January 3, 2011

Mon, January 3, 2011 4:06:37 PM

Fw: Risk/Reward Vol 48

----- Forwarded Message ----
From: John Busch
To: John Busch
Sent: Mon, January 3, 2011 2:40:57 PM
Subject: Risk/Reward Vol 48

THIS IS NOT INVESTMENT OR TAX ADVICE.  THIS IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN

I was asked by a reader to describe with a concrete example how and why I make an investment.  Here goes.

 

Over the weekend, I was perusing www.seekingalpha.com , one of my favorite sites and happened across an article on the 100 Best Dividend Plays for 2011.  As a dividend hunter, I could not resist a look.  On the list was Seadrill, Ltd. (SDRL).  SDRL owns and operates the youngest, safest and most technologically advanced fleet of off shore oil rigs in the world.  As you can imagine, this sector took a beating after the BP oil spill, but with the increase in oil demand has rebounded nicely.  I want to invest more in oil in general, but "big" oil (Shell, BP)is becoming expensive relative to dividend yield, and oil royalty trusts (BPT, PBT, etc.),  for tax reasons,  only fit my 401k.  With its 7.8% dividend, which my research reveals qualifies for the 15% tax rate, (CONSULT YOUR OWN TAX ADVISOR), SDRL hits the sweet spot in my personal (non 401k) portfolio.  Moreover, SDRL is controlled by John Fredriksen, a Norwegian billionaire living in Cyprus, a dividend tax haven.  He is an old school entrepreneur who demands that the companies he controls pay him, and fellow investors, outsized dividends.  Indeed, just today SDRL announced the purchase of two new rigs, and Fredriksen's only comment was that the acquisitions should serve to support the dividend.  I love that!  He is not a "professional manager" whose interest is in building a behemoth organization to justify a huge salary.  I bought SDRL today.

 

My admiration for Fredriksen in turn led me to explore the source of his original fortune, oil tankers.  Through his control of Frontline (FRO),Knightsbridge (VLCCF), Independent Tanker (trades on Oslo exchange), and other shipping companies,  Fredriksen is  major player in the fleet business.  These companies did not fare well in the recent recession, but if you believe, like I do, that the demand for oil and its cost are on the rise, these companies should rebound nicely.  The biggest criticism of them has been their overcapacity, but frankly, Fredriksen controls so much of the market, I am betting he can control supply so as to be just below demand.  (Gotta love monopolistic behavior).  I bought VLCCF today because its fleet is primarily under long term contract and is less dependent than some of the other companies on the spot market (which can be very profitable during high demand, but is less reliable).

 

I will monitor these.  If I like how they perform on good and bad days, I will add to my holdings.

 

P.S.  After hours, Annaly (NLY) announced a 75million share offering.  I have not seen how it is priced, but if it follows past form for MREITs it will be priced below current trading levels.  If if dips, like I suspect it will, I will be a buyer.

 

So, readers, this is an example of the method that feeds my madness.