Two from Toby

11/04/2005 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Whether he is finding solid, high-yielding "ballast" stocks or speculative technology issues, the common theme for Tobin Smith is isolating long-term emerging trends. Here, we look at both ends of the spectrum, with an energy trust, and a hi-def tech stock.

"Harvest Energy Trust (HTE NYSE), located in Calgary, has grown to be one of Canada's largest energy trusts, based on production, in just three years. What I look for most in trusts is how successful they are in maximizing production in the ‘probable’ reserves they acquire in proven reserve transactions. That is the secret sauce of increasing reserve life and dividends. One of the big issues right now is how higher energy prices make otherwise uneconomic reserves now very economical. In heavy oil or tight sands formations, the finding risk is zero. We know where the oil is. The risk is economic. The only question is, 'Can it be extracted at a profit?'

"Harvest is at the lowest level of any Canadian energy trust for payout ratio, only paying out 48% of its cash flow as dividends. This low payout ratio gives us marvelous upside as they have hedged a lot of production with unlimited upside hedges. And they have a great history of growth. With more than 350 drilling locations and operating control on most of its reserves, Harvest can do its magic with low-risk developmental drilling while at the same time tying in reserve production to cut operating costs. Most importantly, this trust is now traded on the New York exchange. And, since it's a Canadian Trust, 85% of our dividends are tax-free.

"Silicon Image (SIMG NASDAQ) has been cut in half during the last few months, but is time to back up the truck and buy. The battle between the two high-definition DVD camps (Blu-ray and HD-DVD) has put a hold on the rapid roll-out of high-def DVD players that will be massive buyers of Silicon Image's HDMI chips. But that's not the best part of their story. We are coming into the holiday season where we will see LCD and plasma flat screen TVs selling in record numbers. And all the screens will need the connections made possible by Silicon Image's chips to provide the best picture possible.

"Then there is the video-enabled iPodnot the recently-revealed version but the high-def version that is coming next year. It will have to have an HDMI chip connection because that's the best way to provide the digital content protection that the movie studios and TV networks want. With $117 million in cash, SIMG is selling for about ten-times cash flow and at 13-times next year's earnings – an insane valuation. The company has virtually zero debt. This is a $200 million a year company that will move to $350 million by 2008 as high-def DVD player sales explode. A $582 million market cap is just ridiculous. Buy under $8 and take advantage of this lunacy."

(Editor's note: Following Tobin's commentary, Silicon Image jumped sharply in price and we would remind readers of his advice to buy under $8.)

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