Star Maritime Acquisition Company (SEA – AMEX)

Dear Bottarelli Research Member,

We’ve seen some rather sizable swings in the market this week, and volatility like this supports our daily goal of picking only the very best small-cap stocks on the market. It also supports the idea of picking up great companies for discounted values, so let’s stay focused on our mix of quality small-cap names, starting with our energy trusts. Provident Energy Trust (PVX – NYSE), Canetic Resources Trust (CNE — NYSE), and Advantage Energy Income Fund (AAV — NYSE) have all pulled back, so it’s time to enter (or add) to them if you haven’t already done so.

JA Solar Holdings (JASO — NASDAQ) has also pulled back to under $35.00. Watch this monster closely, because it moves at incredible speed. If you have yet to enter JASO, I’d recommend adding this position anywhere between $30.00 and $35.00 per share. The same goes for Solarfun Power Holdings (SOLF – NASDAQ). If you’re not in it yet, I would use any dips to establish a position.

US Geothermal (UGTH.OB) is another company we want to own as they move towards having the Raft River project on line later this fall. I also understand they have just received the rights to another 2.6 square miles to evaluate geothermal productivity, and they’re also in talks with Idaho Power for more production. This is all good news, so this dip could be a great spot to add to your position.

Yellowcake Mining (YCKM.OB) just released more news about starting their 6,000 meter drilling campaign, so now is when we need to be on it. Expectations can run high as the drills begin to turn, and this is what drives the upward momentum on these plays. If any news breaks, we’ll be in great position to ride the upside, so be patient with this one because it could really be a huge winner if I’m right.

Big Cat Energy Corporation (BCTE.OB) is struggling due to the lack of news, but they’re waiting on permits to come out from Wyoming’s DEQ. They’re also in talks with other CBM operators who are interested in their ARID tool, and that’s good news. So let’s hold this one a bit longer and give them the chance to deliver the goods. I believe they will.

And now for this week’s pick. Bryan and I have each scoured through a segment of the market that we are currently not in: Dry Bulk Shipping. Companies like DryShips (DRYS – NASDAQ), Eagle Bulk Shipping (EGLE – NASDAQ), Frontline (FRO – NYSE), and Excel Maritime Carriers (EXM – NYSE) have been on a substantial upside run, so I dug into this booming sector and found one name that could be on the verge of a big upside move.

With the world’s import and export activity expanding at an incredibly high rate, everything from raw ore to coal to clothing is being shipped across the globe — and Bryan and I both feel that the shipping segment will remain hot for quite some time. This week’s newest pick is based on exactly this continued expansion. In fact, we actually have two small-cap shipping stocks lined up for you, but only one of them has triggered a “buy” at this time. Since I hate to chase any stock (and I’m sure you feel the same), we’ll issue the first play to you today and save the second play for a forthcoming alert.

For this week, we bring you Star Maritime Acquisition Company (SEA – AMEX). From what I have learned, this company is expanding rather quickly. They have a nice mix of vessels within their fleet which allows them to enter and exit strategic ports across the globe, and the have a business plan that will make them sizable returns immediately. With dry bulk shipping rapidly expanding across the world, I feel that SEA is utilizing their unparalleled expertise to become one of the next major shipping companies within this powerful segment. Let’s enter a small position under $14.20 per share. As Bryan will explain to you below, we could be in for one heck of a ride.

Sincerely,

“All shipping sectors are hot right now, but dry bulk shipping is especially strong”

- Jim Cramer, July 23^rd 2007

To fully recognize the potential and exclusiveness of today’s small-cap pick, you must first understand the background of two amazing individuals.

The first individual I’d like to introduce you to is named Seth Klarman.

Seth is a value investor who draws parallels to the all-time greats like Benjamin Graham. Seth’s book titled “Margin of Safety” had an original cover price of $25, but today the book is out of print and sells on eBay for $1,145. That’s an increase of 4,580%…for a book! So when it comes to making abnormal returns, you can already tell that Seth has incredible talent. But what should really interest you is the portfolio management tactics that he uses for an investment partnership called The Baupost Group.

Founded in 1982, The Baupost Group currently manages $5.4 billion in investments. Under Seth’s management as President of The Baupost Group, the fund has averaged approximately 20% per year for 24 years! Amazingly, they’ve only registered one negative year in this 24-year time frame. Investing $1.00 in this fund at its inception would be worth $55.00 today. That’s a whopping 5,500% increase, so once again the money-making talent of Seth Klarman is clearly on display with these amazing performance figures.

When you see results like this, it’s easy to understand why many elite Wall Street inner circles consider Seth Klarman to be one of the world’s most recognized value investors. Some have even called him a modern day Benjamin Graham because both men implement the same market-beating investment strategy: They consider investments in unpopular stocks or companies involved in special situations (like distressed debt, liquidations, foreign equities, etc.)

And with that back-drop, let me transition over and introduce you to one of the most experienced ship managers in the business: A man named Prokopios (Akis) Tsirigakis.

From 1984 to 1991, Mr. Tsirigakis served as Konkar Shipping Agency’s Technical Director where he managed 16 dry bulk carriers, multi-purpose vessels, and tanker carriers. From 1991 to 1998, he was promoted to Vice-President & Technical Director of Konkar Shipping Agencies.

In November of 1998, Mr. Tsirigakis founded a company called Combine Marine, which provides ship management services to third parties. And then in November 2003, he was appointed Joint Managing Director of Oceanbulk Maritime, a dry cargo shipping company that operates 1.6 million tons of deadweight vessel. Even more impressive, Mr. Tsirigakis has also served on the board of directors of Dryships (DRYS — NASDAQ) since its initial public offering in February 2005.

As Mark mentioned above, DRYS provides international seaborne transportation services carrying various dry bulk cargoes. One look at the DRYS chart and you’ll see how valuable the stock has been to its shareholders:

Now here’s the thing: This story gets very interesting when you discover how Seth Klarman and Prokopios (Akis) Tsirigakis come together…

Back in 2005, Mr. Tsirigakis founded a new dry-bulk company called Star Maritime Acquisition (SEA – AMEX). And as I write you today, one of SEA’s largest shareholders is (you guessed it) Seth Klarman.

This means you have one of the world’s greatest modern-day fund managers investing in the newest company of one of the world’s greatest dry bulk ship operators. This opens up a wonderful opportunity for you and me to invest alongside this world class tag-team. So let’s dive right into the investment opportunity offered by Star Maritime Acquisition (SEA – AMEX), starting with their overall business niche: Dry Bulk Shipping.

There are three types of ships that carry bulk cargo: Container ships, tankers, and dry-bulk shippers. While globalization has made every shipping company a great investment, dry bulk shipping is red hot because commodities like iron ore and coal are shipped between rapidly-developing countries in increasingly high amounts.

To clearly express my “red hot” description from above, take a look at the Baltic Dry Index (BDI), which is managed by the Baltic Exchange in London and plots dry bulk shipping rates. Between 1985 and 2003, the BDI ranged between 600 and 2200. But in 2003, it started to take off, closing in on the 6,600 mark here in Q3 2007.

(BDI)" height="216" alt="Baltic Dry Index (BDI)" src="/images/small-caps/alerts/2007/07/27/star-maritime-acquisition-company-sea-amex/BalticDryIndex_SEA.jpg" width="400">

Why has the BDI made such an incredible increase?

Commodity demand from China and India is driving unprecedented business growth — and that’s the easiest way to answer that question. But that’s only the tip of the iceberg. The larger story is that a shortage of dry bulk ships is fueling an incredible increase in dry bulk rates, and that’s the real opportunity.

You see, dry bulk ships can bill at $95,000 per day even though it costs them under $10,000 per day to operate. And since these shipping companies get paid by the day, the longer the trip, the more revenue they earn! So when countries like Japan and Korea must import materials from Australia, this long voyage (combined with extreme port congestion) can tie up dry bulk capacity for weeks on end. This results in windfall profits for dry bulk operators!

Not only that, but today’s shipping companies don’t even need to invest money in new ships. You see, instead of spending operational capital to expand their fleets, ship owners simply raise their prices on existing fleets — and their customers have no choice but to pay the rate increases. They simply do not have any other option! As long as their goods make it from point A to point B, they’re happy. It’s a wonderful situation for the shipping companies — especially when you consider that shipyards are backlogged with orders until 2009.

So the investing thesis is simple: If you believe, like I do, that the growth of world trade is only in the beginning stages of a multi-year uptrend (fueled especially by India and China), then owning a small-cap dry bulk shipping company is a fantastic way to profit off this continuous trend. This leads us directly into the opportunity offered to you by Star Maritime Acquisition (SEA – AMEX).

SEA is officially characterized as a “blank-check” company, also known as a SPAC (Special Purpose Acquisition Company). A SPAC is a company that raises money with the intention of finding an acquisition target by a set date. If not, they simply liquidate the seed capital and return it to shareholders. So in many respects, investors characterize SPAC companies as a, “heads I win, tails I get my money back with interest” scenario. But in the case of SEA, a deal did emerge in January 2007 — and this deal could quickly turn SEA into a leading global dry bulk shipping company.

You see, Star Maritime has entered into an agreement to purchase eight dry bulk vessels from a private Taiwanese operator, and they’ll use these vessels to create a new company called Star Bulk Carriers. By focusing only on larger vessels, SEA will be in position to capture demand growth of major bulk cargo like iron ore and coal. In fact, this purchase provides robust cash flow with a double-digit yield right out of the gate. At less than five times the estimated 2007 EBITDA, the purchase looks dirt cheap.

The table below outlines the initial charter rates of their eight vessels:

For a purchase price of $345 million, SEA projects gross revenue to be around $93 million at current rates (that’s revenue of $259,712 per day for 358 days). Net of commissions, you’re looking at $89.29 million. And stripping out operation expenses, interest, and depreciation gives you yearly cash flow of $69.03 million. That should make available cash per share $0.401 with a possible dividend per share of $0.325.

When you can kick-start a company by making returns like this right out of the gate, you’re certainly on the fast-track to success. That’s why Mr. Tsirigakis said, “We are pleased to bring this significant asset acquisition to our stockholders. We believe this transaction combines the rich traditions of Asian and Greek shipping and that we will be well positioned to become a significant player in the fragmented dry bulk shipping sector.”

With extremely limited dry bulk vessel supply, shipyards at full capacity through 2009, and mounting port congestion, SEA looks primed and ready to be the next major dry bulk shipping company. Upon approval of SEA shareholders (which looks likely), the deal will get completed and SEA will take possession of the eight vessels. At that point, Mr. Tsirigakis will apply his magic touch and do what he has done for the last 20 years: Turn SEA into a major dry bulk company and reward early shareholders like you and me.

Make no mistake, for $14.20 per share, you’re investing alongside the world’s elite fund manager and the world’s elite shipping operator — giving you an investment opportunity rarely seen among Wall Street investment circles. Nevertheless, let’s only enter a small position at this time due to the recent market weakness. Buy HALF of what you normally would. We can always add more shares at a later date — once the major selling pressure has subsided.

PLAY: Buy shares of Star Maritime Acquisition (SEA – AMEX) at or under $14.20, good for the week.

Sincerely,