For the two latest buys in his Winning Stocks newsletter, editor Harry Domash looks towards oil. His first pick, deep sea drilling Transocean (NYSE: RIG) is chosen for growth, while his second play, crude tanker operator, Frontline (NYSE: FRO) is selected for income.
The advisor explains, ""In my view, Transocean dominates an industry sector that can only grow from here. The company is a global provider of deepwater oil and gas well drilling services. Its newest equipment is able to go 10,000 feet below the ocean surface to reach oil."
Already the biggest deepwater driller, he observes, Transocean has agreed to buy competitor GlobalSantaFe. The deal, he notes, is expected to close by the end of the year.
Meanwhile, since the consumption of crude oil is growing around 2% annually, and the easily accessible oil reserves are being depleted, the advisor concludes that demand for deepwater drilling services is growing rapidly.
Meanwhile, he adds, "Transocean reported June quarter earnings of $1.84 per share vs. year ago $0.42. Revenues rose 68% to $1.43 billion. Analysts expect Transocean's revenues to climb 50% this year to $5.9 billion. They forecast earnings for the year of $7.96 per share, up 166% over '06. He rates the stock a buy for those willing to hold the shares for 12 to 24 months.
Meanwhile, he adds, global crude oil consumption is growing around 2% annually and that oil gets delivered mostly by boat. His other new buy recommendation, Frontline, operates 80 tanker ships used to transport crude oil, and in some cases, coal and iron ore, from the Middle East to the Far East, Europe, the Caribbean, and the U.S.
He explains, "Frontline charters about two-thirds of its fleet at short-term (day) rates. These spot rates are usually higher, but more volatile, than longer-term rates."
He add that the company is in the process of selling off divisions providing dockside and other ancillary services to focus solely on operating its tanker ships. He contends, "Frontline's profits and dividends vary with day rates, which have dropped recently but are expected to bounce up again in the December quarter."
He notes that the company is currently paying a $1.50 per share quarterly dividend, and may declare a special payout before year's end. Estimated dividends of $6 a share over the coming 12 months, he adds, equates to a 13% or so yield. The advisor emphasizes that this high yielding issue must be considered only by more speculative investors.
Each day, Steven Halpern's TheStockAdvisors.com features the latest stock picks and investment ideas from the nation's leading financial newsletter advisors.
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