"Green" Opportunities

10/29/2004 12:00 am EST


Alexander Green

Chief Investment Strategist, The Oxford Club

I'm always amazed at the diversity of intriguing ideas offered by Alexander Green, editor of The Oxford Communique . Here's a sampling of his wide-ranging coverage, from a cancer treatment firm, to a natural resource play, to a high-yield opportunity.

"Varian Medical Systems (VAR NYSE) is the nation’s top maker of radiation systems for treating cancer. The high price of its machines ($1.7 million each), the heavy regulation of the healthcare industry, and the complexity of the technology have sharply limited competition. Cancer remains the nation’s second-biggest killer after heart disease and the cost of radiation treatment in the US exceeds $1.4 billion annually. Varian’s technology is used mainly to treat head, neck, and prostate cancers. However, the company is working hard to get FDA approval for breast and lung cancer too. An announcement here would cause these shares to rally strongly again. But in addition to successfully killing cancer tumors, Varian’s X-ray machines can see through 17 inches of steel. This gives the machines the ability to inspect cargo coming into US ports. In fact, Varian machines are already used at 35 ports worldwide. Currently, there are six million containers a year coming into more than 360 ports in the US. And less than 2% of this cargo is screened. This is a matter of no small concern at the Department of Homeland Security. We still expect Varian to get a major defense contract, providing security at the nation’s seaports. And that shouldn’t hurt the share price any, either.

"Record prices for oil and China's brisk economy have been good for Anglo-Australian mining group BHP Billiton (BHP NYSE). The stock recently hit a new 52-week high on surging volume. Think of BHP as the Paul Bunyan of resource companies. Formed in 2001 from the merger of Australia's Broken Hill Proprietary and Britain's Billiton, the new company is a monster with $23.5 billion in annual revenue. It's the world's largest diversified resources company, with huge interests in aluminum, iron ore, copper, coal, oil, gas, nickel, silver, and diamonds. In the resources industry, size confers major advantages. In particular, it gives BHP a diversified income stream, easy access to international capital markets, bargaining power with suppliers, and enormous economies of scale. For all these reasons, BHP should continue to see dramatic earnings growth in the months ahead. Meanwhile, China accounts for over 10% of revenues, and is about to contribute substantially more. This stock is a world-class blue chip by any measure. And its diversification among different commodities, businesses, and countries reduces its risk profile substantially. In short, if you own only one resource stock in your portfolio, make it this one.

"Hardly a week goes by that I don't hear investors grumbling about low yields. But there are still some interesting opportunities out there for folks who don't mind taking a bit of risk. Debt Strategies Fund (DSU NYSE), a publicly traded junk bond fund, currently yields 9.7% with dividends paid monthly. I like it for several reasons. First, it's got plenty of liquidity, with nearly $1 billion in assets. The fund, run by Joe Matteo at Merrill Lynch, also has a good track record. Over the last three years, the fund's average annual increase has been 16.9%. (Not bad, especially since the S&P 500 has returned about 1% annually over the same period, with a whole lot more risk.) Thirdly, the fund should continue to do well as the economy recovers. This surprises some investors who feel if interest rates are going up, it's bad for bonds. But lower-grade corporate bonds like the ones Debt Strategies owns are more sensitive to the creditworthiness of the issuers than the Fed's tightening. With Debt Strategies you're spreading your risk, as the fund doesn't have more than 2% of the portfolio in any single issue. All in all, Debt Strategies has good liquidity, broad diversification, experienced management, and a smart track record, and pays 9.7% monthly. It should continue to be a good place for us to be in the year ahead."

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