Companhia Vale do Rio Doce (RIO – NYSE)
Dear Bottarelli Research Member,
As I mentioned last week, there are some powerful economic headwinds coming from emerging nations like China, India, Korea, and Brazil. Unprecedented infrastructure demand for roads, water treatment facilities, sewage processing facilities, bridges, buildings, and housing will continue to fuel a demand trend that’ll remain strong for years to come.
China, for example, is expected to have 10 to 20 cities the size of New York within the next two decades. And despite economic weakness here in the U.S., the companies positioned to help meet this global infrastructure demand represent some of the very best investment plays you can make today. Thanks to events that surfaced this week, investing in the top global infrastructure companies at severely reduced valuations could be the best investment decision you’ll make all year.
You see, I just learned of a meeting in Beijing between U.S. Secretary of State Condoleezza Rice and Chinese Premier Wen Jiabao, where they discussed an “emergency plan” between the U.S. and China. The U.S. accounts for around 33% of China’s exports, so it behooves China to help get the U.S. economy back on track. And right now, plans are in the works for China to help get our economy going again.
I bring this up for two reasons. The first reason revolves around the trading patterns of the iShares FTSE/Xinhua China 25 Index (FXI – NYSE). As I’ve mentioned in past small-cap alerts, the FXI is an index that Bryan and I both watch very closely. With the FXI down over 50% over the last year, a drop of this magnitude is usually where you see a strong support point – setting the floor for a reversal move to the upside. Therefore, we’ll continue to watch this situation very closely.
The second (and more important) reason for bringing this situation to your attention is because it indirectly presents us with a major investment opportunity in South America. You see, you won’t hear the media talking about the huge growth in countries like Argentina, Panama, Belize, Columbia or Peru, but these countries are indeed going through major transition periods – right along with China. And in my view, the country with the strongest investment potential is Brazil. After all, Brazil has become a self-sufficient country over the last decade, and that’s why many top investment banks are upgrading their entire Brazilian investing thesis. As a matter of fact, I’m now hearing rumors that major exchanges like the NYSE Euronext (NYX – NYSE) and the CME Group (CME – NYSE) are considering expanding their ties into Brazil.
The wheels are definitely in motion. So this week, we’ll scoop up one of the best bargains on Wall Street, which is the world’s top iron ore company operating in Brazil. Iron ore is essential for steel production, and that’s why this company plays such a critical role in meeting the global infrastructure demand I mentioned above. Not only that, but they’re also involved in energy, coal, nickel, aluminum, potassium, and copper. And best of all, when you see where this company is trading, you’ll agree that this play is as perfect as it gets.
But what I truly love about this company is the fact that they’ve been hit hard by the recent “global inflation” fears. Since I believe global infrastructure will remain a vital investment play for years to come, I’m viewing this as a prime buying opportunity. As you’ll see, the selling pressure has gotten way over-done, and as I mentioned above, a 50% retrenchment is a pullback that we simply cannot ignore.
On that note, this week’s pick is Companhia Vale do Rio Doce (RIO – NYSE), and I truly believe that adding RIO anywhere under $30.00 is a gift. For savvy traders like us, buying RIO today could lead to a quick 30% to 50% return. Currently trading at 8x next year’s earnings, I’m thrilled to buy RIO under $30.00. You should be too!
UPDATES
Northern Oil & Gas (NOG – AMEX): As I mentioned last week, NOG shares have pulled back hard from the levels where we took our profits. A Barron’s story over the weekend expressed some concerns about the company, but I’m not sure they got the whole story correct. With about 70 permits to drill in an area surrounded with major oil names like Marathon Oil (MRO – NYSE), EOG Resources (EOG – NYSE) and Hess Corporation (HES – NYSE), I’m sticking to my viewpoint that the Bakken Oil formation could be the most important U.S. oil discovery in 50 years. Therefore, I’d like to use this recent pullback as an opportunity to re-establish a position in NOG. Re-establish a position in NOG by buying shares at or under $10.00, good for the week.
EMCORE (EMKR – NASDAQ): Although the market turbulence has pushed this little gem lower, they’re still overlooked and undervalued. For example, they announced two definitive supply agreements for solar cell receivers in June 2008 with a total value of approximately $29 million. These supply agreements incorporate advance deposits to ensure production priority, setting the stage for commercialization by 2009. I still view EMKR as an overlooked company that’s dominating the solar receiver field, so shares remain in play. Buy/Hold.
Nacel Energy Corporation (NCENE.OB): On Monday morning, our small-cap wind stock took a huge hit on (what I feel was) over-blown news. Here’s what happened: In a rather shocking and unexpected move, the Utah Public Service Commission reversed an earlier pact allowing them to move forward with their wind power project. This came at a time when the output from the first phase of their project was under contract with the Southern California Public Power Authority. It’ also at a time when California has a major need for extra power, so it all makes no sense to me. In fact, as I reviewed the information this past week, the entire situation appears to be nothing more than a power struggle between two municipalities. To sort it out, there is now a hearing set for the end of September, so there is certainly a strong chance that this week’s ruling will get rejected. If the court does indeed reverse this ruling, NCENE is going to launch. And I’ll tell you right here and now, I’m betting it will! Therefore, I am viewing this downside move on NCENE as a gift, and I recommend adding shares on this dip. Plus, on a more positive note, Senate Tax Committee Chairman Max Baucus (D-MT) and Senate Majority Leader Harry Reid (D-NV) are trying to pass a one-year renewable energy production tax credit (PTC), which will include a wind turbine investment tax credit. This could offer NCENE a nice boost as well. Plus, I fully expect an energy bill to be passed soon, and I have no doubts that wind power will be a major component of this legislation. Therefore, I recommend adding shares of NCENE to your ledger. Buy.
Seadrill (SDRLF.PK): Our offshore drilling play has really held up well, once again showing the muscle SDRLF has in their field. Once we get a policy in gear to drill offshore (“drill, drill, drill!” as Larry Kudlow says), it should really help a stock like Seadrill. Hold.
Gerdau AmeriSteel (GNA – NYSE): Our small-cap steel play has also been holding up quite well. Considering the powerful earnings from U.S. Steel (X – NYSE) and Arcelor Mittal (MT – NYSE), I firmly believe that the steel segment will remain one of the strongest market sectors, so maintain your GNA position. They are scheduled to report earnings on August 6th, and hopefully their numbers are as strong as X and MT. Hold.
Brigham Exploration (BEXP – NASDAQ): They reported Q2 earnings this week, and the numbers came in just as Wall Street expected. But the real trump card was their guidance for the rest of the year, stating “Our fourth quarter production forecast is positively impacted by our four new Southern Louisiana wells, which have yet to impact our production volumes. Our oil production, benefiting from the favorable crude oil pricing fundamentals, generated roughly 75% more revenue during the second quarter 2008.” Folks, as we have been saying there is a lot happening at the Bakken oil project, and just like NOG, it’s time to once again add BEXP to our ledger. Buy under $13.00.
International Coal Group (ICO – NYSE): Now that steel and coal stocks are coming back into favor, our decision to get re-positioned in ICO under $10.00 looks to be a good move. Earlier this week, TECK made a buyout offer to Fording Coal, and this tells me that a small-cap coal play like ICO remains a very strong position to own. Earnings for the first six months of 2008 totaled $529.8 million, compared to $436.4 million for the same period in 2007. Net income for the first half was $1.1 million versus a loss of $18.3 million for the same period in 2007. So as you can see, the stock is clearly moving in the right direction. I remain confident that ICO will hand us strong returns. Hold.
Gran Tierra Energy (GTE – AMEX): Our re-entry price of $5.50 was triggered this week, so we’re once again positioned in this rapidly-growing oil and gas producer operating in Colombia, Argentina, and Peru. Since GTE locked up extremely valuable land leases that are now starting to make their way into production, GTE is going to turn a lot of heads. Make sure you own a position, because I feel you’ll be handsomely rewarded. Buy.
Before I sign off, please note that we have now bought back many of our winners as others panicked and sold off these stocks. This is exactly our game plan. Now, we’re in prime position to sit back, remain patient, and get set for the next round of 30% to 50% profits. Perhaps even more. So on that note, have a good weekend, and be sure to give thanks for the abundance in your life.
Sincerely,
“Right now, shares of vale are priced as if the world is going to drastically reduce its appetite for steel. That’s quite unrealistic.”
- Barron’s, July 21st 2008
When it comes to “safe haven” investments in times of recession, gold is typically the metal that receives all the attention.
But let me tell you, the times are changing. Today, the more powerful “safe haven” investment comes in the form of steel.
For example, the price of gold is actually down 2% from mid-January, but steel prices are 50% higher. Prices of hot-rolled steel (which act as the industry benchmark) have jumped from $600 per metric ton in January to $1,000 per metric today. And in terms of steel stocks, a collective grouping of top steel names have averaged 22% returns this year, while a similar grouping of top gold names have actually lost 3.5% over the same time period. With statistics like this, it’s easy to make the case for steel as the market’s top safe-haven play.
Why has steel been so strong?
Well, when you look at the rapidly growing “BRIC” economies (which include Brazil, Russia, India, and China), it’s easy to see why steel has enjoyed such tremendous upside. In 2007, for example, steel usage increased:
- 18.6% in Brazil
- 13.5% in Russia
- 13% in China
- 11.3% in India
Plus, if you look at the current steel company earnings (released earlier this week), it’s clear that global steel demand is not slowing down anytime soon. For example, United States Steel (X – NYSE) reported earnings of $5.65 per share on Tuesday July 29th, a whopping 122% increase over the $2.54 they earned one year ago. Shares rose 14.1% on the news, and U.S. Steel said it expects an “excellent” third quarter as well.
Not to be outdone, Arcelor Mittal (MT – NYSE) reported on Wednesday, July 30th that their net income increased to $5.8 billion ($4.19 per share) from $2.72 billion ($1.97 per share) one year earlier. That’s good for a 114% increase, as robust steel boosted their pricing power during a time of short supply. This allowed Arcelor Mittal to beat expectations by a wide margin.
NOW HERE’S THE THING: While most savvy investors recognize that steel is in high demand, most of these same investors do not realize that steel cannot be manufactured without its key ingredient: iron ore. As a direct result, iron ore prices have increased 50% since January – setting in motion the catalyst for today’s new small-cap pick on the world’s largest iron ore producer, Brazil’s Companhia Vale do Rio Doce (RIO – NYSE).
While it hasn’t been widely reported in the financial media, RIO just increased their prices by 65%. Now ask yourself, what other company is able to successfully increase their prices by 65% in this “global recession” we’re facing? In short, there aren’t too many companies that can pull this off. Perhaps even none. That’s why RIO makes such a powerful addition to our small-cap ledger right now.
Not only that, but Brazil just announced a $27 billion plan to double their iron ore production. This ambitious plan aims to increase iron ore production from 350 million metric tons to 650 million metric tons over the next four years, which should bode extremely well for RIO. No wonder the July 21st issue of Barron’s called RIO “a low-cost beauty from Brazil.”
Looking forward, analysts estimate that Vale (pronounced VA-yey) can produce iron ore for $21 per ton and sell it anywhere between $45 and $80 per ton. That’s quite a powerful pricing model. And considering that Vale’s iron ore production is expected to rise substantially in coming years, the future (from an investment standpoint) simply cannot look better. This leads directly into the intriguing aspect of this play.
You see, while investors have rewarded steel stocks, the same upside returns have not been transferred over to the steel component suppliers like RIO. And in my view, this opens up a tremendous opportunity. With RIO shares currently trading less than 8x next year’s earnings, the stock’s current valuation is half that of the average member of the S&P 500. Furthermore, their profit forecasts are rising while the stock price is moving down.
What’s happening here?
The answer is quite simple…
Investors fear that the U.S. economic slowdown will get transferred to the rest of the world, and this will negatively effect the demand for iron ore. As a result, RIO has been trading lower. Perhaps there is some truth to these fears, but I don’t think so.
You see, by 2012, RIO is expected to increase their iron ore production from 296 million metric tons to 422 million metric tons, good for a 9% annual increase over the next 4 years. So even if there is a U.S. demand slowdown, RIO will more than account for any losses with their production increases and overseas commitments.
In other words, the fears that have pushed RIO down to current levels are completely over-blown, and that’s why both Mark and I feel so strongly that adding RIO to our small-cap ledger at these levels represents one of the top buys of 2008. Let’s take full advantage and add RIO to our small-cap ledger now!
PLAY: Buy shares of Companhia Vale do Rio Doce (RIO – NYSE) at or under $30.00, good for the week.
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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