What to Trade: Buy North American Palladium (AMEX: PAL) < 7.50.
Why Now: North American Palladium should benefit from rising demand for palladium, a key component in catalytic converters that reduce emissions from automobiles. Demand for palladium should increase as auto manufacturers substitute palladium for higher-priced platinum and new car sales continue to grow in emerging markets. North American Palladium also plans to increase its output substantially.
In Las Vegas to speak at Investing Daily’s annual Wealth Summit, Elliott and Yiannis are lunching on champagne and seafood at the Wynn’s poolside restaurant, Botero. Joining the two stock pickers are their publisher Phil Ash and Roger Conrad, editor of Utility Forecaster and Canadian Edge. Jet-setter Yiannis Mostrous flew from his native Greece to attend the conference, stopping briefly at his home in the Washington, DC area to pack a suitcase with his US clothes.
Phil: As much as I enjoy listening to Yiannis talk about old movies, I hoped I’d be able to sit in while you guys discuss the next pick for Cocktail Stocks. The issue comes out next week, you know.
Roger: What’s Cocktail Stocks? If this is a new product, The Inebriated Investor has a better ring to it.
Elliott: When Yiannis and I came up with the idea for Stocks on the Run, we pitched it to Phil as Cocktail Stocks. As you know, Yiannis and I meet up every few weeks to discuss the markets, usually over dinner and cocktails.
Yiannis: Cocktail Stocks is way better. Not only does it reflect how we work, but it also doesn’t resemble a certain Paul McCartney & Wings album. You know, Band on the Run.
[Editor’s Note: Stocks on the Run will officially become Cocktail Stocks in the May issue.]
Roger: I agree with the boss–Botero is the perfect place for the inaugural Cocktail Stocks meeting.
Phil: Definitely. Let the debate begin.
Yiannis: Why the hurry? Let’s order some more champagne and relax. Elliott, Roger and I will be talking about stocks all day tomorrow.
Elliott: We could give them a preview. I’ve got a couple of ideas for April’s cocktail stock.
Yiannis: What’s on your mind, Big E?
Elliott: Chart Industries (NSDQ: GTLS) is one name that should benefit from the situation in Japan.
Yiannis: Really? Another Japan-related trade. Didn’t we just write a lengthy article about our favorite Japanese equities for Personal Finance? And what about that massive 35-page issue of The Energy Strategist that discussed the implications of Japan’s nuclear crisis on various energy-related oil industries?
Elliott: Crisis begets opportunity, Yiannis.
Yiannis: Roger, what’s your outlook for the market.
Elliott: Wait, what about my new idea for Cocktail Stocks? Phil already looks annoyed–and he hasn’t even seen the lunch bill yet.
Yiannis: Your new old idea? We can talk about that later, man. So what’s your outlook, Roger?
Roger: Overall, I’m bullish. Volatility may have picked up, but the rally hasn’t run its course. The trend looks good on the upside.
Elliott: That reminds me about another change I wanted to make to cocktail stocks.
Yiannis: Let Roger speak, man. It’s rude to interrupt him like that.
Phil: Wow. This is exactly how I envisioned your monthly meetings. If I’ve learned anything from the old Stocks on the Run, that’s Elliott’s cue to make fun of your thick Greek accent.
Elliott: As I was telling Yiannis on our flight from DCA…
Yiannis: That upgrade to first class made my day. I was finally able to get some sleep.
Elliott: Sleep is for wimps, man.
Yiannis: Sure. Over the past three days, I’ve been in Greece, DC and now Vegas. I’m worn out.
Elliott: Wimp. And you’re welcome for the upgrade to first class. While you were asleep on the job, I was looking for fresh investment ideas.
Yiannis: Well, I was dreaming of profitable trades.
Elliott: Right. Anyway, I think we should remove the stop-loss orders from our recommendations and issue Flash Alerts when it’s time to sell a position. The volatility that Roger mentioned prematurely stopped us out of a few names that still had plenty of upside.
Phil: Tell me about it. I lost some money on your first few picks because of these stops. It hurts even more that the majority of those recommendations eventually worked out.
Elliott: A lot of investors use trailing stop-loss orders these days; the market just takes these people out and then rallies. It’s like a game. Some of our picks feature prominently in high-volume exchange-traded funds, making the stocks even more volatile.
Yiannis: Any objections, Phil?
Phil: Nope. I have no objection to making more money.
Roger: Enough housekeeping. I want to know more about Chart Industries. What’s the story?
Elliott: Chart Industries manufactures and sells equipment used in the liquefied natural gas (LNG) supply chain. Sales should increase as LNG consumption picks up in Europe and emerging-market Asia.
Yiannis: Where does the stock trade these days.
Elliott: Around $50 per share.
Yiannis: That’s a bit pricey for a swing trade, but I like the story.
Elliott: I have other ideas, you know. Maybe I’ll save those for dinner. Yiannis, you made the reservation for SW Steakhouse, right?
As Phil settles the bill, Roger spots Steve Wynn leaving a nearby table with his companion and an aide. The quartet had unwittingly been in the presence of Las Vegas royalty for the past hour.
Fast-forward to the evening. Roger, Elliott and Yiannis meet two of Yiannis’ friends at Southwest Steakhouse and resume the quest for the April stock pick. With the publisher out of the picture, the conversation heats up quickly.
Yiannis: This is probably the best steakhouse in all the Vegas hotels. Superb food, impeccable service and an incredible view.
Elliott: Definitely. Try some of this Barolo.
Yiannis: That has terrific flavor–much better than those softer ones some vineyards are putting out these days.
Elliott: I’ll have it decanted. In the meantime, let’s enjoy this chilled Sancerre with the seafood appetizer.
As if on command, three waiters deliver a mountain of lobster pieces, oysters, crab legs and other fruits de mer on a huge mound of ice at the center of the table.
Yiannis: Nice work. Your food selection is almost as good as your ability to pick stocks. This is one of my favorite dishes here because it tastes the way it looks. Last time we ate here, Roger offered our readers a bonus pick. You up for it again this year, Rog Mahal?
Roger: You guys are big boys now. You don’t need my help. Besides, I’ve got my own stock-of-the-month service, Big Yield Hunting.
Elliott: Well played, sir.
Yiannis: Well, I don’t think we should go with Chart Industries. That stock has already run.
Elliott: Energy names will likely lead the market higher.
Yiannis: I won’t argue against that. But let’s try something that could surprise people.
Elliott: For example?
Elliott: Ok, we wrote about palladium in the latest issue of Global Investment Strategist. Palladium features prominently in catalytic converters; an investment in a palladium producer offers exposure to rising automobile sales.
Yiannis: Car sales should grow substantially in emerging markets. Don’t forget that palladium could also be used in diesel engines eventually.
Roger: Why isn’t it now?
Elliott: Diesel engines operate at lower temperatures than gasoline engines; in those conditions, platinum is a better autocatalyst. But new technology is removing this restriction. Palladium can already make up 25 percent of the autocatalyst in diesel engines. A few years ago palladium had no place in a diesel engine’s catalytic converter.
Yiannis: Palladium is also cheaper than platinum.
Elliott: Platinum costs more than $1,700 per ounce, while an ounce of palladium goes for less than $800. Platinum historically has commanded a premium of roughly three times the price of palladium. Vehicle manufacturers would love to substitute cheaper palladium in autocatalyst applications.
Roger: I read somewhere that demand for autocatalysts in the past five years rose more than 33 percent, while demand for platinum fell.
Yiannis: Ah, so that’s where Roger gets all of his good investment ideas: Global Investment Strategist. We just wrote an article about that a few days ago.
Roger: Could be. I read so much stuff these days.
Yiannis: Perhaps it’s your advanced age.
Elliott: Speaking of age, our aged steaks are here.
Bone-in rib eye and porterhouse steaks arrive at the table.
Roger: This is superb.
Elliott: The Barolo is a perfect match. Easy there, Yiannis. I know the steak is rare, but it doesn’t have enough life in it to run away. Slow down, man.
Roger: The Greek is hungry.
Yiannis: Laugh all you want. I’m savoring this meal. Also, I prefer the palladium story to Chart Industries.
Roger: I agree. What else can you tell us about palladium?
Elliott: Well, it’s also used in the manufacture of ceramic capacitors and…
Yiannis: Wait, it’s used in pottery?
Elliott nearly chokes with laughter.
Elliott: What are you 8 years old? A ceramic capacitor temporarily stores electric energy and converts direct current into alternating current.
Yiannis: Sounds a lot better than the pottery business.
Elliott: It is. Capacitors are used in just about every electronic device you can imagine; growing sales of these items and appliances drives demand for palladium.
Roger: Do you have a specific stock in mind?
Yiannis: Russia is a big producer of Palladium.
Elliott: True. But none of the Russian producers are pure plays on growing demand for palladium. I prefer a play that’s closer to home.
Yiannis: There’s a Greek palladium producer?
Elliott: North American Palladium (AMEX: PAL) owns two producing mines in Canada, the Lac des Iles palladium mine in Ontario and the Sleeping Giant gold mine in Quebec.
Yiannis: Sounds like a high-beta play.
Elliott: If we’re right, this stock could move fast.
Yiannis: Let’s do it.
Elliott: Don’t you want to hear about the company’s business? Lac des Iles began its life as an open-pit mine, but North American Palladium is now mining from an underground shaft. The company will expand this mineshaft into a promising new area. Management expects this expansion to be ready for production by the end of 2012.
The company produced less than 100,000 ounces of palladium in 2010, but its output will jump to about 175,000 ounces in 2011. With a production cost of less than $400 per ounce, the company reaps plenty of profit in the current pricing environment. In the intermediate term, efficiency improvements and expansions should enable the firm to produce 250,000 ounces by the mid-decade.
Yiannis: Ok, I didn’t need to know all of that. I trust you.
Elliott: Stop interrupting, man! North American Palladium also offers a kicker in the form of gold production from the Sleeping Giant mine, which it acquired in 2009. The mine could produce up to 35,000 ounces of gold in 2011, though production costs are on the high side. However, over the next few years, expanding the mine into areas richer in gold should increase production and reduce mining costs.
Yiannis: Has the professor finished his lecture?
Elliott: Class dismissed. North American Palladium is a buy under 7.50.
Roger: No objections here. I’d buy it. Also, congratulations on the first anniversary of Stocks on the Run. Or, wait, Cocktail Stocks.
Elliott: Thanks, man. Yiannis, what are you shoveling into your mouth now?
Yiannis has ordered a chocolate soufflé without anyone noticing.
Elliott: Man, you have a herculean appetite for a short Greek.
August 2010: Vale (NYSE: VALE)–Buy < 36
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October 2010: LG Display (NYSE: LPL)–Stopped Out
November 2010: True Blue (NYSE: TBI)–Buy < 17
December 2010: iShares MSCI France (NYSE: EWQ)–Buy < 26.50
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March 2011: Helix Energy Solutions (NYSE: HLX)–Buy < 17.50