Paving the Way to Profits

11/18/2008 1:36 pm EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, is adding some high demand/high-yield to his portfolio.

As far as the near-term outlook for the market, I’m not optimistic. Normally, we would have a bit of a rally after the traditional October carnage, then some tax-loss selling into yearend, and another rally in January. But it can certainly be argued that this isn’t a normal bear market, so all bets are off. China recently took some significant steps to liquefy its markets; that could inspire a rally soon. How much staying power it would have is way beyond my pay grade.

Economic statistics lately have been even more terrible than was expected. It’s tough to fight that headwind. I suspect any rallies will be on light volume as big money sells into it. The market usually turns around about six months before the economy does, but the economy’s trajectory at the moment shows no sign of even leveling off, much less turning.

NuStar Energy L.P. (NYSE: NS) had nearly tripled its EPS this quarter, and that the company’s Chairman had bought $12 million worth of stock. Wall Street Journal had a good story on asphalt, as did the Associated Press. Between the two of them, they cited enough sources outside the company to convince me that asphalt is indeed in short supply and high demand. The conversion of many refineries to process heavy crude into expensive gasoline and jet fuel has cut into the supply of the main ingredient in asphalt. Now the amount of a barrel of heavy crude that goes toward asphalt production has dropped by 75% at those refiners. More refiners are converting every month.

Although the drop in oil prices may stall some of those projects, that would only slow the rate of decrease in supply. But in a move that was either very lucky, or brilliantly prescient, NuStar bought two refineries last year. It doesn’t have to rely on outside refineries to supply ingredients for its asphalt; it makes its own.

The bottom line is that demand should exceed supply for quite some time to come. NuStar is positioned to sell all the asphalt it can produce for the next few years. The units are yielding more than 9%. If we get no capital appreciation for five years, we’ll still do well and cream the market.
That doesn’t mean the units won’t slump over the next quarter or year; I can’t guarantee that. But I can say earnings should remain robust, and the dividends should remain at the current level or higher.

Buy NuStar Energy L.P. up to $61.

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