Basic Industries Are Still Compelling
08/04/2006 12:00 am EST
In searching for companies whose stocks have the potential to double in two years, Ken Kam utilizes his unique approach to ferreting out his ‘best ideas’, and gives us a peek at what’s on his mind…
"We recommended Lufkin Industries (LUFK NASDAQ) in December because it provides the pumps (which are the "picks and shovels") needed to make exhausted oil fields productive again. As the price of oil climbs, many exhausted oil fields are being put back into production.
"You never get all the oil out of an oil field. When the price of oil is $25/bbl, it makes sense to spend up to $25 to get a barrel of oil out of the ground. If it costs more than that, the field is considered exhausted. But with the price of oil over $70/bbl these days, many of these fields are economic again. To put them back into production, you need pumps.
"Lufkin is one of the leaders in this industry and business is booming. Lufkin is perfectly positioned to make money on the sale of new units, which also expands its large installed base and grows recurring revenue from spare parts and services. LUFK was up 35% in January and we took a little off the table. June’s panic attack created a perfect opportunity to get back in.
"Cemex (CX NYSE) has built a great business selling cement and aggregate throughout the world. The stock is up over 150% over the past five years, as historically low interest rates in the US sparked a construction boom. Now that rising long-term rates have slowed new construction starts, Wall Street believes Cemex will be hurt as well. Since early May, Cemex has fallen almost 20%.
"But Cemex’s products are used for much more than the construction of sidewalks and home foundations. Concrete is used as a substitute for increasingly expensive oil-based asphalt roads and building construction based on wood, aluminum, or steel. And politicians often like to fund major public works projects during a recession to win votes by putting people to work. Cemex has a big presence in oil-producing regions like the Middle East, where record oil prices are fueling a construction boom and in Asia, where infrastructure development is racing to support the booming growth of their economies. At the current price, I think it’s a good bet that Cemex will do well for us even if there is a recession in the US."