Throughout financial history, you can find their likeness all over the world – even as far back as ancient Rome and Greece…or ancient Egypt, Mesopotamia and Persia. And in more modern times, you find their likeness in conglomerates – holding companies that deal in many different businesses. Run by a talented team – guided by solid investing principles – such a “does anything” structure can lead to great long-term track records of wealth creation for its shareholders. The old Teledyne, created by the late great Henry Singleton was one of the best. Warren Buffett’s Berkshire Hathaway is another modern example.

And I’ve recommended a few of these free-form merchants to the subscribers of Capital & Crisis. One such company is Loews Corp. ( NYSEL:L ), which is celebrating its 50th anniversary. Run by the Tisch family, which holds more than 20% of the stock, Loews has generated an annual return of 16% over those 50 years, compared with only 5.7% for the S&P 500. Of course, the past is no predictor of the future, but I like the philosophy and investments here. At today’s price, picking up Loews’ stock is like picking up free money, as I’ll show you.

The mix of assets has changed over time. Loews once owned movie theaters and supertankers, for instance. Not today. Last year, it dumped its tobacco company and picked up a natural gas explorer and producer. The Tisches are free to go where the opportunity is.

There are several things I really like about how the Tisches manage Loews, beyond the flexibility of the conglomerate approach. Two in particular stand out:

Share repurchases. Over time, Loews has cut the numbers of shares outstanding by buying back stock from time to time. Loews reduced its share count by 18% in 2008 and 30% since 2000. That means that over time, you own a bigger stake in the company. This is in great contrast to many companies in which the opposite is true. When share counts rise, that is dilution for the existing shareholders. Same assets, but now you share them with a lot more people.

This is one aspect of investing that most people simply do not follow much, but one that I pay a great deal of attention to. I have no use for managers who treat their shares like candy they hand out to themselves and their friends. In my book, Invest Like a Dealmaker, I cite research that shows how low price-to-book stocks with falling share counts beat out those where share counts rise. Respect the share count. Loews does that.

Additionally, I like how the Tisch’s commit themselves to maintaining an excellent financial condition. That means lots of cash and liquidity. I find it impressive that in 2008 – when most everyone was scrambling for cash – Loews was able to invest $2.5 billion and still finish the year with $2.3 billion cash at the holding company level.

Perhaps best of all is the value you get in owning Loews stock. Today, the company has three publicly traded subsidiaries. It owns 90% of CNA Financial, a large insurance company with ample levels of liquidity. It owns 50.4% of Diamond Offshore (NYSE:DO), a driller with sales of $3.5 billion last year and a backlog of $10 billion. It also has $700 million in cash and no debt. And Loews owns 74% of Boardwalk Pipeline (NYSE:BWP). Boardwalk has over 14,000 miles of pipeline in some of the most prolific natural gas basins in the country – the Barnett Share, Fayetteville, Haynesville and other places.

Forget that these investments are cheap in their own right. After all, Diamond Offshore is priced at less than half of its high and trades for only 8 times earnings. Boardwalk is nearly half its recent high and pays 9%. CNA is a third of its 52-week high and half of book value. Let’s just accept today’s market prices. Based on those market prices, the Loews’ stock price of $28 equals those investments.

Of course, Loews owns more than this. Loews owns HighMount Exploration, a natural gas company with 2.2 trillion cubic feet of reserves. HighMount probably chips in another $3.50 per share in value. Then there is the net cash, plus general partnership interests, preferred stock and Loews Hotels. The value of all these private investments is around $12-13 per share, by my estimate. That means Loews stock is worth at least $37-38 per share – even in this depressed environment.

With Loews at $25 per share as I write, the stock market is telling you that portfolio of private investments is worthless. Looks like a buy to me.

As I think about this crazy market, I don’t mind putting some dough with guys who’ve produced superior long-term track records, who’ve lots of cash and who pursue an investing philosophy I can warm up to. In this case, we also get in at a cheap price.

There is certainly a lot going on the market today – plenty to chew on and figure out. I look forward to seeing how it all unfolds. In the meantime, I feel good about investing alongside proven operators like Loews’ management.

Source: If Stocks Terrify You, Buy This

This stock is just waiting to explode. He recommends you take advantage of this investing opportunity and says, “because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound.”

This from Horacio:

In the face of the global financial meltdown, the price of oil has plummeted from a record high of almost $150 a barrel in July to less than $40 recently. And now it seems to be bottoming.

Clearly, this isn’t the precise moment to call a market bottom, but it is reasonable to think about a bottom around this range for a few reasons.

For starters, the forward curve of oil futures prices is showing a very marked upward slope, known in the commodities business as a forward curve in “contango.”  This means that – the farther out we go – the higher and higher oil futures prices climb. To see what we mean, let’s take a look at the projected price of oil as depicted by this graph.

A futures curve as upwardly skewed as this one provides a great opportunity for profits:  One can just buy oil today, sell it forward and hold it until December 2016 and make a guaranteed rate of return of about 62%.  In a year, you can make about 11% by just buying now, holding it and delivering in a year.  If you add some leverage to the transaction, you can make a nice return.

Some sophisticated players are doing just that: They’re buying oil, and are holding it in a tanker in port – with the obvious intent of capturing these profits.

However, this very favorable contango arbitrage is not going to last for long, as more players have been jumping into it, thus flattening the futures curve with time.  It is easy to see that, at some point, as oil gets absorbed into storage, and the curve gets inverted, the speculative players that shorted oil by selling futures long ago without having production or physical oil will be squeezed into covering at much higher spot prices.  This spike in spot prices situation will develop in less than a year, as demand recovers.

The slope of the curve also indicates widespread expectations for inflation.

From Stimulus to Inflation

The U.S. government has launched a huge stimulus package and its plan for a $3.6 trillion budget for fiscal 2010 will elevate the fiscal deficit to a staggering $1.75 trillion this year – a numbing 12.3% of gross domestic product (GDP).

And we have yet to deal with the massive social-security and health-care entitlement programs, which pose a huge fiscal threat ahead.

The financing of the announced deficits will come through issuance of U.S. Treasuries, which means that the U.S. Federal Reserve will have to monetize the debt. That is, the U.S. central bank will have to print money in order to make it available to buy the debt, since the level of issuance is so high that foreign buyers will not be able to purchase all the debt.

In addition, the Fed has already been very busy expanding its balance sheet in order to pump liquidity into the markets to buy mortgages and other assets. And it has already lowered its benchmark Federal Funds rate to a range of 0.00%-0.25%.

Why are the Fed and the government so intent in stimulating the economy?

The nightmare scenario for any central bank is falling into the so-called “liquidity trap” – a situation that exists when an economy’s asset prices enter a deflationary spiral and people reach the conclusion that by merely sitting in cash, even at a zero interest rate, they are getting richer by the day.  In that situation, monetary policy becomes ineffective, since rates are already at zero, and since it is very difficult to get out of that deflationary spiral.

That is precisely what happened in Japan during its “Lost Decade.” By the time the Japanese figured out that they needed to do something very dramatic in terms of stimulus, it was too late. The drop in prices had already created too many losses in the banking system and taken the entire system into bankruptcy.

Therefore, the theory goes, very aggressive monetary and fiscal action is needed right at the outset, in order to prevent the deflationary spiral and to actually generate some inflation.  At the same time that the United States, at the epicenter of the global crisis, is acting in this manner, countries around the rest of the world, which have been affected to different degrees, have launched their own stimulus initiatives.

China’s Stimulus Points to Strong Global Demand

China, which is at the forefront of global commodities demand, is of particular interest.  China needs to grow its economy at a minimum rate of 8% a year in order to employ the 18 million workers that join the labor force annually.  This is an imperative for a country that has dictatorial government, in order to avoid massive unrest.  That’s why in November, Beijing announced a $585 billion (4 trillion yuan) stimulus plan. It’s also why the country is taking such aggressive steps to assure access to supplies of key commodities.
Since then, the government has been aggressively buying long term access to commodities in such countries as Brazil and Australia.

Aluminum Corp. of China (NYSE ADR: ACH), otherwise known as Chinalco, has invested $19.5 billion in Rio Tinto PLC (NYSE ADR: RTP) to acquire stakes of up to 50% in nine of Rio’s mining assets.

China also struck a deal with Brazil’s Petrobras (NYSE ADR: PBR) for a long-term supply of oil.

China Development Bank, one of China’s largest state-owned enterprises, agreed to lend $10 billion to Petrobras for its ambitious deepwater-development program in order to ensure a long-term daily supply of 160,000 barrels oil. That followed a similar deal with two Russian giants. China Development Bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

Hence, the outlook for commodities – given easy global monetary and fiscal policies, and a reflationary bias – is very favorable, and we are going to take advantage of it.

Enter Diamond Offshore Drilling Inc. (NYSE: DO).

Drilling for Profit

Diamond Offshore is the world’s second-largest driller by market capitalization, right after Transocean Ltd. (NYSE: RIG).  It has 31 floating rigs: nine sophisticated deepwater semi-submersibles, one drill ship for very deep water, and 21 other semi-submersibles.  In addition the firm owns only 13 jack-up rigs, of which only seven are in the Gulf of Mexico.

What I like about Diamond Offshore is its conservative, shrewd management and its commitment to shareholders.  The latter is especially ensured because of the situation of its controlling company, the New York conglomerate Loews Corp. (NYSE: L), which owns 54% of the Diamond Offshore’s stock.

Loews, run for half a century by the Tisch family, initially acquired Diamond Offshore’s assets in an opportunistic transaction in 1992.  It then sold 30% of the company to the public in 1995 and later acquired Arethusa (Offshore) Ltd. in 1996, using stock, a move that reduced its participation to the current 54%. Since that time, Diamond Offshore has been using its ample cash flow to repurchase shares from public hands.

Diamond Offshore, also referred to as DO, has been managed very wisely.  As the world’s No. 2 contract driller, DO has concentrated on the higher-priced equipment, that is, the semi-submersible rigs, which operate in deep waters.  And deep water, which require that higher-priced equipment, is where the biggest action is.

And since the specialized deepwater equipment is all taken, DO’s mid-depth equipment benefits because it can be adapted for use on bigger projects.

DO has minimized its exposure to jack-up rigs (those that rest on the ocean floor) and especially to work in the Gulf of Mexico, which has more competition and lower daily rates.

No wonder that DO’s fourth-quarter results handily beat analysts’ consensus estimates of $2.34 per share by posting operating earnings per share of $2.53.  Revenue also beat expectations, showing a 1% increase over the prior quarter.  The company also realized higher day rates and higher utilization rates.

These are all indications of strong management execution.  What is impressive about DO is that the company used the run-up in oil prices last year to enter into long-term contracts at very high prices, registering an impressive $10.3 billion backlog.  That gives Diamond Offshore a great earnings visibility going forward.

But the upside does not stop there.

There is a special situation in the making, because the Loews Group owns CNA Financial Corp. (NYSE: CNA), an insurance company that is trading at half of its book value.  You see, insurance companies have been hit hard financially by markdowns in their fixed-income and hedge-fund holdings, but Loews invested $1.25 billion in CNA last fall in a move to improve the company’s balance sheet.

And in order to be ready to defend debt ratings, a conservative management like Tisch has all the incentive in the world to keep maximizing Diamond Offshore profits to support CNA – should it be needed despite CNA’s current strong liquidity and financial flexibility.

DO recently paid one of its regular special dividends of $1.85 a share, bringing the dividend yield to almost 13%.  If this dividend is safe – and we believe that it is – this is a winning strategy for the group, given the current financial environment, and it will greatly help to maximize profits and cash flow from Diamond Offshore.

Mark Urness, a friend of mine at Calyon Financial, one of the leading energy research specialists on Wall Street, concurs with our assessment of this sky-high dividend. He estimates that DO will continue to offer the 12.5% dividend yield, which is unparalleled in the oilfield-services segment. We, like Mark, expect the company to distribute $8 a share in 2009 in the form of both the regular and the special dividends that DO has been using.

DO has been extremely disciplined with costs and with new investments, maximizing free-cash flow to almost $900 million last year.  In fact, with the ample backlog at higher prices of the contracts signed, DO should increase its free cash flow and net income to about $1.4 billion to $1.5 billion in 2009.

DO’s profit margins are impressive – and exorbitant – thanks to the shortage in rigs: Gross margins are 64% and operating margins are 54%.

These margins are likely to keep growing as management continues to execute thoroughly and oil prices rebound.  This strong growth in revenue and earnings – driven by DO’s savvy positioning in deepwater and mid-water rigs, and bolstered by rebounding oil prices thanks to global monetary and fiscal conditions – will surely help deliver much higher multiples than the meager six times earnings that Diamond Offshore’s shares are currently trading around these days.

Diamond Offshore’s shares closed Friday at $55.58. They are down 62% from their 52-week high of $147.77.

This cash-rich, profit-fountain company is a resounding “Strong Buy,” as its stock is waiting to explode to the upside.

Recommendation: Buy Diamond Offshore Drilling Inc. (NYSE: DO), a top player in its sector, and a company that is poised to capitalize on a projected resurgence in oil prices. Because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound (**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest in Diamond Offshore Drilling Inc. (NYSE: DO).

Source: Buy, Sell, or Hold: Profit From the Projected Oil-Price Rebound With Diamond Offshore

This from Investment U:

Most investors have never heard of, or purchased, shares of a master limited partnership (MLP). But, with many yielding more than 10% and prices at historically low levels, these bargains are getting hard to ignore.

Few investors know that master limited partnerships are publicly traded asset pools. They have the tax benefits of a partnership plus the liquidity of a publicly traded stock.

Because they invest in many different types of assets, most master limited partnerships have significant debts on the balance sheet and have suffered from the credit crisis. But not all debt is bad debt. And their crisis could be your opportunity.

Profit From Master Limited Partnerships In the Energy Sector

I prefer master limited partnerships in the energy sector because their business is easy to understand. The ones that interest me own the pipes that move oil and natural gas from production to marketplace. Some of these companies also process natural gas, and they may even own an oil or gas field directly.

These companies are like utilities for energy production. Without their infrastructure, oil and gas couldn’t move to the consumers who need it. They play an integral part in the supply chain, and this makes their income stream steady and predictable.

The market has unfairly beaten up the prices of these partnerships. And the bankruptcy at Lehman Brothers only made things worse. They were dumping assets even before they went under. As a lender and advisor in this sector, Lehman was a major player in master limited partnerships.

One of my favorite master limited partnerships is Boardwalk Pipeline Partners (NYSE: BWP) – a firm that handles the storage and transportation of natural gas. Its largest shareholder, Loews Corp. (NYSE: L) heavily influenced BWP by assembling the core company assets, and taking the partnership public. It still owns 52% of the shares.

Loews Corp is controlled by the prominent Tisch family – known for their financial discipline. Boardwalk is no exception. It generates consistent cash flows and has limited debt. It has a ratio of long-term debt to capital of only 38%. Yet at a current share price of $16.30, it yields 11.5%.

Boardwalk’s shares have fallen 48% over the past 12 months. But even if energy prices stay depressed, it should rebound when the market sell-off subsides.

The Master Limited Partnership of NYSE: KMP

Another master limited partnership that I like is Kinder Morgan Energy Partners (NYSE: KMP). KMP is the largest independent owner and operator of petroleum-products pipeline in the United States, transporting more than two million barrels a day of gasoline, jet fuel, diesel fuel and natural gas liquids through over 8,300 miles of pipelines.

It is a major transporter of natural gas in Texas, the Rocky Mountains and the Midwest. The natural gas pipelines business segment consists of approximately 14,700 miles of pipelines with transportation capacity of about seven billion cubic feet per day, and working gas storage capacity of about 35 billion cubic feet. They also own or operate additional natural gas gathering, treating and processing facilities.

CEO David Kinder said in the dividend announcement, “While no company is 100% immune to external conditions, KMP continues to demonstrate that our diversified portfolio of stable assets is capable of generating consistently strong cash flow, even in extremely difficult market conditions.”

Having been formed in 1992, Kinder Morgan has now raised dividends for 12 years in a row – an exceptional record for a company that young. In fact, this pipeline giant just announced it was raising its payout again – increasing cash distributions per partnership unit from 99 cents to $1.02. With today’s price of $48.45, this puts its yield at 8.4%.

Master Limited Partnership Investing With An ETF

Another option for master limited partnerships is an exchange traded fund (ETF) that specializes in investing in the energy sector. The master limited partnership & Strategic Equity Fund (NYSE: MTP) holds a basket of energy master limited partnerships, and it’s currently yielding nearly 14%.

Many of these partnerships look incredibly inexpensive and they’re generating steady income. The income they offer will pay you until the share prices recover – perfect for investors looking for an alternative to stocks in this volatile market.

Owning these makes you a limited partner, which allows you to claim a share of the master limited partnership’s depreciation on your tax returns. In addition, they avoid the corporate income tax, on both state and federal levels. You still would owe tax payments ­(just like your other investments), but you suffer no double taxation.

This is why master limited partnerships are not appropriate for tax-deferred accounts – such as an IRA – because you would lose the ability to deduct this depreciation.

If crude oil and gas prices fail to stabilize, then sentiment against these master limited partnerships could stay negative. And that could mean even better bargain shopping down the road…

Source: Master Limited Partnerships: A New Way to Shop for Bargains

This from Rude Awakening:

History tells us that epic panics create epic buying opportunities. Inconveniently, history does not tell us in advance how long the panics will last or how low stock prices will ultimately fall. Great buying opportunities always present themselves in hindsight. In other words, to quote Henry Ford, “History is bunk.” Financial history, in particular, is bunk.

Therefore, knowing only that we do not know how low prices will fall, we must exercise a measure of caution and prudence. That said, a cheap stock is a cheap stock, even if it is destined to become cheaper. So let’s get a little crazy. Let’s imagine that we are prepared to risk some of our precious capital. Let’s imagine that we are prepared to stare financial peril straight in the face until it buckles under the strain and runs away whimpering. Let’s imagine that we are courageous enough to buy a stock…What stock would we buy?

In the midst of one of the many recent multi-hundred-point selloffs, your editor dialed up an expert on Canadian investment trusts.  “Hey Danny, how’re you holding up?” Your editor started off.

“I’m still answering my phone,” came the reply. “But I can’t say that I’m enjoying myself.”

“Well, you’ve got plenty of company,” your editor empathized. “This is brutal. So what’s the smart money doing?”

“No idea,” Danny joked. “I haven’t seen any smart money around here for several weeks.”

“Okay, so what are YOU doing?” your editor persisted.

“Well, all of my clients are selling, so I’m thinking that I should probably be buying.”

“Are you?”

“A little,” Danny said, “but the problem is that the stocks I follow looked dirt cheap two weeks ago. And now they’re down another 30% or so. It’s unbelievable.”

“What’s causing this carnage?”

“Panic…Pure panic.”

“Understood,” your editor empathized, “but if you were making your first buys today, what would you buy? In other words, if an alien, loaded down with cash, stepped out of his spacecraft and strolled into your office, what would you tell him to buy?”

“Almost anything,” came the reply. “I’d start with Penn West (NYSE: PWE). That’s a blue chip investment trust that’s down 50% from its mid-summer high. And now it’s yielding more than 20%.” [Editor's Note: Your editor does not own Canadian investment trusts, but at least one member of his extended family owns PWE and ERF.]

“Amazing!” your editor replied. “Is this company susceptible to any credit problems?”

“Not that I know of,” Danny said. “It carries very little leverage. But look, with the benefit of hindsight, you can see how we got here. Oil is collapsing, the Canadian dollar is collapsing and to top it all off, investors are freaking out. You add it all up and you get Canadian investment trusts that yield 25%!…I mean this Canadian dollar is just hard to believe. It is down 4% just TODAY! So that brings its loss against the US dollar to more than 15% since mid-Summer. I think you could easily argue that Canada’s finances are in MUCH better shape than the U.S.’s. But the markets see it differently.”

“Yeah, these are incredible times. What else do you like?”

“I’ll give you a short list,” said Danny. “I like Baytex Energy Trust (NYSE: BTE), Provident Energy Trust (NYSE: PVX) and Enerplus Resources Fund (NYSE: ERF). All three stocks yield about 20%, which seems totally crazy. Even if you believe energy prices are going to remain depressed, these stocks are too cheap.”

“Thanks Danny. Hang in there!”

To be clear, dear investor, Danny’s “short list” of distressed investment trusts are not automatically a buy because they yield more than 20%. But as we never tire of observing here at the Rude Awakening, they are probably less of a sell. (Please remember, that oil and gas investment trusts like Penn West derive their incomes from oil and gas production. So when energy prices are tumbling, as they are currently, these trusts earn less income, which means that their dividend payouts could fall sharply).

A few days after speaking with Danny, your editor checked in with Chris Mayer, editor of Capital & Crisis. [By the way, if you missed the October 14 edition of the Rude Awakening, you almost missed Chris' examination of Atlas Pipeline Partners (NYSE: APL), a deeply depressed stock that pays a very high dividend. Click here to read the story].

Chris is nervous, but excited. “I never expected to see stocks as cheap as they are today,” he said. “I had always assumed that deep value stocks became extinct sometime in the 1940s and that I would never see them during my career. But I was wrong. Deep value stocks are reappearing in parts of the stock market. The ENTIRE stock market is not cheap, of course. But many individual stocks are.”

Chris expanded upon this observation in a recent email alert to his subscribers:

“Recently, The Wall Street Journal reported a fact that shows just how extreme some valuations have become out there. According to the WSJ, nearly one out of every 10 stocks trades below the value of its per share cash holdings, “an even greater proportion than [Benjamin] Graham found in 1932.” [Graham, author of "The Intelligent Investor," is legendary among us value investors as the "Father of Value Investing."]

The year 1932 was horrific for stocks. By July 9 of that year the Dow Jones Industrial Average had collapsed 91% from its 1929 peak. So it’s hard to believe that there are more stocks trading below their cash balances now than in 1932. Amazing!

Or to put it more specifically, of the 9,194 stocks Standard & Poor’s tracks, about 876 trade below their per share cash holdings. In theory, you could drain the cash in these companies’ treasuries to buy the whole company and get everything else for free.

Loews Corp. (NYSE: L) isn’t quite that cheap, but it is VERY cheap. For starters, the stock is 40% cheaper than when I first recommended it to my subscribers. But that’s not all. At the current quote of $26 per share, Loews trades for just under 6 times earnings and has $3.5 billion of net cash — or about 30% of its market cap. If you net out that cash, Loews’ price-to-earnings ratio slips to well under 5. That’s incredibly cheap for such a well-financed company.

Even better, the company’s net asset value comes in around $40 per share. Much of that NAV is in publicly traded companies. So it’s easy to figure the values. And they are good investments on a stand-alone basis. Loews owns stakes in Boardwalk Pipelines and Diamond Offshore, both of which look like bargains. If these shares rise in value, as I expect they will, Loews’ NAV will also rise. In other words, Loews is cheap on its own merits as is, and you get its cheap portfolio, too. Loews is also a buy.

There are a lot of these kinds of opportunities out there now. At least in pockets, we have the kind of true Depression-era valuations that Ben Graham would have recognized. Old Ben Graham is more relevant now than ever because the market we are in increasingly resembles the ugliness of 1930s, when Graham plied his trade. Graham wrote in 1932, and I think it will prove true today: “In all probability, [the stock market] is wrong, as it always has been wrong in its major judgments of the future.”

Source: Soldiers of Fortune