Larry Bellehumeur

Three Stocks That Look Cheap Here

should read in my last point "NOT low like a ....

Three Stocks That Look Cheap Here

Correct -- Usually, I use Free Cash Flow. A company can stop doing CapEx for a short period of time, but eventually, their business will suffer.

Valero would sit somewhere in the middle in the CapEx world (no low like a Financial company, but not high like a Communications Carrier).

Fortune.com lists a 2007 Free Cash Flow of $11.27/share. Not sure how much lower they will be when they announce 2008 Earnings. Now, it is trading at less than 3x 2007 Cash flow....assuming that this falls by the same rate as their earnings, they would still be trading at 5x 2008 Cash flow.

Cheers
Larry

Three Stocks That Look Cheap Here

Navfish -- Thanks for your comment. I love Petro-Canada, and would have included them. However, they aren't too well known south of the border....that was why I went with Valero

I like them for their Integrated nature, as well as their new Oil Sands play at Fort Hills (which I have seen, as they are one of my customers).

Great, great long term hold....

Disclosure -- minor position in PCA-T

Three Stocks That Look Cheap Here

Alex -- I never argue with someone who makes my case look stronger! I never plan to gain on currencies as part of my plan (my theory is if you hold a stock long enough, currencies balance out in the end), but it is a good bet that the next few years will not be kind to the Greenback...

Larry

Three Stocks That Look Cheap Here

Truth investing --- I like Berkshire and Altria/Philip Morris as well (you stole a bit of my thunder, as I was going to do a followup article, and MO was one of the choices!). Don't follow RAI as much, but they look like a good choice as well.

Berkshire does scare me a bit (I am quite long on them, so not that much), in that they do have potential exposure to large scale catastrophes. Doubt that Buffett would allow them to be overexposed, but it does take a bit away from its overall safety. However, at its current price, that fear is more than built into the stock...

No positions in MO or RAI.

Thanks for reading!

Three Stocks That Look Cheap Here

In the second paragraph, the last sentence should read "When you factor in Provincial Income taxes....."

Three Stocks That Look Cheap Here

Nutjob -- Royalties vary greatly not only by country, but in some cases (like North America) by states themselves.

The best one that I can speak of is Alberta, Canada, where I live now. The Provincial government will take a very small percentage of revenue for the first while (basically, while the company is recouping the investment that they put in, the Provincial government's royalties are 1% of profit + Corporate Income taxes). Once the initial investment is made back, the royalties will work on a sliding scale (based on the price of Natural Gas or Oil at the time). When you factor in Federal Income tax, it is not unusual to see between 25-40% (or more, in some areas) go to the Government coffers. When you factor in taxes, it becomes more like 50%. Alberta is somewhere in the middle of the road, from what we have heard....

They also "tax" wells or projects that have stabler production at a heavier rate. So, in SE Alberta, there are a lot of Shallow Gas wells. These wells do not take a lot of drilling effort, but tend to be not high producing (so, you need to put a lot of holes in the ground). These wells are taxed at a much lower rate, to the point that if the production falls below a certain amount, there are no royalties at all (only income taxes).

In the case of Deep natural Gas wells or Canadian Oil Sands, the resource will take a lot of initial investment (an Oil Sands operation might cost north of $15B, and an extremely deep Nat Gas well might cost 10's of Millions to drill). However, once you get the initial work done, you can produce many thousands of Barrels per day, at relatively low cost. Trying to encourage this investment, they are given the breaks at first, and the chance to recoup costs.

In many of the OPEC countries, they have Nationalized their production, so they have kicked out the Oil Companies (see Chavez's fight with Exxon). There are few places that are friendly towards Oil Companies anymore....

Hope this helps
Larry

Three Stocks That Look Cheap Here

Deere (DE) was one of the ones that I was considering. The only reason why is that I had heard one of the temporary reasons for it to dive was the bad weather that hit the Mid-West (might reduce the demand for their equipment). I think it will have some impact, but not nearly as much as the market has priced in.
Disclosure -- no position in DE

I don't know either of the ones that you mentioned....

Three Stocks That Look Cheap Here

Feel weird calling someone "Nutjob"....=)

I do like many players in the Oil and Gas space at this stage (Tesoro would be good, I also like Transocean, Noble on the Services and Conoco on the E&P). I just chose Valero, as it was one that I knew well....

Disclosure -- Long on RIG

I'd be reluctant to dip my toes in the US Financial market as of yet. I think that you'll get a good chance to buy later in 2008. However, if you have a long term horizon, you might want to take a partial position soon, though, as I suspect that when they do turn around, they will go up like a rocket.

Home builders might still be too much of a contrarian player for me yet, but might be worth a look if you want to hold them for 3-5 years. I don't follow them that closely, but when you start to see the "Months of Home Inventory" number to drop for 2, maybe 3, consecutive months, I would probably be more likely to jump in.

Great points!

Three Stocks That Look Cheap Here

Brahm / Jermp,
You both make valid points on VLO

Overcapacity may be a concern in the refining market. Only time will tell. I am wagering that is more than priced into VLO at this stage of the game, though. As for other large players, such as Exxon, these are not new competitors to Valero. Their competition has long been put into the price. While they have strong E&P revenue, in addition to their Marketing/Refining operations, they still get hit by lower margins in Refining. They won't stand for low Crack Spreads for very long either, I would think..

In terms of CAT, there is always a chance that the modernization of Emerging markets does slow down. However, one might need to put it in perspective.....China is growing at 4 to 5 times as fast as most Developed nations in 2008. This is stunning growth that even a small correction would still make it need tons of CAT's products.

Great feedback!

Three Stocks That Look Cheap Here

You guys are being too nice to me! I guess I'm so used to being yelled at.....Although, nothing creates responses like bashing Apple and Google!

Tipalia -- They are absolutely long-term plays. Also agreed that many things look cheap here. The trick that seems to be to find those who are cheap without justification.

I was going to add Pfizer (PFE) and Gannett (GCI) on the list, but they both seem to be cheap for a good reason (Pfizer with its Lipitor and other patent issues. Gannett seems to have serious challenges to its long-term business model, and is carrying a lot of debt). I wanted to pick those that "were thrown out with the bath water"

Thanks for reading!