Two Stocks for Commodities' Rebound

05/27/2009 1:00 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Skousen High-Income Alert and Hedge Fund Trader, finds two stocks whose fortunes have risen along with the recovery in commodities prices.

Kinder Morgan Management (NYSE: KMR) is one of the largest pipeline transportation and energy storage companies in North America, with more than 35,000 miles of pipelines and 170 terminals. The company gets raw oil and gas from wells and gas deposits, then carries them to refineries and storage sites.

Kinder Morgan is organized as a master limited partnership. That means it pays no income tax at either the state or federal level. Moreover, investors—the limited partners—can depreciate assets from the partnership on their own tax forms.

It also means that most of the partnership’s net income is paid out in the form of dividends. That’s why Kinder yields an attractive 10%.

Pipeline companies are not immune to the recession, of course. When the demand for oil and gas is down, it has a negative impact on sales.  However, pipelines charge a set fee and aren’t subject to volatile oil-price swings.

The industry also stands to benefit from the $787 billion federal stimulus package that includes money for new construction projects. And Kinder is both winning new contracts and increasing pipeline and storage capacity. That puts Kinder in good shape for the economic recovery down the road.

Confirming this view, Chairman and chief executive officer Richard Kinder [recently] filed a Form 4 with the Securities and Exchange Commission to report that he bought 20,000 shares at a cost of $818,139.  

So buy KMR at market and place a protective stop at $35. (It closed above $42 Tuesday—Editor.) If you prefer to play this one more aggressively, try the August $45 calls (KMR-HI).

[Meanwhile], AgFeed Industries (Nasdaq: FEED) is the largest pork producer [in China]. It operates two business lines—the development and sale of animal feed and the production and sale of hogs. China is by far the world's largest consumer of pork. As the Chinese population grows (now at 1.4 billion) and moves to the big cities, citizens will want more meat, and pork is China’s favorite.  
 
The stock used to sell for $18 a share, but fell 80% during the financial crisis. Now it’s making a comeback, like all Chinese stocks. (It closed above $6 Tuesday—Editor.) Meanwhile, the company has been growing like wildfire. Revenues more than doubled last year to $164 million, and earnings almost tripled to $19 million.  
 
Still, the company's price/earnings to growth (PEG ratio) is only 0.38 (the lower, the better). The company has no net debt, and its return on equity is 23%. Enterprise value is at only $136 million, so this company has room to grow.  
 
Let’s buy FEED at today’s market price, and set a protective stop of $3.30 a share.

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