Jim Kingsdale: Selling SQM and Bullish on Dryships

Thursday I took profits in the Chilean mining company, Sociedad Quimica Y Minera de Chile (SQM) selling 40% of the EIS portfolio’s holdings.  It remains one of the five largest holdings in the portfolio and I have the highest respect for the company.  But the price had appreciated more than 300% since my first purchase just last February, the chart looks like a fully grown hockey stick, and it is now selling at over 50 times running earnings.

I bought SQM initially as an alternative energy play.  Lithium is only 15% of the its business but SQM is the largest lithium supplier in the world and lithium is a central component of the lithium-ion battery that will power the next generation of hybrid-electric vehicles which will be coming to market in less than two years.  Such vehicles represent the future direction of the automotive world.  There will be many millions of them sold between 2010 and 2015. I expect SQM’s lithium business to be a much larger part of the company’s sales and its identity in a few years.

The largest part of SQM’s business now is fertilizer chemicals, perhaps the hottest part of the stock market this year.  That is a wonderful business given the pressure on farmers worldwide to produce more food.  Another important part of SQM’s business is iodine which, interestingly, is also potentially an alternative energy play since iodine is mixed into the liquid that is heated to make steam in some concentrating solar thermal systems.   Concentrating thermal solar is my candidate for the best alternative energy solution long term, so I think this part of SQM’s business also has very high growth potential.

It should be clear from the above that SQM is one of the best positioned companies on the planet in my opinion.  I may well live to regret the sales I made Thursday.  On the other hand, the position had become overly large relative to the portfolio.  In addition it has been publicly hyped by some well known analysts which, along with the stock’s nearly vertical chart, often points to short term weakness in a stock.  Finally, there is evidence that the general condition of the stock market as a whole is weak and getting weaker.  Companies like SQM that are selling on multiples of earnings that are years down the road and that have risen rapidly often are hit the worst during a severe market correction, which may be in the process of happening. 

In sum, selling a great stock like SQM is a difficult decision.  I hope to have an opportunity to buy it back at a lower price, but I recognize the risk that may not happen.

Dryships   

A stock that has become an EIS top five holding is Dryships (DRYS). It is generally considered a dry bulk shipping company and indeed it is.  But in the past year the company has also added a second and related line of business, deep offshore drilling rigs.  It expects to operate a fleet of six rigs that will make it one of the most substantial companies in that terrific business, a great summary of which appeared in today’s New York Times.  Dryships intends to spin off to stockholders its drilling business within the next twelve months. 

The dry bulk business is attractive because of the increasing needs of China and other rapidly growing countries to import coal, grains, and steel.  Moreover, the company’s dry shipping business has been extremely well managed since it went public just a few years ago.  Management has adopted a gutsy entrepreneurial, opportunistic approach to its business in terms of upgrading and enlarging its fleet on attractive terms and cleverly managing its spot vs. charter approach to leasing its assets.  DRYS’ fleet has grown from six ships averaging 19 years old before the public offering to the current 48 vessels averaging 8.4 years.

In fact, the management style at DRYS features a gutsy spirit that reminds me a little of the young Ted Turner who, in the early ’80’s wore a button to a cable television convention that read, “I was cable before cable was cool.”  Like Turner, DRYS’ George Economou is the largest stockholder and totally dominates the management effort.  Unlike Turner, however, Economou is not only a brilliant strategist, but also a detail oriented and accomplished manager.  Some on Wall Street may think he is too much of a buccaneer, like Turner was, but I believe he adds a huge measure of value to this company. 

Selling at under 5 times 2008 projected earnings, DRYS seems cheap to me.  Given that Economou has managed to increase earnings at very high double digit rates per year since becoming a public company and that a great part of its new drilling business’s earnings have not yet become apparent, a multiple of 5 looks to me a little like the company is being given away. 

Let’s remember that in the end Turner created enormous value for both himself and his stockholders.  I think Economou is doing the same thing.  Of course, I could be wrong and obviously a lot of the investment managers who are not grabbing this stock at under five time earnings think I am wrong.

The EIS portfolio has held (and still does hold) another shipping company, TBS International (TBSI) which is pursuing a different but still entrepreneurial strategy.  I think shipping is appropriate for an energy portfolio because it is a play on the rapidly developing countries that are benefiting from globalization.  That is exactly the same set of trends that is making energy and other commodities very scarce.  But, in the case of DRYS, of course, the company is now heavily involved directly in the energy business through its drilling assets that will soon be spun off and will be recognized in time, I think, as a core holding for energy investors.

Comments

[rkr]

Totally agree w/regards to Dryships and TBSI.
I feel that SQM will hit 61.00 tops so I would have placed a sell limit at $59.00 and watched it. But than again you probably paid $17.00 or so a share back in Feb. So congratulations on your 200 + % return

[bobm34256]

DRYS is a great buy... but only concern is George Economou who has a very shady track record. DRYS is only a holding company and George controls all the other subsidiary companies doing a number of intercompany transactions to boost profits and reduce costs. I prefer EXM & PRGN

[its_paul]

I completely agree, I cashed out my SQM position today with profits cause I see a dip coming soon. I also like shipping, because with the dip and shipping being seasonal, this would be a great play to hold onto till later this year.

[sliman]

DRYS will be one of the great stories of 2009 with split in company. The rig part is not being presently valued.

[alphameister]

Love the DRYS story. It's my largest holding. Thanks for your insights.

[User 20844]

Great sTOCK BUT VERY FLEXIBLE IN PRICE

[ritr54]

Jim do u have any thots re: China Bak Battery CBAK?

[Kamal Ahuja]

For those of you with an interest in two domestic producers of Lithium, you can read about FMC Corporation (FMC) and Rockwood Holdings (ROC) in my article at the following link:

seekingalpha.com/artic...

Both companies still trade at respectable and lower valuations than SQM.

[Mark Anthony]

Jim:

Very insightful about SQM, which I start to monitor lately. A few auto maker announced recently they are building new lithium based hybrid vehicle batteries. There are also booming activities in nickel metal hydrate (NIMH) hybrid batteries. IMO, due to safety and durability, raw material availability issue, lithium is not the best solution for hybrid vehicles, nickel is.

But if you really want a spectacular raw material play, consider palladium, and the two only North America based palladium/platinum players, SWC and PAL.

Read my discussions here:
seekingalpha.com/artic...

And here:
seekingalpha.com/artic...

I agree SQM is a bit too expensive to buy here.

[long_on_oil]

After seeing the natural gas powered Honda on the Today show I have my doubts about electric (battery powered cars) being the future of automobiles. 36 mpg plus a range of 220 to 250 miles makes the new Honda a must consideration for local driving. You can refill the car everyday at your house and the average cost is $2 a gallon. You better start watching CHK or COP.
Distribution is critical in establishing an alternate fuel source and as far as I know almost every small town in the country has natural gas or at least will have in the future.
The best plus is we never have to import the product because the USA has at least 125 years supply of natural gas.

[Mr. Wynn]

Kamal, you got it right: FMC is a great way to play the chemical space and ag space as well.

[rbblum]

in short . . . Economou is creating enormous value for both himself and his shareholders; however, a lot of the investment managers not grabbing DRYS at under five time earnings disagree.

Perhaps Wall Street is quasi-paralyzed by the sub-prime lending debacle and it is the individual who is currently in the enviable position of being agile.

[thorng2002]

I think SQM is a great buy after Thursday pullback. Now it's a good entrance point. The demand of lithium has confirmed by Mitsubishi.

Mitsubishi will equip its all-electric cars with lithium-ion batteries, currently being developed by a venture with battery- maker GS Yuasa Corp. and Mitsubishi Corp. Lithium-ion batteries are lighter and can store more energy than nickel-metal batteries now used in most hybrids.

www.bloomberg.com/apps...

[thorng2002]

Demands of lithium has confirmed by GM and Mitsubishi. SQM is a great stock to own now. The PE is about same as POT after Thursday's pull back. I would see up trend is strong.

Both Mitsubishi and GM will use lithium-ion batteries beause it is lighter and can store more energy than nickel-matal batteries.

Tests of the lithium-ion batteries to run the Volt have been ``very satisfactory'' and ``very encouraging,'' GM Vice Chairman Robert Lutz said in an interview today in Seattle.

[Chastain]

Wondering if anyone has any thoughts about SINO, the China IPO which came out recently.

[Carl Martin]

A very good and sober article. I'm just not sure that I agree that the future in batteries is already decided. However, I'm not prepared to back up my doubts with any solid arguements at this point. I just thought that there were many different possibilities and more than a few unsolved problems. Long SGM and DRYS and would like to own TBSI.

[abitarecatania]

“It was surreal. When someone asked why he was doing the deal, here–now, he actually said, basically, ‘Because Americans are the dumbest investors around, and there’s lots of liquidity in this market.’”

CEO Dryship, George Economou

The secondary offerings, plus the testing of the stupidity aka enthusiasm of the market with another "drybulk" shipper. Safe Bulkers (SB), a company with a record of FOUR EMPLOYEES! Unlike DRYS which has TWO EMPLOYEES! LOL!

finance.yahoo.com/q/pr...

finance.yahoo.com/q/pr...

You can take your pick of article and realize how ridiculous this company is.

Curious George
Nathan Vardi 02.25.08, 12:00 AM ET

www.forbes.com/forbes/...

World's Scariest Stock: DryShips
www.fool.com/investing.........

Dryships’ Debut Shows Speculation,
Liquidity Trumping Experience

www.weedenco.com/welli...

A highlight from: Curious George

"Who are my investors? Computer models, hedge funds and some institutions that go in and make $10 and get out." So much for consensus. DryShips has been operating with two employees (Economou, 54, and his internal auditor) since his chief financial officer quit in May, the second to split in three years. The company's fleet is managed by Cardiff, 70% owned by Economou, which gets more than $7 million a year for its troubles.

"A family business, this. Economou's two former wives own a total 15% of DryShips. Chryssoula Kandylidis, his sister, holds 30% of Cardiff Marine. With proceeds from its initial offering, DryShips bought six ships that had recently been picked up by Kandylidis. Five were sold at cost, but DryShips paid his sister a $3 million fee. Economou says she made very little money on the deal and bore great risk.

Kandylidis' son, Antonios Kandylidis, is also in this cozy network. The 30-year-old Antonios is the founder and largest shareholder in OceanFreight (nasdaq: OCNF - news - people ), which raised $218 million when it went public on the Nasdaq last year. Cardiff helped OceanFreight pick up its first dry-bulk vessels, helps manage that fleet and shares office space with OceanFreight.

A rocky maiden voyage. OceanFreight had to clarify its reporting in October, announcing third-quarter earnings per share were really 7 cents as opposed to the 11 cents it had advertised a day earlier. In December Antonios fired his chief executive, who says he intends to sue for wrongful termination. Then OceanFreight's chief financial officer quit; Antonios took over both the executive roles. Within days of the fuss OceanFreight announced it was buying the first of two tankers privately owned by Economou for $112 million."

Of interest also many dry bulk shippers are unloading shares on the stupid:

Secondary Offerings, Debt, and Defaults

Minyanville Professor David Nelson and Minyan Peter were talking about secondary offerings today. Let's take a look.

Professor Nelson: Shipping Secondaries

One by one the Dry Bulk Shippers are reporting blow out quarters. However, another pattern seems to be developing under the surface. Shortly after reporting and getting a big bump from the EPS reports, they've been announcing secondary's. Last week it was TBS International (TBSI) and this morning it's Genko Shipping (GNK).