Holding Pattern

By David Dittman • February 17, 2011

We’ve narrowed down our targets for February, though as it happens one will report earnings early Friday morning our time. This company reports twice a year–on an interim and annual basis–so we haven’t seen numbers since June 2010. Call it an overabundance of caution, if you will, particularly for an endeavor that’s supposed to be about taking on more risk? Guilty as charged. We will point out, however, that our risk-taking is informed.

Specifically, we haven’t abandoned all discipline, even as we track down what appear to be impossibly high yields. We’re looking for securities that, for whatever reason, may be mispriced right now but that also deliver reliable payouts until market inefficiencies are worked out. We still employ, in fact, the systemic approach that characterizes Utility Forecaster, Canadian Edge and Roger’s and Elliott Gue’s MLP Profits–that is, a Safety Rating System designed to identify potential long-term wealth-builders.

Up-to-date numbers are the lifeblood of the UF, CE and MLPP Safety Rating Systems depend on up-to-date numbers; a lot’s happened during the past six months, and we’d like to know whether our potential big yielder may have realized any savings by reducing or refinancing debt. We’re also curious about an asset divestment and what it means for the long-term strategic direction of the company. Ultimately, we want to know if on-the-ground operations are capable of sustaining a market-beating payout.

Whatever the case may be with this particular company, we will have a double-digit yielder for you on Tuesday. In the meantime, here’s an update on open positions. Note that all of our open positions are currently trading above our original buy targets, but we have boosted one recommendation based on its fourth-quarter and full-year 2010 results.

Again, we’ll have more actionable advice on Tuesday.

New Flyer Industries (TSX: NFI-U, OTC: NFYIF), our first pick, made Aug. 19, 2010, is trading above USD12 per stapled share as of midday Thursday. We recommended the Canada-based bus-maker up to USD11. New Flyer has made five monthly payments of CAD0.0975 per unit and declared another, payable Mar. 15.

For our holding period we’re sitting on a 20.8 percent total return (based on the 08/19/10 USD10.49 closing price) in US dollar terms, not bad in a vacuum but short of the S&P 500 (25.9 percent) and the S&P/Toronto Stock Exchange Income Trust Index (34.4 percent).

If nothing else, a substantial (and growing) order backlog will support its generous payout until worries about the health of North American small governments pass. New Flyer will report fourth-quarter and full-year 2010 results in mid-March.

We recommended Avenir Diversified Income Fund, which has since converted into AvenEx Energy Corp (TSX: AVF, OTC: AVNDF), on Sept. 16, 2010. At USD6.31 as of Thursday afternoon, AvenEx, too, is trading above our original target (USD6).

AvenEx has been good for a 22.1 percent total return, besting the S&P 500 by roughly 10 percent over the holding period. It appears as though AvenEx will take most of the first quarter of 2011 to account for the fourth quarter of 2010, as the company won’t announce results until on or about Mar. 30.

AvenEx has streamlined its business around its oil and gas operations. Management set a conservative post-conversion dividend policy, and its payout is covered comfortably by operating cash flow. And management cut net debt (debt less cash on hand) substantially over the first nine months of 2010.

Let’s not forget, of course, that AvenEx’s core business–oil and gas production and marketing–is set for a ton of upside over the next half-decade. On top of management’s proven abilities–apart from shaping up the balance-sheet they navigated this relatively tiny company through 2008-09, a nice feat of derring-do–this alone ought to support a regular payout.

Otelco (NYSE: OTT), our Oct. 22, 2010, selection, reported fourth-quarter and full-year results today. Originally a buy up to USD16, Otelco shares are changing hands at around USD19.40 as of Thursday afternoon.

Otelco has performed impressively in the market since we hunted it down last fall, notching a total return of 24.1 percent; the S&P 500 (14.1 percent) and even the high-yield-heavy S&P/TSX Income Trust Index (19.3 percent) stare upward in admiration.

A quick look at fourth-quarter and full-year numbers reveals that CLEC operations remain strong and more than offset a 2.9 percent drop in access-line equivalents. Cash flow exceeded $50 million for the first time in 2010, and the company posted 9.3 percent cable TV revenue growth. Strong dividend coverage makes Otelco a worthy buy up to USD20.

We offered up Australia’s Telstra Corp Ltd (Australia: TLS, OTC: TLSYY) as a buy up to USD13 on the US over-the-counter market, at a time when the dominant telecom Down Under was yielding well north of 10 percent. Today it’s going to close around USD15.20, and management declared a dividend last week, too.

We’re looking at a 19.3 percent gainer right now, and again our chosen benchmarks (S&P 500, 12.5 percent, S&P/TSX Income Trust Index, 16.1 percent) can only admire the total return we’ve bagged…so far.

Telstra continues to post strong broadband and wireless growth, as it nears a time when it can operate without the specter of Australia’s National Broadband Network. Headline profit was off for the first half of fiscal 2011, but Telstra is still weathering tough conditions. Management declared a dividend Feb. 11 for payment Apr. 4; the latest payout is up 4.1 percent from the August payment.

Capital Product Partners LP (NSDQ: CPLP) is trading above the USD9.50 target we set when we made it our holiday season pick on Dec. 16, 2010. The master limited partnership has returned 6.7 percent since recommendation. The business–its tankers haul products around the world under medium- and long-term contracts–has stabilized since it eviscerated its distribution last April, and it’s possible to see a future with payout increases.

It’s important to note here that Capital Product Partners still isn’t that far off from record-low contract charter rates. Its business is “recovering;” it hasn’t “recovered.” That being said, performance over the balance of 2010 suggests the risks are way overemphasized in the market, still. This thing traded above USD30 in mid-2007, so it’s come down a lot.

The unit price has come back from an initial pop (it closed at USD10.24 Jan. 18) but is likely to return to that level and even higher as the excitement in the market about the implications of the Egypt’s revolution for the broader region eases.

Capital Product’s solid dividend coverage allows management to fund a still-generous payout plus $3 million in replacement capital expenditures, and the company is showing solid progress leasing its fleet.

Our most recent pick, Cellcom Israel Ltd (Israel: CEL, NYSE: CEL), still a buy up to USD32.50, hasn’t experienced the quick bounce our previous selections enjoyed, although much of its underperformance since mid-January is tied to unease about events in Egypt and the broader Middle East.

Cellcom is scheduled to report results Mar. 2, at which time management will also declare the first dividend since our Jan. 20 recommendation.

Remember to look for a special edition of Big Yield Hunting–and a new, double-digit payer–on Tuesday.

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