largest South American producer of oil after Venezuela and Brazil. Oil is its biggest export.

I have a Colombian oil company I’ve been researching as a possible recommendation. Either way, I’ll share with you what I’ve learned about the opportunities unfolding in Colombia.

There was another fascinating story about how Canada ships more and more of its oil to Asia, in particular China. Currently, one ship leaves every month carrying 600,000 barrels of crude oil. That’s a trickle, but Canada’s two biggest pipeline companies are looking to lay pipe and ship massive amounts of oil to Vancouver, en route ultimately to China.

The appeal of Canada’s oil sands has improved mightily over just the last 12 months. For one thing, the troubles in the Gulf and deep-water drilling make land sources of oil look a lot less risky. Secondly, China’s appetite for crude oil continues to grow. (Last week, the IEA reported China is now the world’s largest energy user, surpassing the US.) And now this: new pipelines.

The pipelines do two things. One, they lessen Canada’s dependence on the US, which has been murmuring about greenhouse gas legislation. Such legislation would make it more difficult for Canada’s oil sands to find buyers in the US. Secondly, the pipeline companies actually make more money selling to Asia. Enbridge says it can earn $2-3 more per barrel selling to the Chinese. At 550,000 barrels a day – the estimate for one pipeline – that’s a lot of extra cash.

I’m looking over a small heavy oil player in Canada that appears to trade at a deep discount to its underlying assets.

Another story that caught my eye was about wheat. I don’t know if you’ve noticed, but wheat prices are up a third in just the last six weeks. The main culprit is too much rain or too little rain in Russia, Europe and Western Canada. So wheat prices are flying.

It seems like just two months ago, everybody was chipper about having bumper crops in all the grains. Now weather has suddenly gotten bad and wheat is up a third. You never know anything about crop prices until they hit the bin.

Longer term, though, we know we’re going to need to grow more food. There are many ways to get there – fertilizer, irrigation, new acreage, etc.

Returning to the Vancouver conference, many of the most compelling investment ideas featured investments in oil, emerging markets, agriculture and water. My friend Rick Rule, a great resource investor and speculator, put in some bullish words for potash and water. He mentioned a few different “water plays” like PICO and Limoneira (LMNR).

In my presentation, I encouraged people to invest overseas. I also talked about the growing bulge of new consumers in emerging markets. Finally, I put in some kind words for farmland and agricultural markets.

In my workshop, I talked about a few specific stocks. The general idea was to present some stocks that did not require you to have much of an opinion about the economy. Lots of people hold tightly to such opinions. I asked how many people thought we would have a double-dip recession in the next two years. Almost everyone’s hand went up. No one thought we’d avoid that fate.

Then I asked how many people had no idea. A few hands went up. Honest people, I say. I don’t have any idea either. It’s something that’s unknowable. There are too many shifting variables. A strong conviction on a double dip is like having a strong conviction about next month’s weather. It’s a tough call.

But you don’t really have to know the answer to the double-dip question to invest well. Too often, people think that a poor economy makes for a bad investing environment. But that’s not always true. It depends on prices. Right now there are some interesting bargains out there.

Anyway, four of the stocks I mentioned are existing recommendations from Capital & Crisis:

Gulfport Energy (NASDAQ:GPOR) – An oil and gas company based in Louisiana. Besides solid producing assets in the US, it owns 131,000 net acres of oil sands in Canada via an investment in Grizzly Oil Sands. Recent transactions support valuations of $3,000-14,000 per acre. In per share terms, that’s $9-42 per share for Gulfport, which trades for only $13.50. It’s a stock greatly skewed to the upside with lots of asset value supporting the current stock price.

Loews Corp. (NYSE:L) – A conglomerate with interests in three publicly traded companies: Diamond Offshore, Boardwalk Pipeline and CNA Financial. The value of its stake in these three alone equals the stock price. You get the reset of the company free, which includes cash, HighMount (a natural gas company) and other investments. Total net asset value is $50 per share easy. The stock is $37.

FEMSA (NYSE:FMX) – A Mexican blue chip with interests in two publicly traded companies: Coca-Cola FEMSA and Heineken. FMX owns the third business outright. It is OXXO, a chain of convenience stores. The implied valuation for OXXO is about half publicly traded comparables. Net asset value for FMX is close to $60 per share. The stock is only $46.

Foster Wheeler (NASDAQ:FWLT) – A large engineering and construction firm. FWLT is flat-out cheap, trading at an earnings multiple of only 5-6 times net of cash. The stock is more than 70% off its high. The business is picking up again, yet the market values it as if earnings are about to fall off the table.

I could’ve gone on to mention more. But really, I don’t think you have to have a positive view of the economy to own these names, which provide ready discounts to assets and/or potential earnings.

And I would urge all investors to continue seeking out the kinds of stocks that can deliver strong returns, even if the economy simply muddles along.

Chris Mayer
for The Daily Reckoning

The Daily Reckoning