Titanium Metals (TIE – NYSE)

Dear Bottarelli Research Member,

Over the past week, Bryan and I have had long talks about the market, the possible bottom, and what we’re seeing on the daily charts we study. After much discussion, it’s become perfectly clear that we’re at “a crossroads.”

You see, the charts are all confirming a distinct battle between the Bulls and the Bears, but I think we’ve seen a bottom due to the fact that we’re witnessing huge amounts of insider buying on many of the small-cap stocks we follow.

This buying activity tells me that the CEOs of these small-cap firms are realizing that they have the opportunity to buy their companies at a very discounted price. And if anyone knows the future of a particular company’s business, it’s the corporate insiders. These actions tell me that sizable share price appreciations could be on the horizon in the weeks and months ahead.

Combine this recent insider buying with what we mentioned last week (about bad news sparking rallies) and it all translates into a “worst is over” market mentality. This is a strong signal for savvy traders to carefully begin placing their bets.

Plus, as Bryan mentioned in his daily option alerts, we want to see the Dow re-test its 50- day moving average to confirm our upside thesis. Yes, the Russell 2000 (RUT) has indeed set a double-bottom, but we’d also like to see confirmation of a strong support point on the Blue Chip average as well. If this occurs, we’ll get ready to buy with both hands.

Now, I realize that we’ve been sticking our necks out for quite a while – saying that mid-April will signal the bottom. But honestly, I feel even more confident than ever with my early call. Of course, we won’t jump the gun or ignore the threat of a recession. Rather, we’ll continue with our “calm and patient” approach and continue adding the best small-cap companies as substantial discounts. And when the market eventually turns higher, we’ll be in prime position to achieve sizable returns.

With that in mind, let’s dive into this week’s new pick…

I must tell you, I’m very excited this week because we’ve truly discovered a powerful gem. In fact, the company we’ll be sharing with you is another rare example of what Bryan and I meticulously search for. They’re the world’s largest supplier of high-quality titanium metal products – and they absolutely dominate their field. Their client back-log is huge, they’re rapidly growing, and since they’re involved in a diversified group of global business operations (including commercial aerospace, military, chemical process, oil and gas, sporting goods, automotive, and power generation), I believe they’re immune to any coming recession.

They’re involved with major players like Boeing, Airbus, and Lockheed Martin, but the most important thing for investors like us to realize is that these guys have the unique ability to maintain a steady supply chain of material in any market condition. This ensures that their business is protected against any wild price swings in the metals market.

To use an analogy from the building business, this is like trying to buy plywood for a house right after a hurricane. You either already have the wood ordered (and your price locked in) or you’re in for a huge surprise when you learn that plywood just went up $10.00 a sheet. This is no exaggeration, but rather the elementary principles of supply and demand. This company has been securing both raw materials and extending their long-range contracts with customers for the next 10 years. Excellent maneuver.

In terms of their core business, they utilize a unique refining process that takes scrap metal, smelts it, and turns it back into usable product (such as raw ore). They offer the most refined metallurgical structure available, and this has helped them become a trusted name both here and abroad. With facilities in England, Italy, France, China, and the United States, this company indeed has a growing global presence. Bryan and I are both very familiar with this stock, and we’ve been waiting for the right time to pull the trigger. Now that the market has sold off this magnificent company, it’s time to dip our toe in the water. In fact, I must tell you, picking this one up where she is right now could be the best small-cap bargain of the year.

The company is called Titanium Metals (TIE – NYSE).And as you’ll see below, shares are down from their high near $40.00. In fact, they’ve just come off their yearly lows around $13.00! It would be foolish to let this one get away, so let’s buy shares of TIE anywhere under $18.00 and enjoy the coming upside recovery.

Before I go, some very brilliant traders that I follow very closely are extremely bullish on commodities. When asked what particular commodities they like the best, their response is “anything that you can drop on your foot.” I absolutely love this saying, and I couldn’t agree more with it. Since titanium definitely fits into this category, let’s get positioned in TIE now!

UPDATES

Interoil (IOC – AMEX): Last week, I mentioned that I’m watching this stock very close. Since that commentary, we’ve already seen a very nice bounce – and this is what I expected. After all, I have a very hard time thinking that T. Boone Pickens and his gang would let shares of IOC go by the wayside. Although there’s been no additional news about the money they need, the chart suggests that someone knows something. Therefore, maintain your position. Hold.

Echelon Corporation (ELON – NASDAQ): A few weeks back, we mentioned that ELON could be the buy of the year. Now, the ELON chart is showing that our thesis was correct. For those of you that use my charting set ups at the 9-, 18-, and 40-day moving averages, a major crossover has occurred. Therefore, shares remain a strong buy! Buy.

Ivanhoe Mines (IVN – NYSE): This week, IVN agreed to sell their 42% control block in China gold producer Jinshan Gold Mines to China’s national gold-mining conglomerate China National Gold Group of Beijing. This is very good news for IVN shareholders like us, as they will indeed use a substantial portion this asset sale to advance their gold and copper exploration ventures across China. This dip has given us the opportunity to own what could evolve into the next FCX or PCU, and I’m not exaggerating. China is expected to surpass the U.S. and South America as the world’s largest gold producer this year, so maintain your position in IVN. Hold/Buy.

ISIS Pharmaceuticals (ISIS – NASDAQ): Bristol-Myers Squibb (BMY – NYSE) announced this week that they’ve selected an ISIS compound as a development candidate. As a result, ISIS will receive a $2 million milestone payment. These two companies have an ongoing collaboration agreement to identify anti-sense drugs, and this new development candidate helps regulate the amount of cholesterol in the bloodstream. As we have been saying, ISIS is the best small-cap biotech gem in its class, and it’s one that you need to own. Buy.

On that note, I’ll hand things over to Bryan. But before I go, I truly hope that the Fed continues “doing whatever is needed” because it seems to be working! Mid-April is just around the corner, and that’s where we expect to see a breath of fresh air sweep through the financial markets. Until then, have a great week, and don’t forget to give thanks for the abundance in your life.

Sincerely,

The Most Undervalued Stock on the S&P 500?

Introducing “The Metal of the 21^st Century”

Warren Buffett recently said that he considers stock valuations more attractive right now than he has seen in years. This viewpoint is supported by the bottom formations we’re now seeing in Russell 2000 (as noted in last week’s bulletin).

If we are nearing a bottom as we suspect, then a company like TIE would be a dynamite addition to our small-cap ledger.

As Mark mentioned above, TIE is the world’s largest supplier of high-quality titanium metal products.

Titanium was discovered in 1791 by William Gregor and named after Titans of Greek mythology. Titanium is a light, strong, lustrous, and corrosion-resistant metal with a grayish color. It can be alloyed with iron, aluminum, vanadium, or molybdenum to produce strong lightweight alloys for jet engines, missiles, spacecrafts, petro-chemical and desalination plants, autos, agri-food, or any number of other applications (which I will get into more below).

The two most useful properties of titanium are the fact that it’s resistant to corrosion and that it has the highest strength-to-weight ratio of any metal. In its unalloyed condition, for example, titanium is as strong as some steels but 45% lighter.

As you can imagine, this unique combination of strength, light weight, and corrosion resistance makes titanium useful in hundreds of applications. And right now, the market is quickly discovering that no other metal is as reliable or as economical as titanium. When you consider the benefits of titanium on lifetime cost basis, this alone should fuel demand for years to come.

I’ll get more into the specific benefits of titanium below. And after learning them, I think you’ll be shocked that titanium isn’t spoken about more prominently when it comes to in-demand commodities.

But in terms of the business operations of Titanium Metals (TIE – NYSE), they’re a fully-integrated titanium manufacturer and distributor, involved in every phase of titanium research, manufacturing, and sales.

They offer titanium sponge (which is the basic form of titanium metal) and titanium melted products such as ingot, electrodes, and slab. They also provide mill products that are forged and rolled from ingot or slabs, including billets, bars, plates, sheets and strips, and pipes. Now I admit, this company description doesn’t exactly light the world on fire.

But here’s an interesting fact that should lift your eyebrows…

Year to date, the S&P 500 is down 8%. Telecoms and technology are the two worst-performing sectors, down 15% and 13% respectively. Materials and consumer staples are the best-performing sectors, and yet they’re still down 2% and 3% respectively.

In other words, Q1 2008 was a miserable quarter across the board. But in the midst of these Q1 losses, it’s interesting to see which companies have fallen the farthest yet also contain the strongest growth prospects going forward. These are the stocks that represent the most attractive buying opportunities in the aftermath of a difficult quarter of losses.

Keeping that in mind, if you run a screen of stocks on the S&P 500 that are down over 30% in the past three months and that also carry double digit earnings growth forecasts for the next fiscal year, the one company with the most attractive readings is –you guessed it – TIE!

Their 3-month percent change is -42.5%, yet their Earnings Per Share growth rate currently stands at 35.3%. No other stock which has fallen over 31% has earnings per share growth this high. Not even Google (GOOG – NASDAQ)!

Therefore, you can realistically argue that TIE is the most under-valued stock on the S&P 500 right now. No other company with an EPS growth rate of 35% has fallen so far. And the best part is, most investors don’t realize this fact.

But this won’t remain a secret for long…

After all, the market’s top-performing sector last week was the “Nonferrous Metals” group. A “nonferrous metal” is defined as a metal (other than iron) such as copper, lead, titanium, zinc, nickel, and aluminum. In one week, this group gained an astounding 10.91%, so it looks like Wall Street is beginning to take notice.

The reason for this incredible one-week increase came after the release of three independent reports – all of which sparked concerns about copper and nickel supplies. These concerns indirectly painted a bullish picture for nonferrous metals like titanium.

• First off, a UBS report cited that the global copper supply has been reduced because of labor disputes at various copper pits, energy issues in Chile, and lackluster production at African pits.
• Secondly, a Barclays Capital report on nickel noted that China’s gross refined nickel imports (used in stainless steel) reached an all-time high of 12,600 metric tons in February.
• And third, a report from RBC Capital Markets said that inventories of nickel remain at historically low levels.

Combine all three reports, and the case for increased titanium demand looks extremely attractive – and that’s why early-stage investors have been moving into TIE. After all, the incredible physical attributes of titanium have many calling it “The Metal of the 21^st Century.” And no wonder. Just look at these amazing benefits…

Titanium is absolutely immune to environmental attack, regardless of pollutants. Where other metals exhibit limited life-spans, titanium can withstand urban pollution, marine environments, and sulfur compounds of industrial areas. Plus, it is failure-proof in even more aggressive environments. For example, in power generating plants (where saline, brackish, or polluted waters are used as cooling mediums), a thin wall of titanium condenser tubing will last the lifetime of the condenser and eliminate the need for a corrosion allowance!

Titanium is cost-effective. Titanium’s favorable density, which is half that of ferrous- and nickel-based metals, means that when equipment costs are calculated on a per unit area (rather than per pound) the differential cost of material required narrows dramatically. In other words, about half as much titanium is required to do the same job, based on strength. Or, the same weight of titanium will go twice as far. Since titanium offers lifecycle cost advantages over copper, nickel, and stainless steel grades, while providing initial cost advantages over materials such as high nickel alloys, tantalum and zirconium, many chemical processing operations are now specifying titanium to increase the lifetime operation of their equipment.

Titanium is completely inert to human body fluids.This one I found amazing. Since titanium is inert to human body fluids, it’s ideal for medical replacement structures such as hip and knee implants. Not only that, but titanium actually allows bone growth to adhere to the implants, so they last longer than those made of other materials.

Because of these amazing benefits, titanium is now being used in more and more applications across the globe. In fact, as engineers discover that titanium’s exceptionally high strength-to-weight ratio can reduce lifecycle costs, the uses for titanium are growing faster than ever before.

Here’s the growing list of real-life applications…

Jet Engines: TIE is the world’s largest manufacturer of premium quality billets and bars for critical jet engine rotating applications. They hold approvals from all major engine manufacturers for virtually every type of titanium.

Airframes: TIE supplies the airframe structural market with innovative alloys found in the Boeing 777 landing gears and nacelle applications. Since lightweight titanium improves aircraft efficiency, each new design is increasing the use of titanium parts.

Oil and Gas: In petroleum exploration and production, the light weight and flexibility of titanium pipes make it an excellent material for deep sea production risers. Plus, titanium is impervious to the effects of sea water, making it the preferred material for oil platforms in the North Sea and across the globe. Not only that, but since titanium shows no corrosion in salt water, it’s also the material of choice in worldwide desalination plants.

Military Armor: Titanium’s super-high strength-to-weight ratio makes it well suited for armor applications. It’s used as protective armor on tanks and for personal armor vests and helmets for troops and police.

Architecture: Perhaps the most visually-impressive use of titanium comes in the architectural sector.Architects throughout the world are now realizing that titanium is the metal of choice. After all, titanium’s unsurpassed corrosion resistance results from its stable, highly-adherent, protective surface oxide film. Because the metal is highly reactive and has a strong affinity for oxygen, the beneficial oxide film forms spontaneously when exposed to moisture or air. In fact, a damaged oxide film can generally restore itself instantaneously. That’s why TIE offers an unparalleled 100-year performance warranty on all of their architectural titanium.

World-famous architect Frank O. Gehry used TIE to supply the materials for The Guggenheim Museum in Bilbao, Spain. Using 42,875 interlocking 24” x 48” flat seam panels, the museum’s exterior is sheathed in titanium panels.

Consumer Goods: And finally, titanium is also found in a wide variety of products such as jewelry, watchs, eyeglasses, bicycles, and clocks. In fact, if you bought a new golf club lately, it’s very likely that lightweight titanium was used for the club head on your driver. After all, titanium’s strength and light-weight characteristics allow golf club designers to enlarge the “sweet spot” and increase distance and accuracy.

And best of all, titanium is environmentally safe. Due to its relative inertness in most atmospheres, it is 100% recyclable.

When you combine all of these benefits and applications, I’m shocked that investors have not taken more interest in pure-titanium plays. While most of the investing population is focused on steel, we have a wonderful opportunity to sneak in and invest in an infinitely-better metal in titanium. The benefits are unmistakable, the demand is growing, and the stock is the most undervalued company on the S&P 500. To be honest, I’m hard-pressed to find any reason not to invest in TIE at these levels.

With a forward P/E ratio of 8.97, a price/sales ratio of 2.44, a 20.97% profit margin, and $90 million in cash (versus $500,000 in debt), all signs point to a wonderful opportunity to buy shares of TIE under $18.00. Chart-wise, the stock could easily re-test its 200-day moving average in 2008, which would be a 75% return. Considering the stock’s 52-week high at $39.80, a 75% gain should be the lowest return we expect to see! Therefore, let’s add shares of TIE to our small-cap portfolio now!

PLAY: Buy shares of Titanium Metals (TIE – NYSE) at or under $18.00, good for the week.

Sincerely,