I enjoyed writing yesterday's Real Money column so much that I have decided to pen a sequel. Last Friday, as the market began what has been a 5-and-a-half day rebound from its brief correction, I tried to "buy beta" for my asset management clients. Buying beta is the process of investing in volatile names that perform well in sharply rising markets, which is exactly what we have seen this week. That tailwind allows volatile stocks to outperform more stable stocks by a margin large enough to compensate for the higher volatility. Volatility equals risk; please do not forget that. When you call it correctly, though, buying beta can be quite lucrative. Yesterday I presented three stocks with "what if"scenarios and great upside if those scenarios are resolved favorably. Here are three more "what if" names:
Southcross Energy. (SXE) is one of the "orphaned" Master Limited Partnerships (MLPs) that fell victim to the oil crash. For the past eight quarters SXE has not paid a distribution, and with extremely high leverage -- 7.7x as of year-end -- it is unlikely that SXE would ever be able pay a distribution again on its own. Last October American Midstream Partners (AMID) swooped to the rescue, offering 0.16 units of AMID for each SXE unit. Southcross has solid natural gas gathering and processing assets with a concentration in the Eagle Ford shale, which I believe is an extremely attractive play. So, SXE's assets fit nicely into the American Midstream portfolio and help AMID reduce its exposure to its pipelines and floating production assets in the Gulf of Mexico. It's a win-win, and SXE shareholders will vote on the combination on March 27th. SXE shares are trading at an 8% discount to the implied value of the deal, producing an effective yield of 14.8% on SXE shares assuming the deal goes through. I cannot imagine why any SXE shareholder would vote against the deal, so I have been buying SXE for the past few days to lock in that yield and get AMID at a discount.
Applied Minerals (AMNL) . I have known AMNL management for several years and have mentioned the company in my Real Money column, but what re-piqued my interest in the shares was a press release the company issued on January 17th. That release noted AMNL's progress toward commercialization of its halloysite clay (branded as DRAGONITE) for use in lithium-ion batteries. I wasn't even half way through the release before I was on my Fidelity account buying some AMNL, which is a very illiquid security. Why? Because battery-electric vehicles (BEVs) are coming. I still keep in touch with many of the auto company executives I met during my 11 years as a sell-side autos analyst, and the conversations of late have been dominated by talk of electrified powertrains. Really, it is all they want to talk about. So, skeptics might point to the tepid market reaction to GM's Chevy Bolt and Tesla's continuing comedy of errors on Model 3 production to note that here is no proof that BEVs are viable in the market, but I can tell you as an industry observer that doesn't matter. There will be a plethora of BEVs introduced over the next three years from every global automaker; whether consumers buy them is a separate issue. So, every OEM is looking for that killer app to increase battery range, and AMNL management has noted recent research demonstrates that the unique nanotubular structure of AMNL's halloysite clay (which it produces at a company-owned mine in Utah) improves the energy capacity and thermal stability of a Li-ion battery when combined with a conventional electrolyte. Is that enough to buy the stock? Well I did, but again, I should note that AMNL's market capitalization of about $15 million makes this a very risky play.
Southwestern Energy. (SWN) is trading near a 52-week low at $3.71. While I believe the company's announcement last week that it will re-position its portfolio to maximize shareholder value is an inflection point, fundamentally, in terms of the stock price, there is only one "what if" here. What if natural gas prices rebound from their recent slump and revert back to the $3.00/ mmBTU level that has been the clearing price for the commodity for the past year-and-a-half? Yesterday's EIA report showed natgas inventories hovering near the low-point of their 5-year average, and this commodity is overdue for a bounce. If it does, SWN shares will pop back to the $5 level--where they were trading as recently as January 26th--and you will have made a profit in excess of 25% if you bought SWN today.