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Sometimes a blue chip stock has some special angle that should make it run, but it has other characteristics that are holding it back. A shadow stock is a smaller company in the industry that allows us to invest in that sweet spot. We could use the example of a conglomerate that has one very profitable division and many bland ones. The goal is to find a niche company targeting that one profitable market.

This is the second article in our Shadow Stock series. As an update, our February article compared big dividend payers in the Insurance and Wireless Communications industries. For instance, Allstate (NYSE:ALL) was the household insurance name, and Homeowners Choice (HCII) was the shadow. In the past month, Allstate is up 2%, and Homeowners Choice is up 20%. In fairness, our other shadow stock in that issue was Telular Corporation (NASDAQ:WRLS), which has been consolidating in a narrow range. We still like both Homeowners Choice and Telular as undervalued long-term investments, and they still pay more than 5% annually in dividends.

This issue will address two shadow stocks that are on a growth tear in the Special Chemical and Petroleum Exploration segments. We also will discuss the well-known stocks that they mimic.

It is always interesting to study the financial reports for the great conglomerate 3M (MMM). This corporation is divided into six operating divisions, and although the percentage revenue growth for the corporation may be in low single digits, some segments are on fire. For instance, in its third quarter report, the top two were the "Industrial and Transportation" and the "Safety, Security and Protection Services" divisions, with income growth exceeding 20%. The 3M press release mentions specifically certain popular product sectors, including corrosion protection, abrasives and adhesives, among others. So the search began for a Specialty Chemical shadow stock.

Now I have been waiting for the automotive stores like Autozone (NYSE:AZO) to come back down to earth. I also know that 3M is well represented on Autozone's shelves with chemical products for buffing, waxing and sealing, as well as gaskets and additives. Maybe I should be looking for makers of these products specifically.

What hit the screen was not a maker of automotive compounds, waxes, sealers and additives, but one for boats. Why had I not thought about that niche? It is common knowledge that the luxury product markets have flourished in this economy, so appearance and maintenance products for yachts, jet-skis, airplanes, RVs and small vehicles should be doing well also. Well, apparently they are.

Ocean Bio-Chem, Inc. (OBCI) has earned in the first nine months of 2011 more than it tallied in all of 2010, which, incidentally, was 70% more than 2009. Its earnings are up about 29% to $.26 per share for three quarters. That puts it on track for $.34 per share when it announces full year results around March 26. The stock sells for $2.36, giving it a PE of 7.

Ocean Bio-Chem is not 3M, but it does have a factory, research, patents, sales networks and products that are well-accepted in their markets. In addition, it has some impressive value metrics: Ocean Bio-Chem sells only 39% above book value, and has sales far in excess of market cap. For reference, 3M sales are only one-half of its market cap, and the share price is 390% of book value.

Insiders own 64% of the stock, and lately they are net acquirers of more. Institutions own only about 3%, so the Ocean Bio-Chem story has not resonated with Wall Street, probably because of its low price and limited float. Our experience with this type of micro-cap value stock, in less-than-sexy industries, is that it can be dead money for long periods of time. Nonetheless, most specialty chemical producers of consumer products have reached stratospheric prices levels, and sometimes the last kernel in the pot pops the loudest. The stock's 52-week high is nearly double the current price.

We do not see much downside on this stock, and it certainly could give more bang for the buck than 3M. With this kind of stock, the bang can go either way. For timing purposes, the imminent annual report could be the impetus to attract investor attention. That may not happen immediately, but it should not take more than a month to see a positive move. If not, we would be inclined to see if there are other more vibrant opportunities.

We have been following the domestic petroleum exploration giant Chesapeake Energy (CHK) for some time. Chesapeake was a big beneficiary of the fracking revolution, and the shares jumped 70% in the three months ending in February 2011 as its "Barrel of Oil Equivalent - BOE" resources increased. However, as the glut of natural gas has continued to devastate the price of that commodity, Chesapeake spent the next twelve months giving all of that gain back. Recently, Chesapeake issued an update to its "30/25 Plan" which included divestiture of some natural gas resources and the possibility of reduced drilling activity in others due to low prices. Nonetheless, Chesapeake continues to increase overall resources, including many properties rich in oil and petroleum-liquids. Looking through the maps of petroleum explorers, we see some small explorers working in the "shadow" of the Chesapeake rigs.

If we could find a shadow company that reacted early to curb its dependence on natural gas revenue, we might have a winner. One name that kept showing up near some of the best Chesapeake properties is Crimson Exploration (CXPO) out of Houston. Crimson is drilling next to its big neighbor in the Eagle Ford Texas formation and the Niobrara formation in Colorado. It has increased its production by 28% over 2010.

Crimson used to be mostly a natural gas producer, but decided early to limit its dependence on that commodity, and currently 40% of its production is precious oil and petroleum liquids. That compares to 18% for Chesapeake. Crimson expects to improve that percentage to 50% by mid-2012. Even though the conversion will mean flat production numbers in terms of BCFE (Billions of Cubic Feet Equivalent), the higher liquids price should mean a 40% increase in revenue in 2012.

Normally, I am not too keen on hedging commodities. Over time the prices of commodities have historically increased, so fixing the price is likely to hurt as much as help. Nonetheless, kudos to Crimson management's forethought as they have hedged about half of their natural gas production in 2012 at $5.00 versus current market price around $2.50. The real pot at the end of the rainbow for long-term investors will occur once the glut is eliminated and the price of natural gas jumps.

Crimson closed at $3.19 this week, and management estimates its net asset value of resources to be $16.28, using an average of high-low price/production scenarios. That is five times the current market cap, while Chesapeake's calculation is three times its market cap. Crimson is expected to earn a meaningless three cents when it announces annual earnings on March 13. It plows cash flow- about $1.30 per share- back into exploration.

We should keep in mind that in no way are these small "shadow stocks" replacements for the institutional-quality names. These are investment candidates that have the flexibility to find the profitable areas of their business without a lot of the baggage of the blue chip. We hope to have some interesting suggestions to investigate in our Shadow Stock series next month.

Source: 2 'Shadow Stocks' With 25% Growth