Agora Financial’s Rude Awakening

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· A closer look at Obama’s New Deal and the companies that stand to profit,
· Five “shovel ready” companies for your consideration
· Plus, FDA approval pushes one technology company up 70% and plenty more…

Joel Bowman, reporting from Phnom Penh, Cambodia…

Your humble editor is not one to boast, Rude reader. Given that we’re temporarily homeless, wandering from third world jungle to third-rate guesthouse, we doubt anyone would listen even if we did. Nevertheless, shortcomings of geography and lodging certainly don’t preclude us from boasting on behalf of other people.

A couple of Weekend Editions ago, we featured some commentary from our resident technology expert, Patrick Cox. We wanted to know what opportunities the then president elect might bring to the marketplace.

“Health, medical, and scientific regulations stand to change dramatically under the new Obama administration — which begins with his inauguration on Jan. 20, 2009,” Patrick, editor of the Breakthrough Technology Alert, told us.

“With massive, wide-reaching changes expected at the FDA, as well as the potential restoration of appropriate budgets for the NIH and National Science Foundation… the biggest market story of the next decade is upon us,” he continued.

Well, it turns out Patrick was right on the money. One of the recommendations in his report rocketed nearly 70% after receiving FDA approval on their spinal cord injury drug. Even so, Patrick reckons this particular company still has a long way to run, as does the stack of other stocks he’s piled into his emerging technology portfolio. Before you get into today’s reading, below, we suggest you give Patrick’s report a quick once-over. Those who did just that two weekends ago had the chance to bank 70% already.

Whether you like the guy or not – and there are plenty of reasons for and against here – Obama has changed the game. As investors, we must adapt to the new challenges and opportunities his office will bring. In the column that follows, Chris Mayer takes a 40 thousand foot view of the new Obama investing environment, then drills down into some specific stocks you might wish to consider holding. Enjoy…

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The Great Suppression
By Chris Mayer

Welcome to “The Great Suppression.” The government keeps trying everything it can to suppress the unfolding economic bust. Whether the Great Suppression succeeds or not is beside the point. What concerns us is that its actions will have consequences in the marketplace. And as investors and speculators, we have to think about what those might be.

It’s sometimes uncanny how history repeats. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: “It rewrote a good many of the rules of the economic game as played in America.” The steps the government took resemble what’s happening now an awful lot.

“The New Deal,” Allen continues, “continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…” And on and on.

It also went into the business of stimulating the economy directly by “building dams, bridges, parkways and playgrounds on a grand scale.” If FDR walked the Earth again, Obama’s stimulus would look familiar.

Over the weekend, we got more details of Obama’s stimulus plan, which comes with a price tag of at least $820 billion (and climbing). Some of the projects of interest to us include:

• Renovate 10,000 schools
• Build more than 3,000 miles of new or modernized transmission lines and install 40 million “smart meters” in homes
• Weatherize at least 2 million homes and 75% of office buildings
• Launch 1,300 wastewater projects, 380 drinking water projects and 1,000 rural water and sewer system projects
• Repair and modernize thousands of miles of roadways.

“Shovel ready” is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.

Our infrastructure stocks have been among our best performers over the past year.

Insituform Technologies (INSU:nasdaq), for instance, continues to announce new contract wins. (See Rude Awakening from July 23, 2007 – Pipe Down!) The company repairs water and sewer pipes with a trenchless technology that does not require you to dig up the pipes. We’re up about 37% on that, a welcome spot of green in what has otherwise been a tough row.

Ameron Intl. (AMN:nyse) is another infrastructure play. It has a water pipe business, which ought to benefit from the slew of water projects. Scott Black, of Barron’s Roundtable, had Ameron as one of his stock picks for the year. “In Arizona, Nevada and California, a lot of shovel-ready water projects are waiting for a go-ahead,” Black said.

“Ameron makes wind towers, too, and infrastructure products. It owns 50% of Tamco, which makes steel rebar for highways, bridges and overpasses.”

He also pointed out Ameron’s good backlog. “For each $100 million incremental increase in revenue under an infrastructure bill, based on 22% margins, they’d make $15.3 million after taxes,” he says. “Ameron… is cheap based on both tangible book value and expected earnings. It’s an interesting way to play a pickup in infrastructure in California and the West.”

Others in our portfolio that may see some increase in business thanks to the swell of money from Obama’s bill include Gorman-Rupp (GRC:amex). I updated this one in your last issue. GRC makes a variety of pumps. It has exposure to a number of markets affected by the stimulus plan, including municipal water and wastewater systems.

I like Gorman-Rupp for a lot of reasons, as I outlined in the issue. Chief among them is a rock-solid balance sheet — excess cash and no debt — and a good long-term track record. While not stone-cold cheap at 16 times earnings, it’s not a bad price to pay for an unlevered business earning a steady (and resilient) 16% return on capital with good growth opportunities in front of it.

Viterra, as I mentioned in this column last week (”Investing in Food“), is another very compelling investment. The company, which operates in various aspects of the Canadian grain handling and agribusiness, posted very impressive numbers in the fourth quarter.

In a year which most would rather forget, Viterra’s business shined. For the year, it booked $1.31 in earnings, up 56% from a year ago, thanks to closing the (brilliant) acquisition of Agricore. At today’s price of $9.25, Viterra trades for only 7 times earnings. You’re not going to find many companies putting up those numbers available at 7 times earnings — and Viterra is financially strong.

Viterra generated $400 million in free cash flow in 2008. That on a market cap of just over $2 billion, for a 20% free cash flow yield. There is a lot of room for error when you buy stocks at those kinds of valuations. And the outlook here is still bright if you believe agriculture markets will be strong, as I do.

In today’s Financial Times, there was a story on a new report from the London-based think tank Chatham House. As the FT reports: “The world faces ‘the real risk of a food crunch’ if government does not take immediate action to address the agricultural impact of climate change and water scarcity… ‘Food prices are poised to rise again.’”

This is something I’ve been writing about here and in C&C. I think we’re looking at a strong back half of the year for grain prices as global grain stocks fall. That will be good for a lot of our ag-related names, including Viterra, but also for our irrigation play Lindsay Corp. (LNN:nyse). (See Rude Awakening from July 4, 2007, “The Most Dangerous Religion.”) The latter is another nice pickup here, with no net debt and trading for less than 10 times earnings.

Irrigation and fertilizers play a big role in boosting yields and producing more food. Viterra, a sort of toll road on grain traffic, also benefits. For now, these stocks look cheap. But the market won’t be able to ignore the numbers as we roll through 2009. Good results and rising grain prices will attract attention.

Already, wheat, corn and soybeans are up 15%, 17% and 22%, respectively, since December. As the FT notes: “In contrast with other raw materials such as oil or aluminum, which have plunged back to the levels of 2002-2005, agricultural commodities are trading higher than they were 12-18 months ago.”

As I write, the S&P 500 is down about 8% in the month of January. Barring a rally, we’re on pace for the worst January on record for the S&P 500 since 1970, when the S&P fell 7.7%. I pass this onto you so you appreciate the historic nature of this market we are in. It’s been difficult to show any gains investing on the long side.

But when you invest in good names with valuable assets and quality businesses, their stock prices will – eventually – reflect the good things going on under the hood.

— Mayer’s Special Situations Resource Report —

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Rude Endnote: Markets in the U.S. bobbed around a little yesterday before notching up a slight gain of about half a percent. Here in Asia today, things were somewhat more positive with Japan’s Nikkei 225 surging almost 5% and the Aussie All Ordinaries rallying about 2.8%. Hong Kong’s Hang Seng slipped 0.63%.

Over in Europe it continues to rain on the poor old Pommies. London’s FTSE fell another 1.1% today, or about 44 points. France’s CAC 40 and Germany’s DAX Index closed down 0.79% and 0.55% respectively.

Gold settled down a bit after last week’s rampage, but still trades at $894 as we write to you this morning. A barrel of oil for March delivery goes for $44.70.

That’s all from us today. Flick us your thoughts at the address below and we’ll check in again tomorrow.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com